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Backward-bending supply curve for labor

Back

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

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Behavioral economics

Back

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

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Budget constraint (or budget line)

Back

A graph that shows the possible combinations of two goods that are affordable given the consumer’s limited income.

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Consumer equilibrium

Back

The point on the budget line where the consumer gets the most satisfaction. This occurs when the ratio of the prices of goods is equal to the ratio of the marginal utilities.

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Diminishing marginal utility

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The common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit.

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Fungible

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The idea that all 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.

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Income effect

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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.

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Marginal utility

Back

The additional utility provided by one additional unit of consumption.

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Marginal utility per dollar

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The additional satisfaction gained from purchasing a good given the price of the product; MU/Price.

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Substitution effect

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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.