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Description
Flashcards by hayley fuentes, updated more than 1 year ago
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Created by hayley fuentes
over 7 years ago
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| Question | Answer |
| Consumer | An individual who makes the decision to buy a good or service |
| Utility | The amount of benefit or satisfaction derived from the consumption of a good |
| Assumptions about the consumer | 1. They'll have a limited income 2. They seek to get maximum utility from that income 3.They will act rationally. 4. They are subject to the law of Diminishing Utility. |
| Marginal Utility | The addition to total utility (TU) brought about by the extra utility received by the consumption of one extra unit |
| The Law of Diminishing Marginal Utility | As more units of a good are consumed a point will be reached where marginal utility will eventually begin to decline |
| Assumptions underlying the Law of Diminishing Marginal Utility | 1. Only applies after a certain minimum has been reached. 2.Sufficient time has not elapsed for circumstances to change. 3.Income doesn't change. 4.It does not apply to medicine or addictive goods. |
| Commodities that do not apply with the Law of Diminishing Marginal Utility | 1. Medicine : each dose may be as important as the first one so marginal utility does not decline 2.Addictive Goods : each extra unit provides an increase in marginal utility constanly |
| Income | The flow of wealth received by an individual over a period of time |
| Economic Good | A good that requires a price, derives utility and can be transported |
| Equilibrium | A state where there is no tendancy to change |
| The Equi-marginal Principle | Explains the behavior of a consumer in distributing their limited income so that the ratio of marginal utility to price is equal |
| Formula for Equi-marginal Principle | MUx/Px =MUy/ Py |
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