| Utility | The satisfaction gained from the consumption of goods and services. |
|---|---|
| Total Utility | The total satisfaction gained from the consumption of all the units of a good in a given time period. |
| Marginal Utility | The extra satisfaction gained from consuming an extra unit of a good in a given time period. |
| Law of Diminishing Marginal utility | The marginal utility of a good eventually declines as more of the good is consumed. |
| Indifference Curve | A curve showing various combinations of two goods that give equal total utility. |
| Marginal rate of substitution | The slope of indifference curve. It shows the number of good Y a consumer is willing to sacrifice in order obtain more of good X while remaining at the same level of total utility. |
| Budget Lines | Shows combinations of two goods an individual can consume with a limited budget, at given prices. |
| Giffen goods | A good that sees a rise in demand when its price rises and a decline in demand when its price declines. |
| Substitution Effect | A change in a good's quantity demanded brought on by a change in its relative price. |
| Income Effect | When a change in a price of a good results in a change in the consumer's real income, consequently changing the quantity demanded of a good. |
| Price Effect | The summation of substitution and income effects in indifference curve analysis which demonstrate how a change in price affects the quantity demanded. |
When a person gains satisfaction from the consumption of goods and services, it is known as Utility. The term ‘utils’ is used to describe units of satisfaction.
In a period of time, all the satisfaction a person gains from the consumption of all the units of goods and services is called Total Utility. Say a person eats 5 packets of chips each day. Their Total Utility would be the total satisfaction derived from these 5 packets.
Total Utility tends to increase the more a person consumes. Marginal Utility, on the other hand, is the additional satisfaction a person gains from the consumption of one extra good or service. It tends to fall as every extra unit gives a person less additional satisfaction than the previous unit. For example, the first packet of chips gives the most satisfaction because the person is hungry. As they keep eating, each additional packet satisfies less. This is known as the law of diminishing marginal utility.