ECON 2 Lecture Notes - Lecture 21: Marginal Utility, Mental Accounting, Confirmation Bias
Document Summary
Law of diminishing marginal utility: gains in satisfaction decline as additional units are consumed. Total utility: total amount of satisfaction or pleasure a person derives from consuming some specific quantity. Marginal utility: extra satisfaction a consumer gets from one additional unit of that product. The law of diminishing marginal utility empowers the law of demand. Utility maximization rule: to maximize satisfaction, consumers should allocate their money income so that the last dollar spent on each product yields the same amount of extra utility when the consumer has balanced their margins consumer equilibrium is achieved. Substitution effect: impact that a change in a product"s price has on its relative expensiveness and on the quantity demanded. When the price of oranges fall, there is a substitution of now cheaper oranges. Income effect: increase in real income increased consumption of both apples and. Attempts to make better predictions about human choice behavior by combining insights from economics, psychology, and biology.
