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total utility
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the total satisfaction a consumer derives from consumption; it could refer to either the total utility of consuming a particular good or the total utility from all consumption
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marginal utility
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the change in total utility a person receives from consuming one additional unit of a good or service
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law of diminishing marginal utility
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the more of a good a person consumes per period, the smaller the increase in total utility from consuming one more unit, other things constant
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consumer equilibrium
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The condition in which an individual consumer's budget is spent and the last dollar spent on each good yields the same marginal utility; therefore, utility is maximized.
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Marginal valuation
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the dollar value of the marginal utility derived from consuming each additional unit of a good
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consumer surplus
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the difference between the maximum amount that a consumer is willing to pay for a given quantity of a good and what the consumer actually pays
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Marginal value of Free Medicare
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...
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indifference curve
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shows all combinations of goods that provide the consumer with the same satisfaction, or the same utility (the consumer finds all combinations on a curve equally preferred)
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Marginal Rate of Substitution (MRS)
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The number of "A" you are willing to give up to get more of "B", neither gaining nor losing utility in the process.
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The law of Diminishing Rate of Substitution
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states that as your consumption of "A" increases, the amount of "B" you are willing to give up to get another "A" declines
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indifference map
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A graphical representation of a consumer's tastes. Each curve reflects a different level of utility.
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Summary of the Properties of Indifference Curves
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1. A particular indifference curve reflects a constant level of utility, so the consumer is indifferent about all consumption combinations along a given curve. Combinations are equally attractive.
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2. If total utility is to remain constant, an increase in the consumption of one good must be offset by a decrease in the consumption of the other good, so each indifference curve slopes downward
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3. Because of the law of diminishing marginal rate of substitution, indifference curves bow toward the origin
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4. Higher indifference curves represent higher levels of utility
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5. Indifference curves do not interest
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2. If total utility is to remain constant, an increase in the consumption of one good must be offset by a decrease in the consumption of the other good, so each indifference curve slopes downward
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3. Because of the law of diminishing marginal rate of substitution, indifference curves bow toward the origin
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4. Higher indifference curves represent higher levels of utility
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5. Indifference curves do not interest
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budget line
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depicts all possible combinations of videos and pizzas, given their prices and your budget
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explicit costs
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opportunity cost of resources employed by a firm that takes the form of cash payments
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implicit costs
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A firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment
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accounting profit
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A firm's total revenue minus its explicit costs
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Economic Profit
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a firm's total revenue minus its explicit and implicit costs
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normal profit
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the accounting profit earned when all resources earn their opportunity cost
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Variable Resources
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any resource that can be varied in the short run to increase or decrease production
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Fixed Resources
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any resource that cannot be varied in the short run
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Short run
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A period during which at least one of a firm's resources is fixed
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Long run
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A period during which all resources under the firm's control are variable
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Total Product
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total output produced by the firm
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production function
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the relationship between the amount of resources employed and a firm's total product
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marginal product
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the change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant
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increasing marginal returns
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the marginal product of a variable resource increases as each additional unit of that resource is employed
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Law of Diminishing Marginal Returns
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As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative
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fixed cost
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any production cost that is independent of the firm's rate of output.
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variable cost
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any production cost that changes as the rate of output changes
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total cost
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the sum of fixed costs plus variable costs, or TC=FC+VC
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average variable cost
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Variable cost divided by output, or AVC=VC/q
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average total cost
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Total cost divided by output, or ATC=TC/q; the sum of average fixed cost and average variable cost, or ATC=AFC+AVC
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long-run average cost curve
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a curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve
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economies of scale
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forces that reduce a firm's average cost as the scale of operation increases in the long run
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diseconomies of scale
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forces that may eventually increase a firm's average cost as the scale of operation increases in the long run
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Constant Long-Run Average Cost
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a cost that occurs when, over some range of output, long run average cost neither increases nor decreases with changes in firm size
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production function
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identifies the maximum quantities of a particular good or service that can be produced per time period with various combinations of resources, for a given level of technology
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Isoquant Curve
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A curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output.
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Properties of Isoquants
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1. isoquants farther from the origin represent greater output rates
2. isoquants have negative slopes because along a given isoquant, the quantity of labor employed inversely relates to the quantity of capital employed
3. isoquants do not intersect because each isoquant refers to a specific rate of output
4. isoquants are usually convex to the origin
2. isoquants have negative slopes because along a given isoquant, the quantity of labor employed inversely relates to the quantity of capital employed
3. isoquants do not intersect because each isoquant refers to a specific rate of output
4. isoquants are usually convex to the origin
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Marginal Rate of Technical Substitution
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the rate at which labor substitutes for capital without affecting output
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isocost line
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identifies all combinations of capital and labor the firm can hire for a given total cost
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Expansion Path
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the line formed by connecting tangency points
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Market Structure
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important features of a market, such as the number of firms, product uniformity across firms, firms' ease of entry and exit, and forms of competition
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perfect competition
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a market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run
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commodity
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a standardized product, a product that does not differ across producers, such as bushels of wheat or an ounce of gold
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price taker
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a firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm
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Golden Rule of Profit Maximization
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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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Average Revenue
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total revenue divided by output, or AR=TR/q; in all market structures, average revenue equals the market price
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Short-Run Firm Supply Curve
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a curve that shows the quantity a firm supplies at each price in the short run; in perfect competition, that portion of a firm's marginal cost curve that intersects and rises above the low point on its average variable cost curve
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short-run industry supply curve
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a curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, the horizontal sum of each firm's short-run supply curve
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long-run industry supply curve
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a curve that shows the relationship between price and quantity supplied by the industry once firms adjust fully to any change in market demand
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A lot of questions on Summary of a perfect Competitive Firm's Short-Run Output Decisions
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At point 2 do you shut down to 1 or stay open At point 3 still in deficit of average total cost At point 4 all average total cost are covered break even point. Above 4 at 5 you are making a profit.
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Barrier to entry
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any impediment that prevents new firms from entering an industry and competing on an equal basis with existing firms
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patent
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a legal barrier to entry that grants its holder the exclusive right to sell a product for 20 years from the date the patent application is filed [Pharmaceuticals]
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innovation
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the process of turning an invention into a marketable product
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economies of scale (already defined)
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already defined
Sometimes A monopoly occurs when a firm experiences economies of scale, as reflected by a downward sloping, long run average cost curve. [Exhibit 1] -electricity
Sometimes A monopoly occurs when a firm experiences economies of scale, as reflected by a downward sloping, long run average cost curve. [Exhibit 1] -electricity
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price maker
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a firm that must find the profit maximizing price when the demand curve for its output slopes downward (Graph: Monopoly)
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Rent seeking
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activities undertaken by individuals or firms to influence public policy in a way that will increase their incomes
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US Post office monopoly
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First class mail, letters
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deadweight loss of monopoly
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net loss to society when a firm uses its market power to restrict output and increase price (Graph: Losses from Monopoly)
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price discrimination
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Increasing profit by charging different groups of consumers' different prices when the price differences are not justified by differences in costs
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perfectly discriminating monopolist
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a monopolist who charges a different price for each unit sold; also called the monopolist's dream
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monopolistic competition
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A market structure with many firms selling products that are substitutes but different enough that each firm's demand curve slopes downward; firm entry is relatively easy
- These types of firms are price markers
- Barriers to entry are low
- but there are enough sellers that they behave competitively
- They can act independently or interdependently
- These types of firms are price markers
- Barriers to entry are low
- but there are enough sellers that they behave competitively
- They can act independently or interdependently
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product differentiation
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Products differentiate themselves in four basic way
1. Physical Differences (packaging, colors, weight, et.)
2. Location (Spatial differentiation, price)
3. Services (Free delivery, guarantees, toll free numbers)
4. Product Image (Endorsements, all natural, Starbucks, Image/brand loyalty, environmentally friendly.)
1. Physical Differences (packaging, colors, weight, et.)
2. Location (Spatial differentiation, price)
3. Services (Free delivery, guarantees, toll free numbers)
4. Product Image (Endorsements, all natural, Starbucks, Image/brand loyalty, environmentally friendly.)
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excess capacity
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the difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost. [In monopolistic competition, firms fall short of producing the quantity that would achieve the lowest average cost... as opposed to perfect competition.]
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Oligopoly
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a market structure characterized by a few firms whose behavior is interdependent
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undifferentiated oligopoly
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An oligopoly that sells a commodity, or a product that does not differ across suppliers, such as an ingot of steel or a barrel of oil
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Differentiated oligopoly
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An oligopoly that sells products that differ across suppliers, such as automobiles or breakfast cereal
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