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Microeconomics Chapter 05
Microeconomics Chapter 05
Marginal Utility
The expression ‘’Marginal’’ is a key term in economics and
always means ‘’additional’’ or ‘’extra’’. Marginal utility
denotes the additional utility you get from the
consumption of an additional unit of a commodity.
Marginal utility is the additional satisfaction a consumer
gains from consuming one more unit of a good or services.
Substitution Effect
The substitution effect says that, when the price of a good
rises, consumers will tend to substitute other goods for
the more expensive good in order to satisfy their desires
more inexpensively.
The substitution effect is the change in consumption
patterns due to a change in the relative prices of goods.
Income Effect
The income effect, in microeconomics, is the change in
demand for a good or service caused by a change in a
consumer’s purchasing power resulting from a change in
real income.
The income effect is the change consumption patterns due
to the change in purchasing power.
The income effect is the effect on real income when price
changes- it can be positive and negative.
Income Elasticity
Income elasticity is an economic term that explains the
connection between the demand of a product and the
income of the consumer.
Income elasticity= % change in quantity demanded/ %
change in income.
If a person’s income goes up or down, his income elasticity
impacts if he will purchase a product or not.
Market Demand
Market demand is the total amount of goods and services
that all consumers are willing and able to purchase at a
specific price in a marketplace.
In other words, it represents how much consumers can
and will buy from suppliers at a given price level in a
market.
Substitute Goods
Substitute goods are two alternative goods that could be
used for the same purpose.
Substitute goods are two product or services that fulfill the
same customer need. When two goods are substitutes,
purchase of one reduces demand for the other.
Complementary Goods
A Complement refers to a complementary good or service
that is used in conjunction with another good or service.
A Complementary goods or complement is a good’s with a
negative cross elasticity of demand, in contrast to a
substitute goods. This means a good’s demand is increased
when the price of another goods is decreased. Conversely,
the demand for a goods is decreased when the price of
another goods is increased.
Independent Goods
Independent goods are goods that have a zero cross
elasticity of demand. Changes in the price of one good will
have no effect on the demand for an independent good.
Thus independent goods are neither complements nor
substitutes.
Consumer Surplus
Consumer surplus is a measure of the welfare that people
gain from consuming goods and services.
Consumer surplus is defined as the difference between the
total amount that consumers are willing and able to pay
for a good or service and the total amount that they
actually do pay.
Indifference Curve
An Indifference curve is a graph showing combination of
two goods that give the consumer equal satisfaction and
utility. each point on an indifference curve indicates that a
consumer is indifferent between the two and all points
give him the same utility.