Microeconomics Kendall Kennedy Comprehensive Exam

the amounts of other goods and services that must be given up in order to obtain something

We measure the satisfaction gained from consuming a good or service with ________________

Consumers who make choices based on utility and opportunity costs are acting in

the benefit that arises from an increase in something

the opportunity cost that arises from this increase

the study of choices that individuals and businesses make, the way these choices interact in markets, and the influence of governments

the study of the performance of the national and global economies

testable

an opinion, cannot be tested

1. We have finite resources
2. We have unlimited wants

any natural resource used in production

the physical or mental efforts that people devote to production

any tools, instruments, or buildings used to produce goods and services

the human resource that organizes labor, land, and capital into production

the boundary between those combinations of goods and services that can be produced and those that cannot

shows us what we're able to consume

shows us what we're able to produce

tells us what we must give up for a unit of a good or service

a set of institutions and coordinating mechanisms

the government is limited to protecting private property from theft and establishing an environment where contracts are enforced and people can buy and sell goods, services and resources

the gov owns nearly all property and resources and economic decisions are made by a central authority

where a central government uses incentives to influence markets primarily composed of individuals and firms making economic decisions

- 1.Private property
- 2.Freedom of enterprise and choice
- 3. Active, limited government

how much people are willing to buy

shows the quantity demanded at each potential price level

other things remaining the same, there is a negative or inverse relationship between quantity demanded and price

when the price of a good rises, everything else remaining the same goes up

when your price goes up and your income is the same, you can now afford less

good that can be used with another good. If the price of a good goes up, its compliment goes down

a good that can be used for another good. If a good goes up, the demand for its substitute increases

when quantities are produced on the PPF and where marginal benefit equals marginal cost

the total benefit to society

at the minimum price which producers would be willing to produce a good

goods that are provided usually by governments and used by everyone, or a large portion of society (usually a major cause of market failure)

the benefit that a single consumer of a good or service receives from an additional unit

the benefit from an additional unit of a good or service that everyone else receives

the costs or benefits that fall on someone other than the person choosing an action

the ratio of percentage changes along a curve

most firms take the price set by the market

arises when there are many firms, selling an identical product, with many buyers and no exit restrictions

with opportunity costs factored in, this means positive economic profit implies the best use of the firm's resource

opportunity cost exceeds revenue. There is a better alternative and the firm should close and move their resources

the firms are earning the most they possibly can

the difference between revenue and costs

1. Explicit
2. Implicit

the mandatory payment made by a firm to an outsider to obtain a resource (explicit costs are opportunity costs)

the monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market

the total revenue of a firm less its explicit costs

the difference between revenue both explicit and implicit costs

the slope of the budget line is the price ratio

MRS =. -Px/Py

the combination of two goods at which a consumer maximizes his or her utility given a limited amount to spend

show all possible combinations of goods X and Y that a consumer is indifferent between

the cost of all factors of production. it is the sum of fixed cost and variable cost

the increase in total cost that results from an increase in output

MC = change in Total cost/change in Quantity

1. Technology: advanced technology may lower costs

2. Prices: Higher wages increase costs and cheaper capital will decrease cost

don't change as you produce more

change with quantity produced

the total product divided by the quantity of labor employed

total product/units of labor

Marginal product eventually decreases

the increase in total product resulting from a one-unit increase in the quantity of labor employed

the maximum output that a given quantity of labor can produce

arises when firms produce a good or service that has no close substitutes and there are strong barriers of entry into that market preventing other firms from entering

where marginal revenue is positive

where marginal revenue is negative

A market structure where firms compete by making a similar but slightly different product. These firms are price makers.

a market in which a small number of firms compete

the demand curve for a luxury is more elastic than the demand curve for a necessity

= change in % quantity demanded/change in % other good's price

that goods are substitute

means that goods are complementary

tells us how quantity demanded responds to changes in income

change in % quantity demanded / change in % income

1) greater than 1 = normal
2) between 0 and 1 = normal
3)negative = inferior goods

A decrease in price will increase total revenue. When price and total revenue move in opposite directions, demand is elastic

A price decrease will reduce total revenue. When price and total revenue more in the same direction, demand is inelastic.

{ (changes in quantity) divided by (sum of quantities divided by 2) }

divided by

{ (changes in price) divided by (sum of prices divided by 2) }

1) Substitutability
2) proportion of income
3) Time

The larger the number of substitute goods available, the greater the price elasticity of demand. (Ex: very few substitutes for oil, so oil has a very inelastic demand)

The higher the price of a good relative to consumer income, the greater the price elasticity of demand. If you spend a large percentage of income on a good, demand is more elastic. (Ex: cars have elastic demand)

If a long time has passed since a price change, you are likely to find or develop better substitutes, making demand more elastic

Product Price (P) x Quantity sold (Q)

Product or resource demand whose price elasticity is greater than 1. This means the resulting change in quantity demanded is greater than the percentage change in price.

Product or resource demand for which the elasticity coefficient for price is less than 1. This means the resulting percentage change in quantity demanded is less than the percentage change in price.

extreme situation in which a price change results in no change whatsoever in the quantity demanded

the ratio of percentage changes along a curve

cost that don't change with the amount produced

costs that do not change with the amount produced

fixed costs plus variable costs

addition cost of one additional output

(formula: change in total cost/ change in output)

variable cost/quantity

fixed cost/quantity

Total Cost / Quantity OR (Average Fixed Cost + Average Variable Cost)

% change in quantity supplied / % change in price

the benefit or satisfaction a person gets from the consumption of goods and services

As you consumer more and more of a good, the benefit and pleasure you get from the good decreases. In fact, marginal utility can even become negative.

utility is maximized whenever consumer equilibrium is achieved

Basic idea:
There are lots of things used for aesthetic purposes (diamonds, gold, silver, etc.) that have extremely high prices. There are also necessities for survival (food, water, etc.) that have much lower value. We know that prices are set by supply and demand. But demand, is set by people's marginal benefit.

Question:
Why would people pay high prices for diamonds, but not water? How does the concept of marginal utility help us answer this question?

Answer:
Because marginal utility is decreasing, water has extremely low marginal benefits, even though the total utility we get from water is very high. So the abundance of water (and low supply of diamonds) give us this price disparity, and resolve the paradox.