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Consumption Bundle
answer
A set of goods or services a consumer considers purchasing
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Utility
answer
A measure of how satisfied a consumer is
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Utility Function
answer
A mathematical function that describes the relationship between what consumers actually consume and their level of well being
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Marginal Utility
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The additional utility a consumer receives from an additional unit of good or service
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Welfare Economics
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The area of economics concerned with the economic well being of society as a whole
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Indifferent
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The special cas in which a consumer derives the same utility level from each of two or more consumption bundles
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Indifference curve
answer
A mathematical representation of the combination of all the different consumption bundles that provide a consumer with the same utility
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Marginal Rate of Substitution
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The rate at which a consumer is willing to trade off one good for another and still be left equally well off
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Perfect Substitute
answer
A good that a consumer can trade for another good, in fixed units, and receive the same level of utility
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Perfect Complement
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A good from which the consumer receives utility dependent on its being used in a fixed proportion with another good
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Bad
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A product that provides a consumer with negative utility
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Budget Constraint
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A curve that describes the entire set of consumption bundles a consumer can purchase when spending all income
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Normal Good
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A good for which consumption rises when income rises
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Inferior Good
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A good for which consumption decreases when income rises
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Income Elasticity
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The percentage change in the quantity consumed of a good in response to a 1% change in income
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Production Function
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A mathematical relationship that describes how much output can be made from different combinations of inputs
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Short Run
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In production economics, the period of time during which one or more inputs into production cannot be changed
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Fixed inputs
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Inputs that cannot be changed in the short run
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Variable Inputs
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Inputs that can be changed in the short run
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Long Run
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In production economics, the period of time during which all inputs into production are fully adjustable
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Marginal Product
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The additional output that a firm can produce by using an additional unit of an input (holding use of the other input constant)
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Diminishing Marginal Product
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A feature of the production; as a firm hires additional units of a given input, the marginal product of that input falls
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Average Product
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The quantity of output produced per unit of input
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Cost minimalization
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A firm's goal of producing a specific quantity of output at minimum cost
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Isoquant
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A curve representing all the combinations of inputs that allow a firm to make a particular quantity of output
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Marginal Rate of Technical Substitution
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The rate at which the firm can trade input X for input Y, holding output constant
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Isocost Line
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A curve that shows all of the input combinations that yield the same cost
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Opportunity Cost
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The value of what producer gives up by using an input
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Fixed Cost
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The cost of the firm's fixed inputs, independent of the quantity of the firm's output
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Variable Cost
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The cost of inputs that vary with the quantity of the firm's output
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Total Cost
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The sum of a firm's fixed and variable costs
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Average Fixed Cost
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A firm's fixed cost per unit of output
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Average Variable Cost
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A firm's variable cost per unit of output
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Average Total Cost
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A firm's total cost per unit of output
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Marginal Cost
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The cost of producing an additional unit of output
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Economies of Scale
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Total cost rises at a slower rate than output rises
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Diseconomies of Scale
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Total cost rises at a faster rate than output rises
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Constant Economies of Scale
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Total cost rises at the same rate as output rises
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Economies of Scope
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The simultaneous production of multiple products at a lower cost than if a firm made product separately
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Consumer Theory Assumptions
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1) Preferences are known
2) More goods are better than less bads
3) Law of Transitivity (Ua> Ub> Uc)
4) Law of Diminishing Utility
2) More goods are better than less bads
3) Law of Transitivity (Ua> Ub> Uc)
4) Law of Diminishing Utility
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Slope/Shape
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Slope = Marginal Rate of Substitution
Shape = convex to origin due to MRS and Law of Diminishing Utility
Shape = convex to origin due to MRS and Law of Diminishing Utility
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Preference for Y
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Steep Convex Curves
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Preference for X
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(Shallow Slope) Horizontal Convex Curves
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Y is a Neuter
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Vertical Lines
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X is a Neuter
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Horizontal Lines
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Y is a Bad (getting more x but y is staying the same)
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Upward Linear Function
u1,u2,u3
u1,u2,u3
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X is a Bad (getting more y but x is staying the same)
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Upward Linear Function
u3,u2,u1
u3,u2,u1
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Substitutes
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Downward Linear Function
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Complements
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L shaped curves
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Price Elasticity
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Ed > 1 = elastic
Negative = Ordinary Good
Positive = Giffen Good
Negative = Ordinary Good
Positive = Giffen Good
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Income Elasticity
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Negative = Inferior Good
Positive = Normal Good
Positive = Normal Good
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Cross Price Elasticity
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Negative = Complements
Positive = Substitutes
Positive = Substitutes
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Long Run Process
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- No fixed costs
LRATC = divide by Q
LRMC = first derivative
Minimization = LRATC equal to LRMC
LRATC = divide by Q
LRMC = first derivative
Minimization = LRATC equal to LRMC
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Short Run Process
answer
- Has fixed costs
SRATC = divide by Q
SRMC = first derivative
Minimization = SRATC equal to SRMC
SRATC = divide by Q
SRMC = first derivative
Minimization = SRATC equal to SRMC
question
Economies of Scope
answer
(TCx + TCy - TCx,y)/TCx,y
Cost of producing together
Cost of producing together
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