Micro-Economics Exam 2 University of Cincinnati Erhardt

The difference between the maximum amount that a consumer is willing to pay for a given qunatity of a good and what the consumer actually pays.

Indifference Curves and Utility Maximazation

Shows all combinations of goods that provide the consumer with the same satisfacation or the same utility .(The consumer finds all combinations on a curve equally preferred.)

The number "A" you are willing to give up to get more of "B", neither gaining nor losing utility in the process.

States that as your consumption of "A" increase the amount of "B" you are willing to give up to get Another "A" Declines.

A graph of representation of a consumers tastes. Each curve reflects different level of utility.
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1. Particular indifference curve reflects a constant level of utility so the consumer is indifferent about all consumption combinations along a given curve.
2. If the 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.
3.Because of the law of diminishing marginal rate of substitution, indifference curves bow toward the origin.
4. Higher indifference curves represent higher levels of utility.
5. Indifference curves do not intersect.

Reflects all combinations of goods you can purchase , given their price and your overall budget.
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Consumption possibilities frontier

-Pp/Pm= slope of the line

Opportunity cost of resources employed by a firm that takes the form of cash payments.

A firms opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment.

A firms total revenue minus its explicit costs.

A firms total revenue minus its explicit and implicit costs.

The accounting profit earned when all resources earn their opportunity cost.

Any resource that can't be varied in the short run.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Good Ex.) Labor

Any resource that can't be varied in the short run.
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Ex.) Capital Equipment, Additions on a building

A period of time in which at least one of a firms resources is fixed.

A period of time in which all resources under the firms control are variable.

The total output produced by a firm.

The relationship betweem the amount of resources employed and a firms total product.

The change in total product that occurs when the use a particular resource increases by one unit, all other resources remain constant.

The marginal product of a variable resource increases as each additional unit of that resource is employed.

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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Costs in the Short Run.

Any production cost that is independent of the firms rate of output.

Any production cost that changes as the rate of output changes.

The sum of fixed cost and variable cost.
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TC=FC+VC

Variable Cost divided by output or
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AVC=VC/q

Total Cost divided by the output , sum of the average fixed cost and variable cost.

A curve that indicates the lowest average cost of production at each rate of output when the size or scale of the firms varies also called the planning curve.

Forces that reduce a firms average cost as the scale of operation increases in the long run.

Forces that may eventually increase a firms average cost as the scale of operation increases in the long run.

A cost that occurs when, over the same range of output, long run average cost neither increases nor decreases with changes in firm size.

1997- McDonalds realized they were saving markets, markets don't match up. 5 Regions in the United States to help better fix the markets of the country. Prices no longer were the same everywhere, food cost more in some places, and different menu items were produced.

Resulted in Bull Market Boom.

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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Can be presented as an equation, graph or a table.

A curve that shows all the technologically efficent combinations of two resources such as labor and capital that produce a certain output.
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Properties of Isoquants
1. Isoquants farther from the origin represent greater output rates.
2. Isoquants have negative slopes beause along a given isoquant the quantity of labor employed inversely relates to the qunatity of capital employed.
3. Isoquants do not intersect because each isoquant refers toa specific rate of output.
4. Isoquants are usually convex to the origin.

TC/r W
~~~~~~ . = - ~~~~
TC/w r

The rate at which labor substitutes for capital without affecting output.

Identifies all combinations of capital and labor the firm can hire for a given total cost.

The Line formed by connecting tangency points.

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.

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.

A standardized product, a product that does not differ across producers such as bushels of wheat or an ounce of gold.

A firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm .

The change in total revenue from selling an additional unit in perfect competition, marginal revenue is also the market price.

To maximize profit or minimize lostt. A firm should produce the qunaitity at which marginal revnue equals marginal cost. This rule holds true for all market structures.

Total Revenue divided by the output or AR=tr/q in all market structures average revenue equals the market.

A curve that shows the quantity a firm supplies at each price in the short run, in the perfect competition that a portion of a firms marginal cost curve that intersects and rises above the low point of its average variable cost curve.

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 firms short run supply curve.

A curve that shows the relationship between the price and quantity supplied by the industry once firms adjust fully to any change in the market demand.

An industry that can expand or contract without affecting the long run per unit cost of production the long run industry supply curve is horizontal.

An industry that faces higher per unit production costs as industry output expands in the long run, the long run industry supply curve slopes upward.

The condition that exists when market output is produced using the least cost combination of inputs minimum average cost in the long run.

The condition that exists when firms produce the output most preferred by the consumer marginal benefit equals marginal costs.

A bonus for producers in the short run, the amount by which total revenue exceeds variable costs.

The overall well-being of people in the economy maximized when the marginal cost of production equals the marginal benefit to consumers.

Any impediment that prevents firms from entering an industry and competing on an equal basis with existing firms.

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.

The process of turning innovation into a marketable product.

Already Defined

Sometimes a monopoly occurs when a firm experiences economies of scale as reflected by a downward sloping, long run average cost curve.
EX.) Electricity, Bill Gates with Microsoft

Owns the world supply of uncut diamonds

They began losing control of some of the rough diamond supplies.
Russia
Australia
Canada
These countries all had diamonds

Mid 1980's-90 %
2015- Owned only 30% of the market
They were conflict free diamonds , "Forever mark"

In 2006 they settled a 300 million dollar lawsuit.

A firm that must find the profit maximizing price when the demand curve for its outputs slopes downward.

Net loss to society when a firm uses its market power to restrict output and increase price.

Activities undertaken by individuals or firms to influence public policy in a way that can increase their incomes.

Increasing profit by charging different groups of consumers different prices when the price differences are not justified by a difference in costs.

A monopolist who charges a different price for each unit sold, also called a monopolists dream.

The hypothesis that the creation of new products and production methods destroys market power of firms committed to existing products and old ways of doing business.

10.2 years

9.5%

Sole right to the idea of a product for 20 years

A market structure with many firms selling products that are substances but different enough that each firms demand curve slopes downward firm entry is relatively easy.

These types of firms are price makers.

Low Barriers to entry
Enough Sellers to have a competition

Products Differentiate themselves in four basic ways.

1. Physical Differences- packaging, color, weight
2. Location- price/ convenience
3.Services- Free Delivery, Guarantees, toll free
4. Product image- Endorsements,All natural, loyalty

The difference between a firms profit maximizing quantity and the quantity that minimizes average cost.
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FAST FORWARD

A few firms that behave independently.

An agreement among firms to increase economic profit by dividing the market or fixing the prices.

A group of firms that agree to coordinate the production and pricing decisions to act like a monopolist.
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OPEC Oil largest cartel in the world

A firm whose price is adopted by the other firms in the industry.

THe property of a good whereby a person can be prevented from using it.

The property of a good whereby on person use diminishes other peoples uses.

Goods that are both excludable and rival in consumption.

Goods that are neither excludable nor rival each other in consumption.

Goods that are rival in consumption but not excludable.
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*When a good is excludable but not rival in consumption it is an example of a good produced by a natural monopoly. **

A person who receives the benefit of a good but avoids paying for it.
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National Defense (is neither excludable nor rival in consumption.)
Scientific Research can be patented.
General Knowledge is a public good.
National Institutes of Health
Basic research in Medicine Math Physics Chemistry Biology and Economics.
Temporary Assistance of Needy Families

The study that compares the costs and benefits to society of providing a public good.
Ex.) HIGHWAYS

When you have a common good that is over used and the resources get depleted.
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Modern example would be Air and Water Pollution. Ocean is incredibly difficult to clean.

Areas of the ocean can get fished out, fisheries drop off from exhaustion very little fish in one area after it gets over fished.

The uncompensated impact of one persons actions on the well-being of a by stander(Society).
What policies work best.

Adverse Impact

Beneficial Impacts

Altering the incentives so that people take account of the external effects of their actions.

A better worker, higher wages, and POSITIVE externalities.... more informed voters lower crime rates and higher uses of technology

Social value is greater than the public good, the social value curve lies above the demand curve. A social optimum requires a subsided.

Education is a subsided.

Command and Control policies regulate behavior directly.

Market Based incentives- Allow market to solve their own problem.

A tax designed to induce private decision makers to take account of social costs that arise from a negative externality.