Law of diminishing marginal utility
as the consumption of a product increases, the marginal utility derived from consuming more of it (per unit of time) will eventually decline
Marginal utility
the additional utility, or satisfaction, derived from consuming an additional unit of a good
Marginal benefit
max price a consumer will be willing to pay for an an additional unit of a product; dollar value of the consumer's marginal utility form the additional unit and it falls as consumption increases
Substitution effect
part of an increase in amount consumed that is the result of a good being cheaper in relation to other goods because of a reduction in price
Income effect
an increase in amount consumed that is the result of the consumer's real income being expanded by a reduction in the price of a good
Price elasticity of demand
percent change in quantity demanded over percent change in price; indicates how responsive consumers are to a change in a product's price
Income elasticity
percent change in quantity demanded over percent change in income; measures responsiveness of the demand for a good to a consumer's change in income
Normal good
a good that has a positive income elasticity so that as consumer income rises so does the demand for that good
Inferior good
a good that has a negative income elasticity so that consumer income rises, the demand falls
Price elasticity of supply
percent change in quantity supplied over percent change in price that caused the change in quantity supplied