Glossary
Budget Constraint
The limit on the consumption bundles that a consumer can afford, determined by their income and the prices of goods and services.
Example:
With only $50 for groceries, a college student faces a budget constraint that dictates how many items they can purchase.
Equilibrium (in Utility Maximization)
The state where a consumer has allocated their entire budget such that the marginal utility per dollar spent on the last unit of each good is equal, thus maximizing total utility.
Example:
When a shopper finds that the satisfaction per dollar from their last purchased apple is the same as from their last purchased banana, they have reached equilibrium in their fruit choices.
Law of Diminishing Marginal Utility
A principle stating that as a consumer consumes more units of a good, the additional satisfaction (marginal utility) derived from each successive unit tends to decrease.
Example:
While the first slice of pizza is incredibly satisfying, the law of diminishing marginal utility suggests the tenth slice will provide very little, if any, additional enjoyment.
Marginal Utility (MU)
The additional satisfaction gained from consuming one more unit of a good or service.
Example:
After your first cup of coffee in the morning, the marginal utility of a second cup might be less, but still positive.
Marginal Utility per Dollar (MU/P)
The additional satisfaction a consumer gets from spending one more dollar on a good or service. It helps compare the 'bang for your buck' across different goods.
Example:
If a 1.
Total Utility (TU)
The overall satisfaction a consumer receives from consuming a given quantity of a good or service.
Example:
If you eat three cookies, the sum of the satisfaction from each cookie represents your total utility from cookie consumption.
Utility
The satisfaction or happiness a consumer receives from consuming a good or service.
Example:
The sheer joy you feel after eating your favorite dessert represents its utility.
Utility Maximization
The process by which consumers choose the combination of goods and services that yields the greatest total satisfaction, given their budget constraint.
Example:
A student carefully selecting between buying a new textbook or attending a concert to get the most overall enjoyment from their limited funds is practicing utility maximization.