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13 Cards in this Set
- Front
- Back
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Total Utility
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The aggregate satisfaction gained from consuming successive quantities of a good.
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Marginal Utility
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Change in TU resulting from consumption of one extra unit of a given commodity.
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Equi-Marginal Rule
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Consumer Equilibrium is reached when MU of the last dollar spent on each commodity is equal.
MUa = MUb ---- ----- $a $b |
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Accounting VS Economic Costs
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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) |
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Law of Diminishing Returns
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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.
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Economies of Scale
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Cutting AC as firm gets bigger resulting from spreading fixed costs over more units of output. = downwards-sloping LONGRUN AC curve
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Normal/Sub/Super-normal profit
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PROFIT= difference between AR and AC at Quantity
NORMAL: sufficient to keep in business. AR=AC SUPERNORMAL: More than sufficient - AR>AC SUBNORMAL: AR<AC |
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Break-even/Shutdown
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SHUTDOWN: revenue only just covers VC (MC=AVC)
BREAKEVEN: price at which revenue covers all economic cost. (MC=AC) |
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Oligopoly kinked demand curve
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If one firm lowers price for more market share, competitors will follow suit.
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Revenue - Monopoly VS Perfect Comp.
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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. |
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Government Interventions on a Monopoly (Pricing decisions)
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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 |
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Increasing returns to a factor
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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.
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Economies of Scale
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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.
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