question
perfect knowledge
answer
knowledge about prices, substitutes, etc
question
perfect competition
answer
man small firms, virtually identical products, no firm has control over price
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homogenous products
answer
perfectly substitutable goods
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budget constraint
answer
limits imposed on household choices by income, wealth, product prices
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choice set
answer
options limited/defined by budget constraint
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real income
answer
set of opportunities to purchase real goods/ services available to a household as determined by prices and money income
question
utility
answer
satisfaction a product yields
question
marginal utility
answer
additional satisfaction gained by the consumption or use of one more unit of a good/service
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total utility
answer
amount of satisfaction obtained from consumption of a good/service
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law of diminishing marginal utility
answer
the more consumed in a given period, the less satisfaction from each additional unit
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utility-maximizing rul
answer
equating the ratio of the marginal utility of a good to its price for all goods
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diamond/water paradox
answer
things w greatest value in use have little value in exchange; vice versa
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income effect
answer
change in consumption of x due to improvement of being is called the income effect of a price change
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substitution effect
answer
fall in price of product x might cause a household to shift its purchasing pattern to product x
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labor supply curve
answer
supply of labor @ various wage rates
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financial capital market
answer
complex set of institutions in which suppliers of capital and the demand for capital interact
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3 decisions firms must make
answer
how much output to supply, how to produce it, how much of each input to demand
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profit
answer
tr-tc
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normal rate of return
answer
just sufficient to keep owners and investors satisfied, nearly the same as interest rate on risk-free govt bonds
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short run
answer
fixed scale, no entry or exit
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long run
answer
no fixed factors of production
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production technology
answer
quantitative relationship between inputs and outputs
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labor-intensive technology
answer
human labor more than capital
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capital-intensive technology
answer
heavily relies on capital not labor
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production function/ total product function
answer
numberical/mathmatical expression of a relationship between inputs and outputs
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marginal product
answer
additional output tat can be produced by adding one more unit of a specific input
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law of diminishing returns
answer
when additional units of a variable input are added to fixed inputs aftera certain point the marginal product of the variable input declines
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average product
answer
avg amount produced by each variable factor of production
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fixed costs
answer
paid regardless of output
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variable costs
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depend on output
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total cost
answer
TFC + TVC
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Average fixed cost
answer
TFC/q
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spreading over head
answer
avg fixed cost drops
question
average variable cost
answer
TVC/q
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total revenue
answer
p x q
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marginal revenue
answer
p*=d=MR
question
shutdown point
answer
lowest point on AVC curve, firms will shut down in SR below that point
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sr industry supply curve
answer
sum of individual supply curves in short run
question
increasing returns to scale
answer
increase in a firm's scale of production leads to lower cost per unit produced
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constant returns to scale
answer
increase in a firm's scale of production has no effect on costs per unit produced
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decreasing returns to scale
answer
increase in a firm's sclae of production leads to higher cost per unit produced
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LR average cost curve
answer
envelope of a series of short run cost curves
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minimum efficient scale
answer
smalles size at which the long-run average cost curve is at its minimum
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optimal scale of plant
answer
scale that minimizes average cost
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long-run competitive equilibrium
answer
when p=srmc=srac=lrac
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derived demand
answer
demand for inputs depends on demand for products they produce
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productivity of an input
answer
the amount of output produced per unit of that input
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marginal product of labor
answer
additional output produced by 1 additional unit of labor
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marginal revenue product
answer
mpl x p ; the additional revenue a firm earns by employing 1 additional unit of input
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output effect of a factor price increase/decrease
answer
when a firm decreases/increases its output in response toa factor increase/decrease this decreases/increases demand for all factors
question
demand-determined price
answer
price ofa good in fixed supply i.e. land
question
pure rent
answer
return to any factor of production that is in fixed supply
question
physical/tangible capital
answer
1. nonresidential structures 2. durable equipment 3. residential structures 4. inventories of inputs and outputs that firms have in stock
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social capital
answer
infrastructure, services to public
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intangible capital
answer
goodwill
question
human capital
answer
form of intangible capital, includes skills and other knowledge workers need
question
capital stock
answer
for a single firm the current market value of hte firm's plant, equipment, inventories, and tangible assets
question
investment
answer
flow that increases the stock of capital
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depreciation
answer
the decline in an asset's economic value over time
question
capital market
answer
the market in which households supply their savings to firms that demand funds to buy capital goods
question
bond
answer
contract bw a borrower and a lender in which the borrower agrees to pay the loan in the future along w interest
question
capital income
answer
earned on savings that have been put to use through financial capital markets
question
interest
answer
payments made for the use of money
question
interest rate
answer
interest payments expressed as a percentage of the loan
question
stock
answer
a share of stock is an ownership claim on a firm, entitling its owner to a profit share
question
expected rate of return
answer
annual rate of return that a firm expects to obtain through capital investment
question
partial equilibrium analysis
answer
process of examining the equilibrium conditions in individual markets for households and firms separately
question
general equillibrium
answer
condition that exists when all markets in an economy are in simultaneous equilibrium
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efficiency
answer
condition in which the economy is producing what people want at least possible cost
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pareto efficiency
answer
a condition which no change is possible that will make someone better without making someone else worse off
question
market failure
answer
occurs when resources are misallocated. 1. noncompetitive behavior 2. public goods 3. externalities 4. imperfect info
question
public goods
answer
goods/services that bestow collective benefits on members of society; generally no one can be excluded from their benefits. ie national defense
question
externality
answer
cost or benefit imposed or bestowed on an individual or a group that is outside, external to, the transaction
question
imperfect info
answer
absence of full knowledge concerning product characteristics, available prices, and so on
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