Microeconomic Theory - Assignment Essays %

question

Supply curve

answer

relationship between the quantity of a good that producers are willing to sell and the price of that good

question

Demand curve

answer

the relationship between the quantity of a good that consumers are willing to buy and the price of that good

question

price elasticity of demand

answer

measures the percentage change in the quantity demanded of a good that results from one percent change in price

question

income elasticity of demand

answer

measures how much quantity demanded changes with a change in income

question

cross-price elasticity of demand

answer

measures the percentage change in quantity demanded of one good that results from a one precent change in the price of another good

question

price elasticity of supply

answer

measures the percentage change in quantity supplied resulting form a 1 percent change in price

question

point elasticity of demand

answer

price elasticity of demand curve at a particular point on the demand curve

question

arc elasticity of demand

answer

price elasticity of demand calculated over a range of prices

question

market basket

answer

collection of one or more commodities

question

indifference curve

answer

represents all combinations of market baskets that the person is indifferent to

question

indifference map

answer

set of indifference curves, describes preferences for all combinations of goods and services

question

marginal rate of substitution (MRS)

answer

quantifies the amount of one good a consumer will give up to obtain more of another good; measured by the slope of the indifference curve

question

utility function

answer

formula that assigns a level of utility to individual market baskets

question

budget line

answer

indicates all combinations of two commodities for which total money spent equals total income

question

marginal utility

answer

measures the additional satisfaction obtained from consuming one additional unit of a good

question

diminishing marginal utility

answer

as more of a good is consumed, the additional utility the consumer gains will be smaller and smaller

question

price-consumption curve

answer

curve tracing the utility-maximizing combinations of two goods as the price of one changes

question

individual demand curve

answer

curve relating the quantity of a good that a single consumer will buy to its price

question

income-consumption curve

answer

curve tracing the utility-maximizing combinations of two goods as a consumer's income changes

question

substitutes

answer

two goods are substitutes if an increase in price of one leads to an increase in the quantity demanded of the other

question

complements

answer

two goods are complements if an increase in the price of one good leads to a decrease in the quantity demanded of the other

question

substitution effect

answer

change in consumption of a good associated with a change in its price, with the level of utility held constant

question

income effect

answer

change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant

question

giffen good

answer

good whose demand curve slopes upward because the (negative) income effect is larger than the substitution effect

question

market demand curve

answer

curve relating the quantity of a good that all consumers in a market will buy to its price

question

inelastic demand

answer

the quantity demanded is relatively unresponsive to changes in price; total expenditure of the product increases when price increases

question

elastic demand

answer

total expenditure on the produce decreases as the price goes up

question

speculative demand

answer

demand driven not by the direct benefits one obtains from owning or consuming a good but instead by an expectation that the price of the good will increase

question

consumer surplus

answer

difference between what a consumer is willing to pay for a good and the amount actually paid

question

expected value

answer

the weighted average of the payoffs or values resulting from all possible outcomes

question

variability

answer

the extent to which possible outcomes of an uncertain event may differ

question

deviations in payoffs

answer

difference between expected payoff and actual payoff

question

standard deviation

answer

the square root of the average of the squares of the deviations of payoffs associated with each outcome from their expected value

question

expected utility

answer

sum of the utilities associated with all possible incomes weighted by the probability that each income will occur

question

risk averse

answer

person who prefers a certain given income to a risky income with the same expected value; diminishing marginal utility of income

question

risk neutral

answer

no preference between a certain income and an uncertain income with the same expected value; constant marginal utility of income

question

risk loving

answer

consumer would prefer a risky income to a certain income

question

risk premium

answer

maximum amount of money that a risk-averse person would pay to avoid taking a risk

question

theory of the firm

answer

explanation of how a firm makes cost-minimizing production decisions and how its cost varies with its output

question

factors of production

answer

inputs into the production process (labor, capital, materials)

question

production function

answer

function showing the highest output that a firm can produce for every specific combination of inputs

question

short run

answer

period of time in which quantities of one or more production factors cannot be changed

question

fixed input

answer

production factor that cannot be varied

question

long run

answer

amount of time needed to make all production inputs variable

question

average product

answer

output per unit of a particular input

question

marginal product

answer

additional output produced as an input is increased by one unit

question

law of diminishing marginal returns

answer

principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease

question

labor productivity

answer

average product of labor for an entire industry or for the economy as a whole

question

stock of capital

answer

total amount of capital available for use in production

question

technological change

answer

development of new technologies allowing factors of production to be used more effectively

question

isoquants

answer

curve showing all possible combinations of inputs that yield the same output

question

isoquant map

answer

graph combining a number of isoquants, used to describe a production function

question

marginal rate of technical substitution (MRTS)

answer

amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant

question

fixed proportions production function

answer

production function with L-shaped isoquants, so that only one combination of labor and capital can be used to produce each level of output

question

returns to scale

answer

rate at which output increases as inputs are increased proportionately

question

increasing returns to scale

answer

situation in which output more than doubles when all inputs are doubled

question

constant returns to scale

answer

situation in which output doubles when all inputs are doubled

question

decreasing returns to scale

answer

situation in which output less than doubles when all inputs are doubled

question

accounting cost

answer

actual expenses plus depreciation charges for capital equipment

question

economic cost

answer

cost to a firm of utilizing economic resources in production

question

opportunity cost

answer

cost associated with opportunities forgone when a firm's resources are not put to their best alternative use

question

sunk cost

answer

expenditure that has been made and cannot be recovered

question

total cost (TC or C)

answer

total economic cost of production, consisting of fixed and variable cost

question

fixed cost (FC)

answer

cost that does not vary with the level of output and that can be eliminated only by shutting down

question

variable cost (VC)

answer

cost that varies as output varies

question

amortization

answer

policy of treating a one-time cost expenditure as an annual cost spread out over some number of years

question

marginal cost (MC)

answer

increase in cost resulting from the production of one extra unit of output

question

average total cost (ATC)

answer

firm's total cost divided by its level of output

question

average fixed cost (AFC)

answer

fixed cost divided by the level of output

question

average variable cost (AVC)

answer

variable cost divided by the level of output

question

user cost of capital

answer

annual cost of owning and using a capital asset, equal to economic depreciation plus forgone interest

question

rental rate

answer

cost per year of renting one unit of capital

question

isocost line

answer

graph showing all possible combinations of labor and capital that can be purchased for a given total cost

question

expansion path

answer

curve passing through points of tangency between a firm's isocost lines and its isoquants

question

long run average cost curve (LAC)

answer

curve relating average cost of production to output when all inputs, including capital, are variable

question

short run average cost curve (SAC)

answer

curve relating average cost of production to output when level of capital is fixed

question

long run marginal cost curve (LMC)

answer

curve showing the change in long run total cost as output is increased incrementally by 1 unit

question

economies of scale

answer

situation in which output can be doubled for less than a doubling of cost

question

diseconomies of scale

answer

situation in which a doubling of output requires more than a doubling of cost

question

production transformation curve

answer

curve showing the various combinations of two different outputs (products) that can be produced with a given set of inputs

question

economies of scope

answer

situation in which joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product

question

diseconomies of scope

answer

situation in which joint output of a single firm is less than could be achieved by separate firms when each produces a single product

question

degree of economies of scope

answer

percentage of cost savings resulting when two or more products are produced jointly rather than individually

question

price taker

answer

firm that has no influence over market price and thus takes price as given

question

free entry (or exit)

answer

condition under which there are no special costs that make it difficult for a firm to enter (or exit) an industry

question

cooperative

answer

association of businesses or people jointly owned and operated by members for mutual benefit

question

condominium

answer

housing unit that is individually owned by provides access to common facilities that are paid for and controlled jointly by an association of owners

question

profit

answer

difference between total revenue and total cost

question

marginal revenue

answer

change in revenue resulting from a one unit increase in output

question

producer surplus

answer

sum over all units produced by a firm of differences between the market price of a good and the marginal cost of production

question

welfare effects

answer

gains and losses to consumers and producers

question

deadweight loss

answer

net loss of total (consumer + producer) surplus

question

economic efficiency

answer

maximization of aggregate consumer and producer surplus

question

market failure

answer

situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers

question

import quota

answer

limit on the quantity of a good that can be imported

question

tariff

answer

tax on an imported good

question

specific tax

answer

tax of a certain amount of money per unit sold

1 of 97

question

Supply curve

answer

relationship between the quantity of a good that producers are willing to sell and the price of that good

question

Demand curve

answer

the relationship between the quantity of a good that consumers are willing to buy and the price of that good

question

price elasticity of demand

answer

measures the percentage change in the quantity demanded of a good that results from one percent change in price

question

income elasticity of demand

answer

measures how much quantity demanded changes with a change in income

question

cross-price elasticity of demand

answer

measures the percentage change in quantity demanded of one good that results from a one precent change in the price of another good

question

price elasticity of supply

answer

measures the percentage change in quantity supplied resulting form a 1 percent change in price

question

point elasticity of demand

answer

price elasticity of demand curve at a particular point on the demand curve

question

arc elasticity of demand

answer

price elasticity of demand calculated over a range of prices

question

market basket

answer

collection of one or more commodities

question

indifference curve

answer

represents all combinations of market baskets that the person is indifferent to

question

indifference map

answer

set of indifference curves, describes preferences for all combinations of goods and services

question

marginal rate of substitution (MRS)

answer

quantifies the amount of one good a consumer will give up to obtain more of another good; measured by the slope of the indifference curve

question

utility function

answer

formula that assigns a level of utility to individual market baskets

question

budget line

answer

indicates all combinations of two commodities for which total money spent equals total income

question

marginal utility

answer

measures the additional satisfaction obtained from consuming one additional unit of a good

question

diminishing marginal utility

answer

as more of a good is consumed, the additional utility the consumer gains will be smaller and smaller

question

price-consumption curve

answer

curve tracing the utility-maximizing combinations of two goods as the price of one changes

question

individual demand curve

answer

curve relating the quantity of a good that a single consumer will buy to its price

question

income-consumption curve

answer

curve tracing the utility-maximizing combinations of two goods as a consumer's income changes

question

substitutes

answer

two goods are substitutes if an increase in price of one leads to an increase in the quantity demanded of the other

question

complements

answer

two goods are complements if an increase in the price of one good leads to a decrease in the quantity demanded of the other

question

substitution effect

answer

change in consumption of a good associated with a change in its price, with the level of utility held constant

question

income effect

answer

change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant

question

giffen good

answer

good whose demand curve slopes upward because the (negative) income effect is larger than the substitution effect

question

market demand curve

answer

curve relating the quantity of a good that all consumers in a market will buy to its price

question

inelastic demand

answer

the quantity demanded is relatively unresponsive to changes in price; total expenditure of the product increases when price increases

question

elastic demand

answer

total expenditure on the produce decreases as the price goes up

question

speculative demand

answer

demand driven not by the direct benefits one obtains from owning or consuming a good but instead by an expectation that the price of the good will increase

question

consumer surplus

answer

difference between what a consumer is willing to pay for a good and the amount actually paid

question

expected value

answer

the weighted average of the payoffs or values resulting from all possible outcomes

question

variability

answer

the extent to which possible outcomes of an uncertain event may differ

question

deviations in payoffs

answer

difference between expected payoff and actual payoff

question

standard deviation

answer

the square root of the average of the squares of the deviations of payoffs associated with each outcome from their expected value

question

expected utility

answer

sum of the utilities associated with all possible incomes weighted by the probability that each income will occur

question

risk averse

answer

person who prefers a certain given income to a risky income with the same expected value; diminishing marginal utility of income

question

risk neutral

answer

no preference between a certain income and an uncertain income with the same expected value; constant marginal utility of income

question

risk loving

answer

consumer would prefer a risky income to a certain income

question

risk premium

answer

maximum amount of money that a risk-averse person would pay to avoid taking a risk

question

theory of the firm

answer

explanation of how a firm makes cost-minimizing production decisions and how its cost varies with its output

question

factors of production

answer

inputs into the production process (labor, capital, materials)

question

production function

answer

function showing the highest output that a firm can produce for every specific combination of inputs

question

short run

answer

period of time in which quantities of one or more production factors cannot be changed

question

fixed input

answer

production factor that cannot be varied

question

long run

answer

amount of time needed to make all production inputs variable

question

average product

answer

output per unit of a particular input

question

marginal product

answer

additional output produced as an input is increased by one unit

question

law of diminishing marginal returns

answer

principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease

question

labor productivity

answer

average product of labor for an entire industry or for the economy as a whole

question

stock of capital

answer

total amount of capital available for use in production

question

technological change

answer

development of new technologies allowing factors of production to be used more effectively

question

isoquants

answer

curve showing all possible combinations of inputs that yield the same output

question

isoquant map

answer

graph combining a number of isoquants, used to describe a production function

question

marginal rate of technical substitution (MRTS)

answer

amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant

question

fixed proportions production function

answer

production function with L-shaped isoquants, so that only one combination of labor and capital can be used to produce each level of output

question

returns to scale

answer

rate at which output increases as inputs are increased proportionately

question

increasing returns to scale

answer

situation in which output more than doubles when all inputs are doubled

question

constant returns to scale

answer

situation in which output doubles when all inputs are doubled

question

decreasing returns to scale

answer

situation in which output less than doubles when all inputs are doubled

question

accounting cost

answer

actual expenses plus depreciation charges for capital equipment

question

economic cost

answer

cost to a firm of utilizing economic resources in production

question

opportunity cost

answer

cost associated with opportunities forgone when a firm's resources are not put to their best alternative use

question

sunk cost

answer

expenditure that has been made and cannot be recovered

question

total cost (TC or C)

answer

total economic cost of production, consisting of fixed and variable cost

question

fixed cost (FC)

answer

cost that does not vary with the level of output and that can be eliminated only by shutting down

question

variable cost (VC)

answer

cost that varies as output varies

question

amortization

answer

policy of treating a one-time cost expenditure as an annual cost spread out over some number of years

question

marginal cost (MC)

answer

increase in cost resulting from the production of one extra unit of output

question

average total cost (ATC)

answer

firm's total cost divided by its level of output

question

average fixed cost (AFC)

answer

fixed cost divided by the level of output

question

average variable cost (AVC)

answer

variable cost divided by the level of output

question

user cost of capital

answer

annual cost of owning and using a capital asset, equal to economic depreciation plus forgone interest

question

rental rate

answer

cost per year of renting one unit of capital

question

isocost line

answer

graph showing all possible combinations of labor and capital that can be purchased for a given total cost

question

expansion path

answer

curve passing through points of tangency between a firm's isocost lines and its isoquants

question

long run average cost curve (LAC)

answer

curve relating average cost of production to output when all inputs, including capital, are variable

question

short run average cost curve (SAC)

answer

curve relating average cost of production to output when level of capital is fixed

question

long run marginal cost curve (LMC)

answer

curve showing the change in long run total cost as output is increased incrementally by 1 unit

question

economies of scale

answer

situation in which output can be doubled for less than a doubling of cost

question

diseconomies of scale

answer

situation in which a doubling of output requires more than a doubling of cost

question

production transformation curve

answer

curve showing the various combinations of two different outputs (products) that can be produced with a given set of inputs

question

economies of scope

answer

situation in which joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product

question

diseconomies of scope

answer

situation in which joint output of a single firm is less than could be achieved by separate firms when each produces a single product

question

degree of economies of scope

answer

percentage of cost savings resulting when two or more products are produced jointly rather than individually

question

price taker

answer

firm that has no influence over market price and thus takes price as given

question

free entry (or exit)

answer

condition under which there are no special costs that make it difficult for a firm to enter (or exit) an industry

question

cooperative

answer

association of businesses or people jointly owned and operated by members for mutual benefit

question

condominium

answer

housing unit that is individually owned by provides access to common facilities that are paid for and controlled jointly by an association of owners

question

profit

answer

difference between total revenue and total cost

question

marginal revenue

answer

change in revenue resulting from a one unit increase in output

question

producer surplus

answer

sum over all units produced by a firm of differences between the market price of a good and the marginal cost of production

question

welfare effects

answer

gains and losses to consumers and producers

question

deadweight loss

answer

net loss of total (consumer + producer) surplus

question

economic efficiency

answer

maximization of aggregate consumer and producer surplus

question

market failure

answer

situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers

question

import quota

answer

limit on the quantity of a good that can be imported

question

tariff

answer

tax on an imported good

question

specific tax

answer

tax of a certain amount of money per unit sold

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