BE313 4

• Utility


  The satisfaction of wants and needs obtained from the consumption of goods and services
• Total Utility


  A measure of the total satisfaction of wants and needs obtained from the consumption or use of a good or service
• Marginal Utility


  The additional utility, or extra satisfaction of wants and needs, obtained from the consumption or use of an additional unit of a good or service
• Utility Analysis


  • 0 rides, Total Utility 0, Marginal Utility
• Law of Diminishing Marginal Utility

  Marginal utility, or extra utility obtained from consuming a good, decreases as the quantity consumed increases
• Law of Diminishing Marginal Utility


  As each additional unit of a good is less satisfying, the demand price declines. This inverse law of demand relation between demand price and quantity demanded is a direct implication of the law of diminishing marginal utility.
• Budget Constraint


  The limit to expenditure imposed by a cash-limited budget, often represented as a straight line in geometrical representations of a consumer's choice possibilities between two goods or services
• Budget Constraint


  • 8 units of A, 0 units of B, Total Expenditure 12
  • 6 units of A, 3 units of B, Total Expenditure 12
  • 4 units of A, 6 units of B, Total Expenditure 12
  • 2 units of A, 9 units of B, Total Expenditure 12
  • 0 units of A, 12 units of B, Total Expenditure 12
• Indifference Curves


  Rely on a relative ranking of preferences between two goods rather than the absolute measurement of utility, showing how consumers would react to different combinations of products
• Indifference Curves


  • Negatively sloped
  • Higher indifference curves represent higher levels of satisfaction
  • Convex to the origin
  • Cannot intersect each other
• Consumer Sovereignty


  An economic philosophy that suggests consumer demand drives business in free enterprise systems
• Consumer Surplus


  The extra satisfaction received when purchasing a good or service, the difference between what a consumer paid and how much extra they would have been willing to pay