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13 Cards in this Set

  • Front
  • Back
Total Utility
The aggregate satisfaction gained from consuming successive quantities of a good.
Marginal Utility
Change in TU resulting from consumption of one extra unit of a given commodity.
Equi-Marginal Rule
Consumer Equilibrium is reached when MU of the last dollar spent on each commodity is equal.

MUa = MUb
---- -----
$a $b
Accounting VS Economic Costs
ACCOUNTING: monetary costs involved in production (explicit)

ECONOMIC: returns to all factors of production regardless of ownership, includes opportunity cost for resources owned by the firm itself. (Explicit+Implicit)
Law of Diminishing Returns
As additional units of a variable factor are applied to fixed factors, the resulting increase in output will, after a certain point, be successively smaller.
Economies of Scale
Cutting AC as firm gets bigger resulting from spreading fixed costs over more units of output. = downwards-sloping LONGRUN AC curve
Normal/Sub/Super-normal profit
PROFIT= difference between AR and AC at Quantity

NORMAL: sufficient to keep in business. AR=AC

SUPERNORMAL: More than sufficient - AR>AC

SHUTDOWN: revenue only just covers VC (MC=AVC)

BREAKEVEN: price at which revenue covers all economic cost. (MC=AC)
Oligopoly kinked demand curve
If one firm lowers price for more market share, competitors will follow suit.
Revenue - Monopoly VS Perfect Comp.
PERFECT COMP: price taker, can sell any amount at market price, therefore AR=MR. Too small to influence.

MONOPOLY: Monopolist can only raise sales by lowering price on all commodities.
Therefore MR will always be less than price, which is AR.
Government Interventions on a Monopoly (Pricing decisions)
1. AC=MC. Still makes supernormal profit but below max. profit position (MR=MC)

2. SOCIAL OPTIMUM: D=S or AR=MC - what a perfect competitor would produce and charge. Allocatively efficient. "Marginal Cost Pricing" as P=MC

3. NORMAL PROFITS: AR/P/D=AC, "Average Cost Pricing" as P=AC
Increasing returns to a factor
A firms SHORTRUN AVERAGE COSTS are FALLING (efficient output-to-input change). = increase in input causes larger increase in output, or that decrease in input causes smaller decrease in output.
Economies of Scale
Firms LAC curve is falling (efficient change of INPUTS to OUTPUTS) = and increase in inputs causes more than proportionate increase in output, or decrease in inputs causes a less than proportionate decrease in output.