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Utility
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The satisfaction a product yields
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Income Effect
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The change in consumption of the original product due to this improvement in well-being, or you feeling richer. Ex. The price of a product lowers which allows you to either buy more of that product or spend that extra income somewhere else.
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Indifference Curves
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A set of points, each representing a combination of some amount of good X and some amount of good Y, that all yield the same amount of total utility.
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Marginal Utility
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The additional satisfaction gained by the consumption or use of one more unit of a good or service.
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Substitution Effect
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When the price of a product falls, that product also becomes relatively cheaper. That is, it becomes more attractive relative to potential substitutes. A fall in the price of product X might cause a household to shift its purchasing pattern away from substitutes toward X.
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Marginal Rate of Substitution
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defined as MUx/MUy, or the ratio at which a household is willing to substitute X for Y. We assume a diminishing marginal rate of substitution.
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Budget Line
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A graph that shows the combinations of two goods/services a person can buy within there given income.
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Advertising
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A written or spoken media message designed to interest consumers in purchasing a product or service
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Profit-maximizing
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All firms must make several basic decisions to achieve what we assume to be their primary objective—maximum profits. Marginal revenue must at least equal Marginal cost for a firm to maximize their profit. Questions they ask themselves are 1) How much output to supply, 2) Which production technology to use, and 3) How much of each input of to demand
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Short run
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The period of time for which two conditions hold: The firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry.
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Total Product (TP)
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Is the total quantity of output produced.
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Production Function
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Relationship between the maximum amount a firm can produce and various quantities of inputs.
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Profit
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The difference between total revenue and total cost.
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Long run
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That period of time for which there are no fixed factors of production: Firms can increase or decrease the scale of operation, and new firms can enter and existing firms can exit the industry.
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Marginal Product
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The additional output that can be produced by adding one more unit of a specific input, ceteris paribus.
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Economic Costs
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They can be explicit or implicit. Explicit costs are the monetary payments that a firm makes to obtain resources from nonowners of the firm. Implicit costs are the monetary payments that would have been paid for self-owned or self-employed resources if they had been used in their next best alternative outside the firm. Both types of costs are opportunity costs because the use of the resources for this use means that they are not available for use in the next best alternative use.
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Technology (Three types)
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The three types include Production, Labor-Intensive, and Capital-Intensive technology.
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Production Technology
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The quantitative relationship between inputs and outputs.
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Labor-Intensive Technology
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Technology that relies heavily on human labor instead of capital.
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Capital-Intensive Technology
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Technology that relies heavily on capital instead of human labor.
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Average Product
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The average amount produced by each unit of a variable factor of production.
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Accounting Profit
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Is the difference between a firm's total sales revenue and its total explicit costs.
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Total Revenue (TR)
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The total amount that a firm takes in from the sale of its product: the price per unit times the quantity of output the firm decides to produce (P x q).
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Variable Cost
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A cost that depends on the level of production chosen.
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Economies of Scale
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(a decline in long-run average total costs) Arise because of labor specialization, managerial specialization, efficient capital, and other factors such as spreading the start-up, advertising, or development costs over an increasing level of output.
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Economic Profit
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Profit that accounts for both explicit and opportunity costs.
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Short/Long Run
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A distinction is made between the short run and the long run. The firm's economic costs vary as the firm's output changes. These costs depend on whether the firm is able to make short-run or long-run changes in its resource use. In the short run, the firm's plant is a fixed resource, but in the long run it is a variable resource. So, in the short run the firm cannot change the size of its plant and can vary its output only by changing the quantities of the variable resources it employs.
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Marginal Productivity
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Is the change made in total product from a change in a variable resource input. (Definition of Marginal Product)
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Diseconomies of Scale
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Arise primarily from the problems of efficiently managing and coordinating the firm's operations as it becomes a large-scale producer.
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Implicit Costs
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Are the monetary payments that would have been paid for self-owned or self-employed resources if they had been used in their next best alternative outside the firm.
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Fixed Cost
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Any cost that does not depend on the firms' level of output. These costs are incurred even if the firm is producing nothing. There are no fixed costs in the long run.
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Explicit Costs
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These are the monetary payments that a firm makes to obtain resources from nonowners of the firm.
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Law of Diminishing Returns
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Determines the manner in which the costs of the firm change as it changes its output in the short run. As more units of a variable resource are added to a fixed resource, beyond some point the marginal product from each additional unit of a variable resource will decline.
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Pure Competition (Perfect Competition)
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A market structure characterized by an extremely large number of sellers, none strong enough to significantly influence price or supply. (Definition of Perfect Competition) An industry structure in which there are many firms, each small relative to the industry, producing identical products and in which no firm is large enough to have any control over prices. In perfectly competitive industries, new competitors can freely enter the market and old firms can exit.
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Price Taker
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A buyer or seller that is unable to affect the market price
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Break-even
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The situation in which a firm is earning exactly a normal rate of return. Marginal costs = Marginal benefits
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Number of Sellers
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Usually the number of sellers in a market changes as profits change; firms will enter when profit is high and exit when it is low
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Barriers to Entry/Exit
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It is a characteristic of a market that prevents new firms from joining, or leaving, the market
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Profit Maximization
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A method of setting prices that occurs when marginal revenue equals marginal cost.
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Homogeneous Product
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Undifferentiated products; products that are identical to, or indistinguishable from, one another.
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Shutdown point
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The lowest point on the average variable cost curve. When price falls below the minimum point on AVC, total revenue is insufficient to cover variable costs and the firm will shut down and bear losses equal to fixed costs.
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Operate
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When a firms total revenue is greater than or equal to the variable costs, then they will continue to operate as a business.
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Loss Minimization
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Faced with the certainty of incurring losses, the firm's goal is to incur the lowest loss possible from its production and sale of goods and services.
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Monopoly
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An industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits.
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Price and Output Decisions
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***Read the slides on chapter 13 PowerPoint
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Rent-seeking Behavior
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Actions taken by households or firms to preserve economic profits.
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Price Discrimination
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Charge different consumers different prices. Charging different prices to different buyers for identical products.
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Antitrust Policy
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The basic purposes of antitrust policy are to restrict monopoly power, promote competition, and achieve allocative efficiency.
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Barriers to Entry
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Factors that prevent new firms from entering and competing in imperfectly competitive industries.
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Antitrust Legislation
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This included the Sherman Act of 1890, Clayton Act of 1914, Federal Trade Commission Act of 1914, and Celler-Kefauver Act of 1950.
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Imperfect Competition
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(Definition of Imperfectly Competitive Industry) An industry in which individual firms have some control over the price of their output. The monopoly case shows that imperfect competition leads to an inefficient allocation of resources.
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What are forms of Imperfect Competition?
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A monopoly is an industry with a single firm in which the entry of new firms is blocked. An oligopoly is an industry in which there is a small number of firms, each large enough so that its presence affects prices. Firms that differentiate their products in industries with many producers and free entry are called monopolistic competitors.
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Government Failure
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Occurs when the government becomes the tool of the rent seeker and the allocation of resources is made even less efficient by the intervention of government.
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Inefficiency
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Associated with the fact that higher prices discourage consumption by people whose value of a good exceeds its social cost of production. Monopoly price of $7 from $5 discourages people who would have bought the pizza at five dollars. The marginal cost was $5. So, since you raised the price above marginal cost the people you lost from that change are considered the "loss" (inefficiency).
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