budget constraint:
the limits, usually dictated by income, within which consumers must decide how to allocate their consumption
consumption function:
a functional relationship that describes the economic variables, such as income and the interest rate, that determine consumption spending over time
consumption possibilities:
the opportunities available to consumers, with a given income, to consume goods and services today versus in the future
lifecycle hypothesis:
a theory stating that consumption spending is a function of an individual's age; thus, individuals accumulate wealth during their working years and consume their wealth following retirement, maintaining relatively stable consumption spending
marginal propensity to consume (MPC):
a measure of the increase in consumption spending due to an increase in disposable income
permanent income hypothesis:
the theory that permanent income, that is, annual income based on expected lifetime earnings, determines actual consumption spending; since permanent income is stable, actual consumption spending is also stable
Ricardian equivalence theory:
the theory, attributed mistakenly to the great classical economist David Ricardo , that predicts that a tax cut will lead individuals to increase their savings to take account of the higher future tax burden; also used to describe why there need not be a direct positive relationship between interest rates and government deficit
utility maximization:
the principle in economics that consumers are assumed to attempt to reach the highest level of satisfaction that can be enjoyed in the consumption of goods and services, that is, the highest or maximum level of utility
