KEY TERMS
budget constraint (or budget line) shows the possible combinations of two goods that are affordable given a consumer’s limited income
consumer equilibrium point on the budget line where the consumer gets the most satisfaction; this occurs when the ratio of the prices of goods is equal to the ratio of the marginal utilities.
diminishing marginal utility the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit
income effect a higher price means that, in effect, the buying power of income has been reduced, even though actual income has not changed; always happens simultaneously with a substitution effect
law of diminishing marginal utility As we consume more of a good or service, the utility we get from additional units of the good or service tends to become smaller than what we received from earlier units
law of diminishing returns as we add additional increments of resources to producing a good or service, the marginal benefit from those additional increments will decline
marginal utility the additional utility provided by one additional unit of consumption
marginal utility per dollar the additional satisfaction gained from purchasing a good given the price of the product MU/Price
substitution effect when a price changes, consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price; always happens simultaneously with an income effect
sunk costs costs that we make in the past that we cannot recover
total utility satisfaction derived from consumer choices