Econ 251 Exam 2

The limits to one's consumption choices

Can be bought in any quantity

Expenditure = Income
(Price of good 1 x Quantity of good 1) + (Price of good 2 x Quantity of good 2)

Income expressed as a quantity of goods that an individual can afford to buy
Point where budget line intersects y-axis

-Price of 1 good/Price of another good
aka opportunity cost
-Slope of budget line
ex) $8 per movie/$4 per soda= 2 sodas per movie
To see 1 movie, you must give up 2 sodas

The lower the price of the good on x-axis the flatter the budget line and vice versa

A change in income changes real income NOT relative price
Budget line shifts but slope doesn't change
Increase income, increase real income shifts budget line right
Decrease income, decrease real income, shifts budget line left

Description of one's likes and dislikes

Benefit or satisfaction that one gets from the consumption of goods and services

Total benefit a person gets from the consumption of all the different goods and services
Depends on the level of consumption
aka more consumption = more total utility

Change in total utility that results from one unit increase in the quantity of a good consumed

Situation where a consumer has allocated all of their available income in a way that maximizes their total utility

The marginal utility from a good that results from spending one more dollar on it
ex) gasoline

Marginal Utility of good/price

The situation where some necessities, such as water, have little monetary value, whereas some non-necessities, such as diamonds, have a much higher value.

Line that shows combination of goods among which a consumer is indifferent

A series of indifference curves that resemble the contour lives on a map

Rate at which a person will give up good y to get an additional unit of good x while remaining indifferent
Indifference curve is steep= increasing MRS
Indifference curve is flat= decreasing MRS

Slope of tangent line to any point on the indifference curve

General tendency for a person to be willing to give up less of good y to get one more unit of good x while still remining indifferent as the quantity of x increases

Effect of a change in the price of a good on the quantity of the good consumed
aka point on indifference curve with tangent line

Effect of a change in income on buying plans
aka slope of tangent line on indifference curve

Effect of a change in price on the quantity bought when the consumers hypothetically remains indifferent between the original situation and the new one

Good for which demand decreases when income increases

Substitution effect = increase relative price = decrease quantity of good 1 + increase quantity of good 2
Income effect = decrease real income = decrease quantity good 1 + decrease quantity of good 2
Normal goods ALWAYS obey law of demand

Substitution effect = increase relative price = decrease quantity good 1 + increase quantity of good 2
Income effect = decrease real income = increase quantity good 1 + decrease quantity good 2
Substitution effect > Income Effect

Inferior good that disobeys the law of demand
Substitution effect = increase relative price = decrease quantity good 1 + increase quantity of good 2
Income effect= decrease real income = increase quantity of good 1 + decrease quantity of good 2
Substitution effect < income effect

revenue - explicit costs

total revenue - explicit costs - implicit costs

Time frame where the quantity of at least ONE factor of production is fixed
ex) factory building, machines
To increase output a firm must increase quantity of a variable factor of production usually labor

Time frame when the quantities of ALL factors of production can be varied
To increase output a firm can change its plant and quantity of labor it hires
not easily reversible(sunk cost)

Max output that a given quantity of labor can produce

Increase in total product with 1 more unit of labor while all other inputs remain the same

Change in Quantity/ Change in labor

Quantity of product/Quantity of labor

Marginal product of labor eventually declines

Similar to PPF since it separates attainable(inefficient) and unattainable(inefficient) outputs
ONLY POINTS ON TP ARE EFFICIENT

Slope of total product curve
The steeper the TP line, the larger the marginal product

Relationship between average product and marginal product

Variable Cost + Fixed Cost

Fixed cost/Quantity

Variable Cost/Quantity

Total Cost/Quantity
OR
ATC + AVC

change in total cost(VC+FC)/change in quantity

Relationship between the lowest and attainable ATC and output when the firm can change both the plant it uses and the quantity of labor it employs

Many firms each selling identical product
Many buyers
No restrictions to enter industry

Large number of firms making similar but different product
No restrictions to enter

One firm
No close substitutes
Significant restrictions to enter

Few Firms
May or may not have different products
Significant barriers to entry

Making a product slightly different from the product of a competing firm

Percentage of the value of sales accounted for by the 4 largest firms in the industry

Square of the % market share of each firm summed over the largest 50 firms in a market

Firm that cannot influence the market price because its production is a insignificant part of the total market
ex) firms in perfect competition

Price x Quantity

TR - TC
or
q(p-ATC)

Change in Total Revenue/Change in quantity

MR=Market Price
Where economic profit is maximized either increase/decrease in output and decrease economic profit

Firm can sell any quantity it chooses at the market price so the curve is horizontal at the market price

Total Fixed Cost + (Average Variable Cost - Price) x Quantity

Price and quantity where it is indifferent to produce or shut down
Occurs where AVC is at a minimum

# of firms is fixed

Quantity supplied by ALL firms in the market at each price when each firm's plant and # of firms remain the same

Where demand and supply cross

MR,MC and ATC cross together = break even point
When profit area is above ATC curve = economic profit
When profit area is below ATC curve = economic loss

Supply increases -> shifts right
Decrease market price
eventually eliminates economic profit

Supply decrease -> shifts left
Increase market price
economic loss decreases

When profit and loss has been eliminated and entry and exit has stopped
Competitive market is RARLEY in long-run equilibrium
Market constantly changing due to changes in demand and technology
Happens when MC,ATC,LRAC and MR all cross at Q*

Firm that must sell each unit of its output for the same price to all its customers

Firm that sells different units of a good or service for different prices

ALWAYS elastic
E > 1 elastic
E < 1 inelastic
E = 1 unit elastic

Any surplus (consumer, producer or profit)

The pursuit of wealth by capturing economic rent

A monopoly makes profit by diverting part of consumer surplus to itself(converting consumer surplus into profit). So the pursuit of profit by a monopoly is rent seeking

Barrier to entry create monopolies, but there are no barriers into rent seeking. If economic profit is available, a new rent seeker will try to get some of it. Competition among rent seekers increases the price that must be paid for a monopoly to a point where the rent seeker make 0 economic profit

TR - TVC

The more consumer surplus a firms is able to capture, the closer it gets to their extreme case. Output increases until P=MC(same as perfect competition) No DWL and no Consumer Surplus created

Rules administered by a government agency to influence prices, quantities, entry, and other aspects of economic activity in a firm or industry

Process of removing regulation of prices, quantities, entry and other aspects of economic activity in a firm or industry

IN NATURAL MONOPOLY
Being regulated to set its price equal to marginal cost
Price below LRAC = neg profit

Anytime there are "natural barriers" to entry like cost advantages and "economies of scale"

Long run average cost(LRAC) decreases as Quantity increases

Set price equal to average cost
Profit equals 0
Preferable regulation

Lots of firms
Products differ slightly across firms causing every firm to have a different demand curve(no market demand curve)
Demand of a single firm is relatively elastic but NOT perfectly elastic
No barriers to entry cause profit=0 in long run
Max profit where MR = MC
No production efficiency
No allocative efficiency