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36 Cards in this Set
- Front
- Back
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How is utility measured? |
By if you like it the same, like it more, or like it less and putting things in order to see the relationships with the numbers.
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What is total utility? |
The summation of the satisfaction obtained from consuming a good |
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What is marginal utility? |
The amount total utility goes up with one more unit of a good is consumed |
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What does the Law of Diminishing Marginal Utility State? |
The more you consume the same good, the less you will like each unit of the good, and as you consume more of the same good, the total utility increases by marginal utility decreases. |
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What are the conditions under the LDMU? |
1. Consumption has to occur at the same time. 2. Quality of the item has to remain the same. 3. Consumption stops before satiation so that marginal utility is never negative 4. Holds for all good, except items of addictive behavior and collecting things. |
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What is the definition of Welfare Economics? |
The study of how the allocation of resources affects economic well being |
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What is Consumer Surplus? |
The difference between the amount a buyer is willing to pay for an item minus what the consumer actually pays |
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What is Producer Surplus? |
The difference between the actual price and the amount a supplier would have been willing to supply an item for |
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What is total surplus? |
Consumer Surplus plus producer surplus |
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What are the characteristics of an Efficient Market? |
1. Value of an item is equal to the cost 2. Free market allocates the item to the buyer who values it the most 3. Free market insures that the sellers who can produce at the least cost are the ones who supply the item |
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What is the goal of the firm? |
To maximize the expected value of long term profit |
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Describe the firm in the short run |
One fixed input and one variable input and the firm doesn't have sufficient time to change the size of the plant |
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Describe the firm in the long run |
All inputs are variable |
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What two constraints to the Firms operate under? |
1. Technical- limit to output quantity given best technology and finest inputs 2. Market- condition under which the firm buys its inputs and sells its outputs |
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What types of inputs are there? |
1. Fixed- quantity cannot be readily changed and will not vary with level of output 2. Variable- quantity will vary with level of output and can be changed if market conditions warrant it |
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Difference between total product and marginal product |
Total- sum of all outputs Marginal- extra amount produced when firm uses more of a variable input |
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Describe the Law of Diminishing Marginal Returns |
As the amount of a variable factor increases, marginal product eventually decreases; firm becomes more productive then becomes less productive |
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What is the difference between LDMR and LDMU? |
LDMU is about consumption and LDMR is about production; MU always decreases but MP increases and then decreases |
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What are the Seven Short run Costs of the firm? |
1. Total Fixed Cost 2. Total Variable Cost 3. Total Cost 4. Average Fixed Cost 5. Average Variable Cost 6. Average Total Cost 7. Marginal Cost |
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What is the difference between TFC and TVC? |
TFC: will not vary with level of output and can't be changed in short run TVC: can be changed in short run and vary with level of output |
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What happens to TFC, TVC and TC when Q=0 |
TFC>0 TVC=0 TC=TFC |
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What happens to TFC, TVC and TC when Q increases? |
TFC- stays the same TVC- increases TC- increases |
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What happens to AFC, AVC, and ATC as Q increases? |
AFC- decreases AVC- first decreases then increases ATC- first decreases then increases |
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AFC+AVC=? |
ATC |
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What happens to MC as Q increases? |
decreases then increases |
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What does the cost survivor principle say? |
The firms that will last are the least cost productive |
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What are the three regions on the long run average total cost (LRATC) graph and what do they mean? |
1. 0-A: Economies of Scale, as Q increases, LRATC decreases 2. A-B: Constant Economies of Scale 3. B and beyond: Diseconomies of Scale, as Q increases, LRATC decreases |
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How are accounting costs and economic costs different? |
Accounting: accountants point of view of the firm Economic: point of view for society |
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Whats greater: accounting costs of economic costs? |
Economic costs
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Whats greater: accounting profits or economic profits? |
Accounting profits |
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If the economic profit=0 and Accounting profit>0 what kind of return is that? |
Normal Rate of Return
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If the economic profit>0 and accounting profits>0 what kind of return is that? |
Above Normal Rate of Return |
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If economic profit <0 and accounting profits>0 what kind of return is that? |
below the normal rate or return |
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If economic profit<0 and accounting profit<0 what kind of return is that? |
Below the normal rate of return and the firm eventually goes out of business |
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What are the characteristics of a perfectly competitive industry? |
1. Large number of firms 2. Each firm is relatively small 3. Large number of consumers 4. Each firm sells a relatively homogeneous product 5. No barriers to entry 6. Perfect information on the part of both buyers and sellers 7. Price taker not price maker |
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What is the profit maximizing rule? |
produce up until the point where MR=MC, but when there is not exact match produce up until the point where MR is greater than MC and stop before MR is less than MC |
