In economics, utility is the satisfaction or happiness a person gets from consuming goods and services.
Missing Word
utility
Utility is the economist's word for the satisfaction people get from their choices. Consumers are assumed to pick the affordable combination of goods that gives them the most of it.
Category: Utility Basics
Question 2
Economists express a person's satisfaction in hypothetical units called utils.
Missing Word
utils
Utils are imaginary units used to describe satisfaction in numbers. They are personal and subjective, so they cannot be compared from one person to another.
Category: Utility Basics
Question 3
Economists say choices are made at the margin when people weigh the extra benefit and extra cost of one more unit.
Missing Word
margin
Thinking at the margin means comparing the gain and cost of the next unit rather than all units together, which is why consumer choice relies on marginal utility.
Category: Diminishing Marginal Utility
Question 4
Every combination of two goods a consumer can afford with a fixed amount of money lies on or inside the budget line.
Missing Word
budget
The budget line shows the combinations of two goods that spend exactly the available money at current prices. Combinations inside it leave money unspent, and combinations outside it cannot be afforded.
Category: Budget Constraint
Question 5
The point where the line of affordable combinations of two goods meets one of the axes is called an intercept.
Missing Word
intercept
An intercept shows the most of one good a consumer could buy by spending everything on it, found by dividing the money available by that good's price.
Category: Budget Constraint
Question 6
When a consumer's earnings rise and prices stay the same, the line of affordable combinations moves outward and stays parallel to its original position.
Missing Word
parallel
With prices unchanged, the trade-off between the two goods is the same, so the slope does not change and the new line runs parallel to the old one, farther from the origin.
Category: Income and Price Changes
Question 7
A good that a person buys less of as earnings rise, such as a used car once a new car becomes affordable, is called an inferior good.
Missing Word
inferior
An inferior good has consumption that falls as earnings rise, because buyers switch to alternatives they prefer. Its opposite is a normal good.
Category: Income and Price Changes
Question 8
The substitution effect of a price rise is the shift in purchases toward goods that have become relatively cheaper.
Missing Word
substitution
The substitution effect captures the response to a change in relative prices: a good that becomes relatively more expensive is bought less, and relatively cheaper goods are bought more.
Category: Substitution and Income Effects
Question 9
The income effect of a price rise is the drop in purchases that occurs because the higher price lowers the buyer's purchasing power.
Missing Word
income
The income effect captures the loss of buying power from a higher price. For a normal good it reduces the quantity bought, adding to the substitution effect.
Category: Substitution and Income Effects
Question 10
Pairing each price with the quantity a consumer chooses at that price, holding other factors constant, traces out the consumer's demand curve.
Missing Word
demand
A demand curve shows how much of a good a buyer chooses at each price. The utility model produces it by finding the best affordable choice as the price changes.
Category: Substitution and Income Effects
Question 11
Behavioral economics brings ideas from psychology, the science of the mind and behavior, into the study of economic choices.
Missing Word
psychology
Behavioral economists use findings from psychology to explain choices the traditional model does not predict, such as weighing losses more than gains.
Category: Behavioral Economics
Question 12
Kahneman and Tversky found that people weigh losses more heavily than gains of the same size.
Missing Word
losses
This finding is called loss aversion: losing a given amount causes more unhappiness than gaining the same amount causes happiness.
Category: Behavioral Economics
Question 13
Money is called fungible, meaning any one dollar can be used in place of any other dollar.
Missing Word
fungible
Fungible goods are interchangeable units, and money is the standard example. Behavioral economists note that people often treat dollars as if they were not fungible, keeping them in separate mental accounts.
Category: Behavioral Economics
Question 14
Traditional economic models treat people as rational, meaning they use the information available to them to make consistent choices that serve their own interests.
Missing Word
rational
A rational decision maker in the traditional model weighs costs and benefits consistently. Behavioral economics questions how closely real people fit this picture.
Category: Behavioral Economics
Question 15
Making automatic enrollment the default option in a retirement savings plan is an example of a nudge, a change in how a choice is presented that steers people toward a decision without taking any option away.
Missing Word
nudge
A nudge changes the way options are set up or presented, for example by choosing which option people get if they do nothing, rather than forbidding anything, so people stay free to choose. Automatic enrollment sharply raises the share of workers who save, because few of them opt out.
Category: Behavioral Economics