things to individuals depending on the situation

budget constraint (or budget line) shows the possible combinations of two goods that are affordable given a

consumer’s limited income

consumer equilibrium 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.

diminishing marginal utility the common pattern that each marginal unit of a good consumed provides less

of an addition to utility than the previous unit

fungible the idea that 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

income effect 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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