Introduction to Consumer Choices

Read all the sections in this chapter for information on consumer choice, including utility, consumer equilibrium, consumer equilibrium demand, consumer surplus, budget constraint, and consumer equilibrium and indifference curves.

6. Key Terms

backward-bending supply curve for labor

the situation when high-wage people can earn so much that they respond to a still-higher wage by working fewer hours

behavioral economics

a branch of economics that seeks to enrich the understanding of decision-making by integrating the insights of psychology and by investigating how given dollar amounts can mean different things to individuals depending on the situation.

budget constraint line

shows the possible combinations of two goods that are affordable given a consumer's limited income

consumer equilibrium

when the ratio of the prices of goods is equal to the ratio of the marginal utilities (point at which the consumer can get the most satisfaction)

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


the idea that units of a good, such as dollars, ounces of gold, or barrels of oil are capable of mutual substitution with each other and carry equal value to the individual.

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

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

total utility

satisfaction derived from consumer choices