Economics Chapter 6 Vocab

Front 1

law of diminishing marginal utility

Back 1

The principle that as a
consumer increases the consumption of a good or service, the
marginal utility obtained from each additional unit of the good or
service decreases.

Front 2

utility

Back 2

The want-satisfying power of a good or service; the satisfaction
or pleasure a consumer obtains from the consumption of
a good or service (or from the consumption of a collection of
goods and services).

Front 3

total utility

Back 3

The total amount of satisfaction derived from the
consumption of a single product or a combination of products.

Front 4

marginal utility

Back 4

The extra utility a consumer obtains from the
consumption of 1 additional unit of a good or service; equal to
the change in total utility divided by the change in the quantity
consumed.

Front 5

rational behavior

Back 5

Human behavior based on comparison of
marginal costs and marginal benefits; behavior designed to maximize
total utility.

Front 6

budget constraint

Back 6

The limit that the size of a consumer’s income
(and the prices that must be paid for goods and services)
imposes on the ability of that consumer to obtain goods and
services.

Front 7

utility-maximizing rule

Back 7

The principle that to obtain the
greatest utility, a consumer should allocate money income so that
the last dollar spent on each good or service yields the same marginal
utility.

Front 8

consumer equilibrium

Back 8

In marginal utility theory, the combination
of goods purchased based on marginal utility (MU) and
price ( P ) that maximizes total utility ; the combination for goods X
and Y at which MU x yP x 5 MU y /P y . In indifference curve analysis,
the combination of goods purchased that maximize total utility
by enabling the consumer to reach the highest indifference
curve, given the consumer’s budget line (or budget constraint ).

Front 9

income effect

Back 9

A change in the quantity demanded of a product
that results from the change in real income ( purchasing power)
caused by a change in the product’s price.

Front 10

substitution effect

Back 10

(1) A change in the quantity demanded of
a consumer good that results from a change in its relative expensiveness
caused by a change in the product’s price;

Hint 10

(2) the effect
of a change in the price of a resource on the quantity of the resource
employed by a firm, assuming no change in its output.

Front 11

behavioral economics

Back 11

The branch of economics that combines
insights from economics, psychology, and neuroscience to
give a better explanation of choice behavior than previous theories
that incorrectly concluded that consumers were always rational,
deliberate, and unemotional. Behavioral economics explains:
framing effects, anchoring, mental accounting, the endowment effect,
and how people are loss averse .

Front 12

status quo

Back 12

The existing state of affairs; in prospect theory, the
current situation from which gains and losses are calculated.

Front 13

loss averse

Back 13

In prospect theory , the property of people’s preferences
that the pain generated by losses feels substantially more
intense than the pleasure generated by gains.

Front 14

prospect theory

Back 14

A behavioral economics theory of preferences having
three main features: (1) people evaluate options on the basis of
whether they generate gains or losses relative to the status quo ;
(2) gains are subject to diminishing marginal utility while losses are
subject to diminishing marginal disutility; (3) people are loss averse .

Front 15

framing effects

Back 15

In prospect theory, changes in people’s decisionmaking
caused by new information that alters the context, or
“frame of reference,” that they use to judge whether options are
viewed as gains or losses.

Front 16

anchoring

Back 16

The tendency people have to unconsciously base, or
“anchor,” the valuation of an item they are currently thinking about
on previously considered but logically irrelevant information.

Front 17

mental accounting

Back 17

The tendency people have to create separate
“mental boxes” (or “accounts”) in which they deal with
particular financial transactions in isolation rather than dealing
with them as part of their overall decision-making process that
considers how to best allocate their limited budgets using the
utility-maximizing rule .

Front 18

endowment effect

Back 18

The tendency people have to place higher
valuations on items they own than on identical items that they do
not own. Perhaps caused by people being loss averse .