question
marginal rate of substitution
answer
-slope of indifference curves
the rate at which a consumer is willing to trade one good for another while maintaining the same level of utility
the rate at which a consumer is willing to trade one good for another while maintaining the same level of utility
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Indifference curve
-4 properties
-4 properties
answer
a curve that shows consumption bundles that give the consumer the same level of satisfaction
1. Higher ICs are preferred to lower ones (more is better)
2. ICs are downward-sloping
-If you move from one point to another, you give up some of one good for another good
3. ICs do not cross
4. ICs are bowed inward (greater willingness to give up a good that you already have a lot of)
-Could be a straight line in an extreme case
1. Higher ICs are preferred to lower ones (more is better)
2. ICs are downward-sloping
-If you move from one point to another, you give up some of one good for another good
3. ICs do not cross
4. ICs are bowed inward (greater willingness to give up a good that you already have a lot of)
-Could be a straight line in an extreme case
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Constrained optimization
-tangent point
-tangent point
answer
max utility within budget constraint
-Tangent point: when the slope of indifference curve =slope of budget constraint curve
-Tangent point: when the slope of indifference curve =slope of budget constraint curve
question
Giffen Good
answer
a good for which an increase in the price raises the quantity demanded (inferior goods and income effect dominates the substitution effect; upward sloping demand curve)
-Example: potatoes and rice for low income household
-With price increase on both products and the same budget, you can't buy any of the more expensive product so you end up buying more of the less expensive product
-Example: potatoes and rice for low income household
-With price increase on both products and the same budget, you can't buy any of the more expensive product so you end up buying more of the less expensive product
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Budget constraint
answer
The limits imposed on household choices by income, wealth, and product prices
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Choice set or opportunity set
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The set of options that is defined and limited by a budget constraint.
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Utility
answer
the happiness/satisfaction a product yields
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Law of diminishing marginal utility
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The more of any one good consumed in a given period, the less satisfaction (utility) generated by consuming each additional (marginal) unit of the same good
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Marginal utility (MU)
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The additional satisfaction gained by the consumption or use of one more unit of a good or service.
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How many substitutes do luxuries have?
answer
Many!
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Straight line for indifference curve
answer
perfect substitutes
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90-degree angle for indifference curve
answer
perfect complements
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Higher on difference curve
answer
giving up lots of y for a little x, so you prefer x
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Lower on indifference curve
answer
giving up lots of x for a little y, so you prefer y
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Production
answer
The process by which inputs are combined, transformed, and turned into outputs
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Firm
answer
An organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand.
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Profit
answer
total revenue - total cost
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Total cost (TC)
answer
total fixed costs plus total variable costs
-Including out-of-pocket costs and opportunity cost
-PLL + PKK
-Including out-of-pocket costs and opportunity cost
-PLL + PKK
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Economic profit
answer
Profit that accounts for both explicit costs and opportunity costs.
-Total revenue - explicit costs - implicit costs
-Accounting profit - opportunity cost
-Total revenue - explicit costs - implicit costs
-Accounting profit - opportunity cost
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Implicit costs
answer
indirect costs= opportunity cost
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Accounting profit
answer
total revenue - explicit costs
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Normal profit
answer
when economic profit is zero or alternatively when revenue equals explicit and implicit costs
-Total revenue - (explicit cost - implicit cost) = 0
-Economic profit = 0
-Total revenue - (explicit cost - implicit cost) = 0
-Economic profit = 0
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Perfectly competitive market firms...
answer
Perfectly competitive market firms could earn above normal (super-normal) profit in the short-run; in the long run they earn normal profit or their economic profit = 0 (Market price = Marginal cost)
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Short run
answer
The period of time for which two conditions hold: The firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry.
-We assume that capital is fixed but labor is variable
-We assume that capital is fixed but labor is variable
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Long run
answer
That period of time for which there are no fixed factors of production: Firms can increase or decrease the scale of operation, and new firms can enter and/or existing firms can exit the industry.
-All factors are variable
-All factors are variable
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Optimal method of production (best technology)
answer
The production method that minimizes cost for a given level of output.
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Labor-intensive technology
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Technology that relies heavily on human labor instead of capital.
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Capital-intensive technology
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Technology that relies heavily on capital instead of human labor.
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Production function/total product function
answer
A numerical or mathematical expression of a relationship between inputs and outputs. It shows units of total product as a function of units of inputs.
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Isoquant
answer
A graph that shows all the combinations of capital and labor that can be used to produce a given amount of output.
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Marginal rate of technical substitution
answer
The rate at which a firm can substitute capital for labor and hold output constant.
-MRTS=the factor price ratio, or MPL/PL=MPK/PK
-MRTS=the factor price ratio, or MPL/PL=MPK/PK
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Isocost line
answer
A graph that shows all the combinations of capital and labor available for a given total cost.
-TC = PLL + PKK
-TC = PLL + PKK
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Marginal cost (MC)
answer
The increase in total cost that results from producing 1 more unit of output. Marginal costs reflect changes in variable costs.
-Diminishing Marginal Product of Labor (MPL) and diminishing Marginal Product of Capital (MPK) cause increasing marginal cost (MC)
-Negative relationship between MPL and MC!
-Diminishing Marginal Product of Labor (MPL) and diminishing Marginal Product of Capital (MPK) cause increasing marginal cost (MC)
-Negative relationship between MPL and MC!
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Average variable cost (AVC)
answer
Total variable cost divided by the number of units of output.
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Average total cost (ATC)
answer
Total variable cost divided by the number of units of output.
AFC +AVC
AFC +AVC
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Average fixed costs (AFC)
answer
Total fixed cost divided by the number of units of output; a per-unit measure of fixed costs
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Maximizing profit: 2 questions
answer
how much output to supply and how much capital (K) and labor (L) should be used as inputs/should be demanded?
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Law of diminishing marginal productivity
answer
When additional units of a variable input are added to fixed inputs, after a certain point, the marginal product of the variable input declines.
-Diminishing Marginal Product of Labor (MPL) and diminishing Marginal Product of Capital (MPK) cause increasing Marginal Cost (MC).
TC = VC + FC
VC = ∆L ∗ PL
MPL = ∆q/∆L
-Diminishing Marginal Product of Labor (MPL) and diminishing Marginal Product of Capital (MPK) cause increasing Marginal Cost (MC).
TC = VC + FC
VC = ∆L ∗ PL
MPL = ∆q/∆L
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Efficient scale
answer
bottom of ATC
question
MC < ATC
MC < AVC
MC < AVC
answer
ATC falls
AVC falls
AVC falls
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MC>ATC
MC>AVC
MC>AVC
answer
ATC rises
AVC rises
AVC rises
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the MC curve crosses...
answer
the minimum point of the AVC curve
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shape of ATC
answer
U-shaped
question
shape of AFC
answer
decreasing
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shape of AVC
answer
increasing
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Q versus q
answer
Q=market
q=firm/number of units of output
q=firm/number of units of output
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Perfectly competitive market
answer
d = marginal revenue = market price
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Capital (K)
answer
he equipment and structures used to produce goods and services
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Total revenue
answer
Price x Quantity
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Cost minimize or optimum inputs bundle
answer
slope of isoquant=slope of isocost
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Cost curves for a typical firm
answer
1. Rising Marginal Cost (MC) -Diminishing Marginal Product
2. U-shape Average Total Cost (ATC) - Decreasing AFC and Increasing AVC (MC).
Efficient Scale= the bottom of ATC
3. MC < ATC then ATC fall; MC > ATC then ATC raise
4. Short-run and Long-run ATC
5. Economics of Scale (b/c specialization) and Diseconomics of Scale (b/c coordination problems)
2. U-shape Average Total Cost (ATC) - Decreasing AFC and Increasing AVC (MC).
Efficient Scale= the bottom of ATC
3. MC < ATC then ATC fall; MC > ATC then ATC raise
4. Short-run and Long-run ATC
5. Economics of Scale (b/c specialization) and Diseconomics of Scale (b/c coordination problems)
question
Golden Rule of Profit Maximization
answer
to maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures
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