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60 Cards in this Set
- Front
- Back
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household's budget constraint
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limits imposed by income, wealth, and product prices
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inferior good
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with more wealth you buy less
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normal good
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with more wealth you buy more
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utility
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the satisfaction, or reward, a product yields relative to its alternatives, the basis of choice
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marginal utility
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the additional satisfaction gained by the consumption or use of one more unit of something, MU=change in total price/change in quantity
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where do you maximize utility
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where MUx/Px=MUy/Py all equal
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consumer surplus
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difference between how much you are willing to pay and the actual price
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producer surplus
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difference between the current price and the cost of production
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deadweight loss
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the net loss of producer and consumer surplus from under or over production
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normal rate of return
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rate of return on capital that is just sufficient to keep owners and investors satisfied
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short run
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firm operating under a fixed scale of production, firms can neither exit nor enter an industry
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long run
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no fixed factors of production, firms can increase or decrease the scale of operation, new firms can enter and exiting firms can exit the industry
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law of diminishing return
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when additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines
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fixed costs
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incur even if the firm is currently producing nothing
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marginal cost
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additional cost of inputs required to produce each additional unit of output, when marginal cost goes down so does average variable cost
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perfect competition
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many firms, small relative to the industry, producing identical products, no firm has control over prices, new competitors can freely enter and exit the market, demand curve is perfectly flat
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homogenous products
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identical products
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law of diminishing marginal utility
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more that is consumed, the less satisfaction you get, explains downward sloping
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indifference curve
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set of points, each representing a combination of goods x and y, all of which yield the same utility, slope downward, constant utility, higher indifference curve is better because you can consume more goods (the curves can NEVER intersect)
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marginal rate of substitution
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how many x you are willing to give up for one more y, equal to the absolute value of the slope of an indifference curve, MUx/MUy
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law of diminishing marginal rate of substitution
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as your consumption of good 1 increases, the number of good 2 you are willing to give up to get another of good 1 decreases
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budget line (constraint)
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depicts all possible combinations of x and y one can afford, limits imposed by income, wealth, and product prices
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real income
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set of opportunities to purchase real goods and services available to a household as determined by price and money income
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equation of budget constraint
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PxX+PyY=1
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what do you do to maximize utility?
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must be on budget set, want to be on the indifference curve furthest out, choose a point on the budget line that lies tangent to the highest indifference curve it hits, *the slope of the indifference curve=the slope of the budget constraint
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when the price of a good changes it has what 2 effects on consumption?
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income effect and substitution effect
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income effect
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when price falls we are better off, when it rises we are worse off, if this rises you will buy more normal goods
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substitution effect
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if the price of one good falls, that good becomes less expensive relative to substitutes, if price rises, that good becomes more expensive relative to substitutes
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price of leisure
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wage rate, "For each hour of leisure I decide to consume, I give up one hour's wage"
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as interest rate rises...
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people will save more
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firm
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contracts that allow it to transform inputs into outputs (production), exist to make a profit
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profit
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profit=TR-TC, TR=p x q, accountants consider only explicit costs while economists consider explicit and implicit costs (opportunity costs)
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total cost
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total of out of pocket costs, normal rate of return on capital, and opportunity cost of each factor of production, fixed costs+variable costs
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normal rate of return
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rate of return on each capital that is just sufficient to keep owners and investors satisfied
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a firm must decide these 3 things
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1. how much output to supply
2. which production technology to use 3. how much of each input to demand |
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production technology
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the quantitative relationship between inputs and outputs
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labor-intensive technology
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technology that relies heavily on human labor instead of capital
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capital-intensive technology
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technology that relies heavily on capital instead of human labor
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production function/total production function
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numerical or mathematical expression of a relationship between inputs and outputs
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marginal product
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the additional output that can be produced by adding one more unit of a specific input, MPL=change in total product/change in total units of labor, MPk=change in total product/change in total units of capital
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law of diminishing returns
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when additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines (always applies in the short run)
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average product
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the average amount produced by each unit of a variable factor of production, APL=total product/total units of labor
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isoquant
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a graph that shows all the combinations of capital and labor that can be used to produce a given amount of output, slope-change in K/change in L=MPL/MPk
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marginal rate of technical substitution
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the rate at which a firm can substitute capital for labor and hold output constant
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isoquant line
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graph that shows all the combinations of capital and labor available for a given total cost, lies tangent to the demand curve
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variable cost
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depends on level of production
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total variable cost
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the total of all costs that vary with output in the short run
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marginal cost
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total variable cost that results from producing one more unit of output, reflect change in variable cost, MC=change in total cost/change in total product=change in TC/change in Q, ultimately increase with output in the short run, intersects AVC at lowest point
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long run average cost curve
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shows different scales on which a firm can choose to operate in the long run
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what is the most efficient point?
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where MC intersects the demand curve is most efficient
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five characteristics of perfect competition
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1. can change level of output with out affecting price
2. homogenous products 3. everyone has access to full information 4. unrestricted exit and entry 5. prices not fixed or regulated *perfectly elastic, P=MR=AR, to max profit firm would choose MR (or price)=MC (in the short run) |
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there is zero profit at this point
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when P=MC=AC (in the long run)
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long run competitive equilibrium
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P=SRMC=SRAC=LRAC and profits are zerp
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average fixed costs
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TFC/Q
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average variable cost
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total variable cost divided by # units of output, AVC=TVC/q
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long run average cost curve
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shows different scales on which a firm can choose to operate in the long run
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what is the most efficient point?
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where MC intersects the demand curve is most efficient
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five characteristics of perfect competition
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1. can change level of output with out affecting price
2. homogenous products 3. everyone has access to full information 4. unrestricted exit and entry 5. prices not fixed or regulated *perfectly elastic, P=MR=AR, to max profit firm would choose MR (or price)=MC (in the short run) |
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there is zero profit at this point
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when P=MC=AC (in the long run)
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long run competitive equilibrium
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P=SRMC=SRAC=LRAC and profits are zero
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