EC1010A Notes Pre-Midterm - Assignment Essays

Q: if P (price) < *P (equilibrium price)

there is a shortage; sellers want to sell a smaller amount of the good than buyers want to buy, D(P) > S(P)

question

All economic models are built on two principles:

answer

people make optimal decisions; when people interact, the outcome is an equilibrium (a situation when optimal decisions of all involved are consistent with each other)

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optimal decision

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best course of action for an agent given their objectives and the constraints they face (ex: maximize profits)

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equilibrium

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the outcome of an interaction between agents when optimal decisions of all agents are consistent with each other

question

if P (price) > *P (equilibrium price)

answer

there is a surplus; sellers want to sell a larger amount of the good than buyers want to buy, D(P) < S(P)

question

if P (price) < *P (equilibrium price)

answer

there is a shortage; sellers want to sell a smaller amount of the good than buyers want to buy, D(P) > S(P)

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equilibrium in "mixed strategies"

answer

both players randomly make a choice (no optimal decision-- striker & goalie example)

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price ceiling

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a regulation that sets the max price that can be legally charged for a good/service

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ex. price ceiling

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rent control in NY/ LA

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price floor

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regulation set for min price that can legally be paid for a good/service

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ex. price floor

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min wage -> leads to unemployment

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the price floor/ceiling has no effect/ not bonding if...

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ceiling is above the equilibrium market price OR floor is below the equilibrium market price

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binding price ceiling leads to

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a shortage; some buyers cannot buy the good at the price & price cannot raise

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binding price floor leads to

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surplus; some sellers cannot sell their good at the price & price cannot decrease

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"best-case" scenario

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consumers derive max surplus possible from supply, but there is still welfare/ deadweight loss from price ceiling; NOT an equilibrium

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speculation

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speculators buy products from producers at ceiling price & resell to consumers; speculators maximize profits; result of shortages (price ceiling); EQUILIBRIUM; consumers & producers are worse off

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waiting lines

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money + time; time is opportunity cost ("time is money")

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full price of good

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cost of all resources a consumer must spend, including price, opportunity cost of time & time searching/ consuming good

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two assumptions: waiting lines

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each consumer values their time the same; each consumer buys one product for theirself

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interrelated markets

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affected by markets of supplements and compliments

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general equilibrium analysis

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equilibria in 2 or more interrelated markets, or in all markets

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partial equilibrium

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analyzing equilibria in one market at a time

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production

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inputs are turned into an output (a good or service)

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firm

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any producer, including physical persons, small firms or large corporations

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#1 assumption about production

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firm produces a single good or output

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#2 assumption about production

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firm has already chosen which good to produce

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#3 assumption about production

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firm minimizes costs with every level of production

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#4 assumption about production

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only two inputs used: K (capital) and L (labor)

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#5 assumption about production

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in the short run, capital is fixed and labor is variable

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#6 assumption about production

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output increases with each input

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#7 assumption about production

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diminishing returns = if capital is constant, each additional unit of labor produces less output than the last & vice versa

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#8 assumption about production

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firm is "price-taker" = producers accept and buy capital and labor at market prices and have no influence on these prices

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#9 assumption about production

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capital markets are well functioning-- firm can borrow to finance production with no budget constraint

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production function of firm

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describes max output (Q) that firms can produce from different combos of inputs, capital K and labor L; represents technological capabilities of firms; "flow" variables (physical units over time)

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marginal product of an input

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additional output that a firm can produce using additional unit of input, while other inputs are constant; MPL = delta Q / delta L

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average product/ labor productivity of an input

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firm's output divided by input used; APL = F(K,L) / L

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Cobb-Douglas production function

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Q = K^a times L^b, a&b are greater than 0 but less than 1

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long run

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period of time long enough to allow firms to adjust every amount of input used in production

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returns to scale

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change in output when all inputs in production increase/ decrease in same proportion

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constant returns to scale

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output increases same proportion as inputs; the norm

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increasing returns to scale

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output increases more than inputs; Cobbs-Douglass function when a+b > 1

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decreasing returns to scale

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inputs increase more than outputs; Cobbs-Douglass function when a+b < 1

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technological change

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technology improvement that changes firm's production function over time so more output is produced for same input

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isoquant

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for given output, isoquant charts all possible inputs (K,L) to produce output in the long run

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qualities of isoquants

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more northeast = higher output; negatively sloped; can't cross each other; an convex

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marginal rate of technical substitution (MRTS)

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rate at which firm can substitute small amount of L for K holding output constant; MRTS = - delta K/ delta L; slope of isoquant curve

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Isoquant slope high

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MP of L higher than MP of K

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isoquant slope low

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MP of L lower than MP of K

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flat isoquant

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close substitutes

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curvy isoquant

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not close substitutes, complementary

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perfect complement graph

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two goods with right-angle indifference curves; fixed proportion in relation to each other

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opportunity cost

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value of what producer gives up by using input

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accounting cost

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direct cost/ expenses of operating business (raw cost of materials)

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economic cost

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sum of producer's accounting & opportunity cost

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accounting profit (pie)

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firm's total revenue - accounting cost

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economic profit

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firm's total revenue - economic cost

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sunk cost

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cost that cannot be recovered once the money is spent

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sunk cost fallacy/ throwing good money after bad

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mistake of letting sunk cost affect a firm's future operating decisions

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isocost line

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straight line that shows all input combinations that yield the same cost

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isocost C =

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r(K) + w(L); slope = w/r

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cost minimization

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for a given level of output, cost is minimized at the point of tangency between the corresponding isoquant curve and isocost line

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MRTS = MPL /MPK =

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w/r

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equal bang for buck in cost minimization

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when cost is minimized, an additional $1 spent on any input generates the same increase in output

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output expansion path

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curve that maps the optimal (cost-minimizing) mix of inputs at each level of total output

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total cost function (curve) (TC)

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minimum cost of producing a given output as a function of output

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TC =

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FC + VC

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fixed cost (FC)

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cost of the firm's fixed inputs, independent of the quantity of the firm's output; fixed in short run, flexible in long run

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variable cost (VC)

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cost of inputs that vary with the quantity of the firm's output (raw materials); fixed in short run, flexible in long run

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average total cost (ATC)

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total cost per unit of output

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ATC =

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TC/Q or AFC + AVC

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Average Fixed Cost (AFC)

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fixed cost per unit of output

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AFC =

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FC/Q

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average variable cost (AVC)

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variable cost per unit of output

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AVC =

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VC/Q

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marginal cost (MC)

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additional cost of producing an additional unit of output; MC crosses ATC from below its minimum

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MC =

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delta TC/ delta Q or MVC (since marginal fixed cost (MFC) is always zero)

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average cost curve trends

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1. AFC always falls as Q rises
2. ATC is always above AVC & AFC
3. difference between ATC and AVC shrinks as Q increases

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marginal cost & average cost

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if MC > AC, ATC increases
if MC < AC, ATC decreases
if MC = ATC, ATC reaches minimum (same with average variable cost)

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short run total cost

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total cost of producing various quantities of output when labor is variable, but capital is fixed; many short run TC functions depending on level of capital while only one long run TC function

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short & long run TC curve relationship

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SR TC is always higher than LR TC except for one level of output

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short-run average cost (SRAC) curve

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total cost per unit of output when labor is variable, but capital is fixed

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short run marginal cost (SRMC) curve

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cost of producing an additional unit of output when labor is variable, but capital is fixed

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short run & long run average cost curve relationship

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short run AC curve stays above the long run AC curve except when SR Q = LR Q where the two curves touch each other

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short run & long run marginal cost curve relationship

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if SR Q < LR Q: SRC stays below LRC
if SR Q = LR Q: SRC crosses LRC
if SR Q > LR Q: SRC stays above LRC

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contrast returns to scale & economies of scale

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returns to scale:
all inputs increase proportionally; characterize prodcution function
economies of scale: optimal choice-- not a proportional increase in input; depends on input prices and optimal decisions

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economies of scale

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as output increases, total costs rise slower than output, ATC falls

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diseconomies of scale

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as output increases, total costs rise faster than output, ATC increases

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what factors might cause diseconomies of scale to set in at higher levels of output?

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capacity constraints, management cant cope with coordination problems as output increases, rising input prices

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constant economies of scale

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as output increases, costs rise at the same rate as output, ATC does not change

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market structure

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the competitive environment in which firms operate; categorized by three factors: number of firms, differentiation of products, barriers to entry

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perfect competition

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many firms, identical products sold, no barriers to enter, price-taker, perfectly elastic demand curve

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oligopoly

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few firms, identical/different products sold, some barriers to enter

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monopoly

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one firm, unique products sold, many barriers to enter

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supply choke price

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where quantity = 0 on graph (y-axis)

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profit (pie)

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difference between a firm's total revenue and total cost

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profit (pie) =

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TR-TC

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profit maximization

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firms choose the level of output with the goal of maximizing profit

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Marginal Revenue (MR)

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additional revenue generated by an additional unit of output sold in the market

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MR =

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delta revenue/ delta Q OR delta P*Q)/ delta Q

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in perfect competition, MR

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= price (since firms are price takers and output is unchanged)

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profit maximizing output decision

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competitive firm sets output Q = Q (WHAT IS Q?) so that the marginal cost of producing one more unit is equal to the market price

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profit maximizing equation

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P = MC(Q*)

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comparing MC & P

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if MC < P: increases output, revenue and cost increases, profit increases
if MC > P: decreases output, revenue and cost decreases, profit increases

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in terms of profit maximization, profit (pie) =

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Q(P - ATC)

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market supply in the short/long run

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SR: number of firms is fixed, capital is fixed, firms cannot leave market but can shut down operations (Q=0)
LR: firms enter/exit the market, all inputs can be adjusted

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firm shuts down...

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in the short run when revenue is less than 0

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firm operates

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in short run when revenue is greater than 0

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profit as a firm operates

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TR - TC or TR - VC - FC

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profit under shut down

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TR - TC or -FC (variable cost and revenue is 0 during shut down, but still need to pay fixed cost)

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short run market supply

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at P, market supply QS(P) is the sum of supplies of each firm i in the market

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short run market supply equation

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QS(P) = summation of QS(P)

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short run supply curve of the firm

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short run supply curve of a firm in an industry with identical 100 firms

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short run supply curve of the industry

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horizontal sum of supply curves of all the firms

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producer surplus (PS)

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difference between the amount a firm is willing to sell its output and the revenue it actually receives

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PS =

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TR - VC

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in the short run PS =

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profit + FC

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long run supply in a competitive firm

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output Q in relation to market price P:
if P>= LATCmin, Q is set where LMC(Q) = P
if P < LATCmin, the firm stops production and exits the industry

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if profits are positive in the long run

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new firms enter the market, shifting supply to the right

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in the long run competitive equilibrium, exit and entry stops when

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firms earn zero economic profit

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long run market supply

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all firms have the same costs, market supply is perfectly elastic at P = LATCmin

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long run market supply conditions

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1. P = LMC (firm sets its output to maximize profits)
2. P = LATC (firm earns zero profits, or there would be entry/exit)
- when LMC = LATC, LATC curve is at its min

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specialized input

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bc of special know-how, unique locations, or super talented managers, firms in perfectly competitive industry might have lower costs than competitors

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economic rent

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returns to specialized inputs above what firms pay for them

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characteristics of long run equilibrium in perfect competition where firms have different average costs:

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1. long run equilibrium price = LATCmin of highest-cost firm that remains in the industry
2. highest cost firm makes zero profits
3. lower cost firms employ specialized inputs that earn economic rents (produce more quantity)

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economic rent & economic profit

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NOT equal to each other (economic profit counts all inputs at their opportunity cost, earn zero economic profit in the long run equilibrium; economic rent includes opportunity cost associated with specialized input, earns extra returns in long run equilibrium)

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consumption basket

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set of n different goods, the quantity of each good i set at q, available to a consumer; consumer pick from same list of goods, but select different quantities

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budget constraint (BC)

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set of all consumption baskets a consumer can buy when spending their entire income

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BC =

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income (I) = Px(Qx) + Py(Qy); x and y axis are used for different goods in a consumption basket

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if you double the price of both items in a consumption basket or income...

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feasible and unfeasible regions remain the same

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consumer choice

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consumer's preferences over a basket of goods, characterized by completeness, non-satiation, transitivity, and preference for variety

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completeness

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baskets are comparable and consumer decides if they prefer one to the other/ if they are indifferent

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non-satiation

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having more units of a good is always better than less; or at least not worse than less

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transivity

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if basket A is better than B, and B is better than C, then A must be better than C

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preference for variety/ diminishing marginal utility/ diminishing marginal rate of substitution

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the more of good X a consumer has in their basket, the less of another good Y they are willing to give up to get an additional unit of X

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utility function of a consumer

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assigns a number to each available consumption basket in a way that if a consumer prefers basket A over B, U(A) > U(B), if they are indifferent, then U(A) = U(B)

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marginal utility of a good (MU)

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the increase in utility from one-unit increase in consumption of the good while holding consumption of other goods constant

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MU =

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MUa = U(a+1) - U(b) where a & b are goods and a is the good you want to find the marginal utility for OR row U / row a

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indifference curve (IC)

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a plot of all consumption baskets that provide consumer with the same level of utility

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indifference curve assumptions

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same as consumer preferences--
1. completeness (IC can be drawn through any point)
2. non-satiation (ICs further from the origin represent higher utility)
3. transitivity (ICs never cross)
4. preference for variety (ICs are convex to the origin)

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proof of contradiction

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sometimes called proof by negation - by showing the assumption to be logically impossible, you prove your assumption false and the original conclusion true.

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marginal rate of substitution (MRS)

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rate at which consumer is willing to trade a small amount of good X for a small amount of good Y, and remain equally well off

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MRSxy =

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- delta Y/ delta X; slope of indifference curve OR MUx/ MUy

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MRTS =

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delta K/ delta L OR MPL/MPK

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straight/ less convex indifference curve

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goods that are easily substitutable for one another

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curvy/ more convex indifference curve

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goods that are complimentary to one another

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perfect substitutes

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goods the consumer is indifferent about trading at a fixed rate at any level of consumption of these goods; MRS is constant; VIOLATES indifference curve assumption #4

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perfect complements

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goods consumed only in fixed proportions

1 of 146

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All economic models are built on two principles:

answer

people make optimal decisions; when people interact, the outcome is an equilibrium (a situation when optimal decisions of all involved are consistent with each other)

question

optimal decision

answer

best course of action for an agent given their objectives and the constraints they face (ex: maximize profits)

question

equilibrium

answer

the outcome of an interaction between agents when optimal decisions of all agents are consistent with each other

question

if P (price) > *P (equilibrium price)

answer

there is a surplus; sellers want to sell a larger amount of the good than buyers want to buy, D(P) < S(P)

question

if P (price) < *P (equilibrium price)

answer

there is a shortage; sellers want to sell a smaller amount of the good than buyers want to buy, D(P) > S(P)

question

equilibrium in "mixed strategies"

answer

both players randomly make a choice (no optimal decision-- striker & goalie example)

question

price ceiling

answer

a regulation that sets the max price that can be legally charged for a good/service

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ex. price ceiling

answer

rent control in NY/ LA

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price floor

answer

regulation set for min price that can legally be paid for a good/service

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ex. price floor

answer

min wage -> leads to unemployment

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the price floor/ceiling has no effect/ not bonding if...

answer

ceiling is above the equilibrium market price OR floor is below the equilibrium market price

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binding price ceiling leads to

answer

a shortage; some buyers cannot buy the good at the price & price cannot raise

question

binding price floor leads to

answer

surplus; some sellers cannot sell their good at the price & price cannot decrease

question

"best-case" scenario

answer

consumers derive max surplus possible from supply, but there is still welfare/ deadweight loss from price ceiling; NOT an equilibrium

question

speculation

answer

speculators buy products from producers at ceiling price & resell to consumers; speculators maximize profits; result of shortages (price ceiling); EQUILIBRIUM; consumers & producers are worse off

question

waiting lines

answer

money + time; time is opportunity cost ("time is money")

question

full price of good

answer

cost of all resources a consumer must spend, including price, opportunity cost of time & time searching/ consuming good

question

two assumptions: waiting lines

answer

each consumer values their time the same; each consumer buys one product for theirself

question

interrelated markets

answer

affected by markets of supplements and compliments

question

general equilibrium analysis

answer

equilibria in 2 or more interrelated markets, or in all markets

question

partial equilibrium

answer

analyzing equilibria in one market at a time

question

production

answer

inputs are turned into an output (a good or service)

question

firm

answer

any producer, including physical persons, small firms or large corporations

question

#1 assumption about production

answer

firm produces a single good or output

question

#2 assumption about production

answer

firm has already chosen which good to produce

question

#3 assumption about production

answer

firm minimizes costs with every level of production

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#4 assumption about production

answer

only two inputs used: K (capital) and L (labor)

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#5 assumption about production

answer

in the short run, capital is fixed and labor is variable

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#6 assumption about production

answer

output increases with each input

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#7 assumption about production

answer

diminishing returns = if capital is constant, each additional unit of labor produces less output than the last & vice versa

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#8 assumption about production

answer

firm is "price-taker" = producers accept and buy capital and labor at market prices and have no influence on these prices

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#9 assumption about production

answer

capital markets are well functioning-- firm can borrow to finance production with no budget constraint

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production function of firm

answer

describes max output (Q) that firms can produce from different combos of inputs, capital K and labor L; represents technological capabilities of firms; "flow" variables (physical units over time)

question

marginal product of an input

answer

additional output that a firm can produce using additional unit of input, while other inputs are constant; MPL = delta Q / delta L

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average product/ labor productivity of an input

answer

firm's output divided by input used; APL = F(K,L) / L

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Cobb-Douglas production function

answer

Q = K^a times L^b, a&b are greater than 0 but less than 1

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long run

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period of time long enough to allow firms to adjust every amount of input used in production

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returns to scale

answer

change in output when all inputs in production increase/ decrease in same proportion

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constant returns to scale

answer

output increases same proportion as inputs; the norm

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increasing returns to scale

answer

output increases more than inputs; Cobbs-Douglass function when a+b > 1

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decreasing returns to scale

answer

inputs increase more than outputs; Cobbs-Douglass function when a+b < 1

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technological change

answer

technology improvement that changes firm's production function over time so more output is produced for same input

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isoquant

answer

for given output, isoquant charts all possible inputs (K,L) to produce output in the long run

question

qualities of isoquants

answer

more northeast = higher output; negatively sloped; can't cross each other; an convex

question

marginal rate of technical substitution (MRTS)

answer

rate at which firm can substitute small amount of L for K holding output constant; MRTS = - delta K/ delta L; slope of isoquant curve

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Isoquant slope high

answer

MP of L higher than MP of K

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isoquant slope low

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MP of L lower than MP of K

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flat isoquant

answer

close substitutes

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curvy isoquant

answer

not close substitutes, complementary

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perfect complement graph

answer

two goods with right-angle indifference curves; fixed proportion in relation to each other

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opportunity cost

answer

value of what producer gives up by using input

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accounting cost

answer

direct cost/ expenses of operating business (raw cost of materials)

question

economic cost

answer

sum of producer's accounting & opportunity cost

question

accounting profit (pie)

answer

firm's total revenue - accounting cost

question

economic profit

answer

firm's total revenue - economic cost

question

sunk cost

answer

cost that cannot be recovered once the money is spent

question

sunk cost fallacy/ throwing good money after bad

answer

mistake of letting sunk cost affect a firm's future operating decisions

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isocost line

answer

straight line that shows all input combinations that yield the same cost

question

isocost C =

answer

r(K) + w(L); slope = w/r

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cost minimization

answer

for a given level of output, cost is minimized at the point of tangency between the corresponding isoquant curve and isocost line

question

MRTS = MPL /MPK =

answer

w/r

question

equal bang for buck in cost minimization

answer

when cost is minimized, an additional $1 spent on any input generates the same increase in output

question

output expansion path

answer

curve that maps the optimal (cost-minimizing) mix of inputs at each level of total output

question

total cost function (curve) (TC)

answer

minimum cost of producing a given output as a function of output

question

TC =

answer

FC + VC

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fixed cost (FC)

answer

cost of the firm's fixed inputs, independent of the quantity of the firm's output; fixed in short run, flexible in long run

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variable cost (VC)

answer

cost of inputs that vary with the quantity of the firm's output (raw materials); fixed in short run, flexible in long run

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average total cost (ATC)

answer

total cost per unit of output

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ATC =

answer

TC/Q or AFC + AVC

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Average Fixed Cost (AFC)

answer

fixed cost per unit of output

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AFC =

answer

FC/Q

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average variable cost (AVC)

answer

variable cost per unit of output

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AVC =

answer

VC/Q

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marginal cost (MC)

answer

additional cost of producing an additional unit of output; MC crosses ATC from below its minimum

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MC =

answer

delta TC/ delta Q or MVC (since marginal fixed cost (MFC) is always zero)

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average cost curve trends

answer

1. AFC always falls as Q rises
2. ATC is always above AVC & AFC
3. difference between ATC and AVC shrinks as Q increases

question

marginal cost & average cost

answer

if MC > AC, ATC increases
if MC < AC, ATC decreases
if MC = ATC, ATC reaches minimum (same with average variable cost)

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short run total cost

answer

total cost of producing various quantities of output when labor is variable, but capital is fixed; many short run TC functions depending on level of capital while only one long run TC function

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short & long run TC curve relationship

answer

SR TC is always higher than LR TC except for one level of output

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short-run average cost (SRAC) curve

answer

total cost per unit of output when labor is variable, but capital is fixed

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short run marginal cost (SRMC) curve

answer

cost of producing an additional unit of output when labor is variable, but capital is fixed

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short run & long run average cost curve relationship

answer

short run AC curve stays above the long run AC curve except when SR Q = LR Q where the two curves touch each other

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short run & long run marginal cost curve relationship

answer

if SR Q < LR Q: SRC stays below LRC
if SR Q = LR Q: SRC crosses LRC
if SR Q > LR Q: SRC stays above LRC

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contrast returns to scale & economies of scale

answer

question

economies of scale

answer

as output increases, total costs rise slower than output, ATC falls

question

diseconomies of scale

answer

as output increases, total costs rise faster than output, ATC increases

question

what factors might cause diseconomies of scale to set in at higher levels of output?

answer

capacity constraints, management cant cope with coordination problems as output increases, rising input prices

question

constant economies of scale

answer

as output increases, costs rise at the same rate as output, ATC does not change

question

market structure

answer

the competitive environment in which firms operate; categorized by three factors: number of firms, differentiation of products, barriers to entry

question

perfect competition

answer

many firms, identical products sold, no barriers to enter, price-taker, perfectly elastic demand curve

question

oligopoly

answer

few firms, identical/different products sold, some barriers to enter

question

monopoly

answer

one firm, unique products sold, many barriers to enter

question

supply choke price

answer

where quantity = 0 on graph (y-axis)

question

profit (pie)

answer

difference between a firm's total revenue and total cost

question

profit (pie) =

answer

TR-TC

question

profit maximization

answer

firms choose the level of output with the goal of maximizing profit

question

Marginal Revenue (MR)

answer

additional revenue generated by an additional unit of output sold in the market

question

MR =

answer

delta revenue/ delta Q OR delta P*Q)/ delta Q

question

in perfect competition, MR

answer

= price (since firms are price takers and output is unchanged)

question

profit maximizing output decision

answer

competitive firm sets output Q = Q (WHAT IS Q?) so that the marginal cost of producing one more unit is equal to the market price

question

profit maximizing equation

answer

P = MC(Q*)

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comparing MC & P

answer

if MC < P: increases output, revenue and cost increases, profit increases
if MC > P: decreases output, revenue and cost decreases, profit increases

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in terms of profit maximization, profit (pie) =

answer

Q(P - ATC)

question

market supply in the short/long run

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SR: number of firms is fixed, capital is fixed, firms cannot leave market but can shut down operations (Q=0)
LR: firms enter/exit the market, all inputs can be adjusted

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firm shuts down...

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in the short run when revenue is less than 0

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firm operates

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in short run when revenue is greater than 0

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profit as a firm operates

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TR - TC or TR - VC - FC

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profit under shut down

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TR - TC or -FC (variable cost and revenue is 0 during shut down, but still need to pay fixed cost)

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short run market supply

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at P, market supply QS(P) is the sum of supplies of each firm i in the market

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short run market supply equation

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QS(P) = summation of QS(P)

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short run supply curve of the firm

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short run supply curve of a firm in an industry with identical 100 firms

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short run supply curve of the industry

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horizontal sum of supply curves of all the firms

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producer surplus (PS)

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difference between the amount a firm is willing to sell its output and the revenue it actually receives

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PS =

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TR - VC

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in the short run PS =

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profit + FC

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long run supply in a competitive firm

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output Q in relation to market price P:
if P>= LATCmin, Q is set where LMC(Q) = P
if P < LATCmin, the firm stops production and exits the industry

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if profits are positive in the long run

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new firms enter the market, shifting supply to the right

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in the long run competitive equilibrium, exit and entry stops when

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firms earn zero economic profit

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long run market supply

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all firms have the same costs, market supply is perfectly elastic at P = LATCmin

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long run market supply conditions

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1. P = LMC (firm sets its output to maximize profits)
2. P = LATC (firm earns zero profits, or there would be entry/exit)
- when LMC = LATC, LATC curve is at its min

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specialized input

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bc of special know-how, unique locations, or super talented managers, firms in perfectly competitive industry might have lower costs than competitors

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economic rent

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returns to specialized inputs above what firms pay for them

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characteristics of long run equilibrium in perfect competition where firms have different average costs:

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question

economic rent & economic profit

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consumption basket

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set of n different goods, the quantity of each good i set at q, available to a consumer; consumer pick from same list of goods, but select different quantities

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budget constraint (BC)

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set of all consumption baskets a consumer can buy when spending their entire income

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BC =

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income (I) = Px(Qx) + Py(Qy); x and y axis are used for different goods in a consumption basket

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if you double the price of both items in a consumption basket or income...

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feasible and unfeasible regions remain the same

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consumer choice

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consumer's preferences over a basket of goods, characterized by completeness, non-satiation, transitivity, and preference for variety

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completeness

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baskets are comparable and consumer decides if they prefer one to the other/ if they are indifferent

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non-satiation

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having more units of a good is always better than less; or at least not worse than less

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transivity

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if basket A is better than B, and B is better than C, then A must be better than C

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preference for variety/ diminishing marginal utility/ diminishing marginal rate of substitution

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the more of good X a consumer has in their basket, the less of another good Y they are willing to give up to get an additional unit of X

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utility function of a consumer

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assigns a number to each available consumption basket in a way that if a consumer prefers basket A over B, U(A) > U(B), if they are indifferent, then U(A) = U(B)

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marginal utility of a good (MU)

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the increase in utility from one-unit increase in consumption of the good while holding consumption of other goods constant

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MU =

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MUa = U(a+1) - U(b) where a & b are goods and a is the good you want to find the marginal utility for OR row U / row a

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indifference curve (IC)

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a plot of all consumption baskets that provide consumer with the same level of utility

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indifference curve assumptions

answer

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proof of contradiction

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sometimes called proof by negation - by showing the assumption to be logically impossible, you prove your assumption false and the original conclusion true.

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marginal rate of substitution (MRS)

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rate at which consumer is willing to trade a small amount of good X for a small amount of good Y, and remain equally well off

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MRSxy =

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- delta Y/ delta X; slope of indifference curve OR MUx/ MUy

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MRTS =

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delta K/ delta L OR MPL/MPK

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straight/ less convex indifference curve

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goods that are easily substitutable for one another

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curvy/ more convex indifference curve

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goods that are complimentary to one another

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perfect substitutes

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goods the consumer is indifferent about trading at a fixed rate at any level of consumption of these goods; MRS is constant; VIOLATES indifference curve assumption #4

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perfect complements

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goods consumed only in fixed proportions

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