Micro Economics Chapter 5-9

Front 1

Consumer's surplus

Back 1

The total utility derived from a commodity minus the value of the money spent in buying it

Front 2

Inferior good

Back 2

Commodity of which consumers by less when they get richer (such as secondhand clothing.)

Front 3

Law of demand

Back 3

a microeconomic law that states, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa.

Front 4

Law of diminishing marginal utility

Back 4

Psychological hypothesis that as consumer acquirers more of a good or commodity, the marginal utility of additional units of the commodity decreases

Front 5

Marginal analysis

Back 5

•method/decision-making tool to help companies maximize their profits that examines the additional benefits of an activity compared to the additional costs of that activity

Front 6

Marginal (monetary) utility

Back 6

The maximum amount of money that a consumer is willing to pay for an additional unit of a particular commodity or good

Front 7

•Marginal net utility

Back 7

- net utility obtained from one more unit of the good

Marginal utility (MU) - Price (P)
if positive MU > P, (MU-P) > 0 slope is uphill
if negative MU

Front 8

Market demand curve

Back 8

the sum of all the individual demand curves in a given market. It shows the quantity demanded of the good by all individuals at varying price points. For example, at $10/latte, the quantity demanded by everyone in the market is 150 lattes per day.

Front 9

Total monetary utility

Back 9

the largest sum of money a person is willing to give up for a particular good or commodity at all quantities.

Front 10

Budget line

Back 10

Indicates what 2 choices (based on 2 commodities) are available to the consumer, based on the size of his income and the commodity prices fixed by the market

Front 11

Indifference curve

Back 11

a graph showing combination of two goods that give the consumer equal satisfaction and utility

Front 12

Slope of a budget line

Back 12

a straight line graph that tells us how much of the good on the y axis we must give up to buy one more unit of good on the x axis, as we move from left to right on the figure. Here the slope equals the ratio of the prices of the goods.

Front 13

slope of indifference curve (marginal rate of substitution)

Back 13

indicates how much of a good the consumer is willing to give up to get an additional unit of the other good. It normally has negative slopes

Front 14

Optimal purchase rule

Back 14

If MU > (greater than) P
Buy more

If MU < (less than) P

Buy less

Maximize net total utility
MU = P

Front 15

Complements

Back 15

Goods that make each other more desirable where Increase in quantity consumed of one good, increases the quantity demanded of other good.

Front 16

cross elasticity of demand

Back 16

the Ratio of Percentage change in quantity demanded of X, To percentage change in price of Y

substitutes have positive CEOD complements have negative

Front 17

(Price) elasticity of demand

Back 17

It is defined by %change in Q demanded divided by %change in Price (after eliminating the minus sign).
Here, as Sales increases, there is a Fall in price

Front 18

Elastic, inelastic, and unit – elastic demand curves

Back 18

if E > (is greater than) 1 raise in price = less purchases of that good

if E < (is less than) 1 raise in price = more purchases of that good

E=1 price change doesn't affect amount purchased

Front 19

Income elasticity of demand

Back 19

Ratio of Percentage change in quantity demanded To percentage change in income

Front 20

Substitutes

Back 20

WHEN there is an Increase in quantity consumed of one good, there is a Decrease in quantity demanded of other good

Front 21

Average physical product APP

Back 21

The quantity of total output produced per unit of a variable input, holding all other inputs fixed.

Total physical product (TPP)
Divided by quantity of input (X)
APP=TPP/X

Front 22

Economies of scale ( increasing returns to scale)

Back 22

when doubling inputs lead to the production of more than double the output

All input quantities - increase by X%
TC – increase by X%
Quantity of output - rises > X%
Decreasing long run AC curves

Front 23

Fixed cost

Back 23

costs whose total amounts do not vary when output increases

Front 24

Long run

Back 24

period long enough for the firm's plant to require replacement and for their contractual commitments to expire.

Front 25

Marginal physical product MPP of an input

Back 25

the increase in total output resulting from a one-unit increase in that input, where the quantities of all other inputs remain constant

Front 26

Marginal revenue product MRP

Back 26

the additional revenue generated from using one more unit of the input

=MPP x output price = P

which shows how profit can be maximized

Front 27

Short run

Back 27

period of time during which some of the firm's commitments will not have ended that is relatively briefer than long run

Front 28

Total physical product TPP

Back 28

Total amount of output From a given quantity of input

Front 29

Variable cost

Back 29

cost that varies with output

Front 30

Expansion path

Back 30

shows for each possible output level the combination of input quantities that minimizes cost of producing that output

Front 31

Production indifference curves

Back 31

production relationship curves, each of which shows all input combos capable of producing a specified amount of output

Front 32

Average revenue AR

Back 32

Total variable cost / Quantity produced total revenue divided by quantity
=TR/Q

Front 33

Economic profit

Back 33

= total revenue - (explicit costs + implicit costs)

= total revenue - (opportunity costs + input costs)

the monetary costs and opportunity costs a firm pays and the revenue a firm receives

if Economic profit > (is greater than) 0, Optimal decision
if Economic profit = 0, Satisfactory decisions
if Economic profit < (is less than) 0, Not optimal

Front 34

Marginal profit

Back 34

the Addition to total profit From one more unit of output

Front 35

Marginal revenue MR

Back 35

the Addition to total revenue
from one more unit of output

MR1 = TR1 – TR0

Front 36

Optimal decision

Back 36

the Best - among possible decisions
that must be made on the basis of marginal cost and marginal revenue figures, not avg cost and avg rev figures

if Economic profit > (is greater than) 0, Optimal decision
if Economic profit = 0, Satisfactory decision
if Economic profit < (is less than) 0, Not optimal

(Choice that best serves objectives of decision-maker that is selected by Explicit or implicit comparison)

Front 37

Total profit

Back 37

= Net earnings
= Total revenue TR- total cost TC (Incl. opportunity cost)
= Economic profit

Front 38

Total revenue TR

Back 38

Total amount of money
From buyers
with No deduction of costs

TR = P ˣ Q

Front 39

Bond

Back 39

IOU sold by corporation with Promise to pay the holder a fixed sum of money by a specified maturity date. Other fixed amounts of money such as Coupon / interest payments are made every year up to maturity date.
– lends money; no ownership
– high degree of certainty
- less risky than stocks

Front 40

Common stock

Back 40

Piece of paper that gives Partial ownership
to Stock holders.

It is a share in a company's ownership.

Front 41

Corporation

Back 41

A Firm or legal status of a fictional individual
Owned by stockholders, Run by a Set of elected officers, and Board of directors with Chairman

Front 42

Credit default swap CDS

Back 42

buyer of the swap makes payments to the swap's seller up until the maturity date of a contract.

Front 43

Derivative

Back 43

a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and often called the "underlying"

Front 44

Inflation

Back 44

Rapid rise in prices

Front 45

Interest rate

Back 45

The Amount Borrowers pay to lenders
Per dollar of money borrowed

It is also the Current market price of a loan

Front 46

Leverage

Back 46

the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. 2. The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged.

Front 47

Limited liability

Back 47

risk protection given by corporations to investors, where investors cannot be asked to pay more of the company's debts than they have invested in the firm

Front 48

Doubletaxation

Back 48

corporation obligation where the company earnings are taxed, and then the dividends from those earning are taxed again in the form of personal income tax

Front 49

Mortgage back security

Back 49

securities that represent an interest in a pool of mortgage loans.

Front 50

Plowback (retained earnings)

Back 50

retained part of corporation's finance (for activities) reinvested into the funds of the company

Front 51

Random walk

Back 51

the theory that stock price changes have the same distribution and are independent of each other, so the past movement or trend of a stock price or market cannot be used to predict its future movement.

Front 52

Securities

Back 52

a financial instrument that represents an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option.

Front 53

Speculation

Back 53

Deliberate investment in risky assets
with Hopes obtain profits that leads to
Future changes in assets’ prices

Front 54

Subprime mortgage

Back 54

a type of mortgage that is normally made out to borrowers with lower credit ratings. As a result of the borrower's lowered credit rating, a conventional mortgage is not offered because the lender views the borrower as having a larger-than-average risk of defaulting on the loan

Front 55

Takeover

Back 55

outside group buys enough stock to get control of the firm's decisions. It is a strategic way to get rid of incompetent management, forcing them to become more efficient.

Front 56

Equities

Back 56

= Assets - Liabilities ?

Front 57

Index fund

Back 57

Mutual fund
that Chooses a particular stock price index and
Buys stocks (or most of the stocks) in index

Front 58

Mutual fund

Back 58

shares that can be bought by individual investors, where private investment firm holds a portfolio of securities

Front 59

Portfolio diversification

Back 59

Investing in different asset classes and in securities of many issuers in an attempt to reduce overall investment risk and to avoid damaging a portfolio's performance by the poor performance of a single security, industry, (or country)

Front 60

Stock price index

Back 60

Average prices of a large set of stocks

Front 61

•Normal good

Back 61

when real income increases,
the Quantity demanded for this commodity increases.
Here all other things remain equal.


Front 62

Elastic

Back 62

Describes a supply or demand curve which is relatively responsive to changes in price. That is, a curve wherein the quantity supplied or demanded changes easily when the price changes. It has a curve with an elasticity greater than or equal to 1

Front 63

Unit elastic

Back 63

Describes a supply or demand curve which is perfectly responsive to changes in price. That is, the quantity supplied or demanded changes according to the same percentage as the change in price. It has a curve with an elasticity of 1

Front 64

Inelastic

Back 64

Describes a supply or demand curve which is relatively unresponsive to changes in price. That is, the quantity supplied or demanded does not change easily when the price changes. A curve with an elasticity less than 1

Front 65

•Price elasticity of supply

Back 65

Ratio of Percentage change in quantity supplied To percentage change in price

Front 66

•Total revenue or
•Total expenditure

Back 66

= PˣQ

Front 67

"Law” of diminishing marginal returns

Back 67

As Amount of one input Increases,
All other inputs amounts remain Constant.
Ultimately, MR will become Lower

Front 68

Trade-off

Back 68

Substitute one input for another

Front 69

Total variable cost (TVC)

Back 69

Cost of variable inputs

Front 70

Average variable cost (AVC)

Back 70

Total variable cost / Quantity produced

Front 71

Marginal variable cost (MVC)

Back 71

Increase in total variable cost
From one additional unit of output

Front 72

Total cost TC

Back 72

= TFC + TVC

Front 73

Average cost AC

Back 73

= AFC + AVC

u-shaped curve

Front 74

Marginal cost MC

Back 74

= MFC + MVC = 0 + MVC = MVC

u-shaped curve

Front 75

A mortgage

Back 75

is a debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments

Front 76

Hostile takeover

Back 76

Takeover where Old management opposes takeover

Front 77

Speculators

Back 77

they have vital economic functions
to Sell protection from risk to other people
to Help smooth out price fluctuations

by Buying – when abundant & cheap
and Reselling – when scarce & expensive