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budget constraint
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The limits imposed on household choices by income, wealth, and product prices
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choice set or opportunity set
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The set of options that is defined and limited by budget constraint
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diamond/water paradox
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A paradox stating that (1) the things with the greatest value in use frequently have little or no value in exchange and (2) the things with the greatest value in exchange frequently have little or no value in use
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financial capital market
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The complex set of institutions in which suppliers of capital (households that save) and the demand for capital (firms wanting to invest) interact
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homogeneous products
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Undifferentiated output; products that are identical to or indistinguishable from one another
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Real income
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The set of opportunities to purchase real goods and services available to a household as determined by prices and money income
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labor supply curve
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A curve that shows the quantity of labor supplied at different wage rates. Its shape depends on how households react to changes in the wage rate.
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law of diminishing marginal utility
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The more of any one good consumed in a given period, the less satisfaction (utility) generated by consuming each additional (marginal) unit of the same good
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marginal utility (MU)
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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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perfect competition
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An industry structure in which there are many firms, each being small relative to the industry and producing virtually identical products, and in which no firm is large enough to have any control over prices.
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perfect knowledge
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The assumption that households possess a knowledge of the qualities and prices of everything available in the market and that firms have all available information concerning wage rates, capital costs, technology and output prices.
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total utility
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The total amount of satisfaction obtained from consumption of a good or service
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utility
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The satisfaction a product yields
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utility maximizing rule
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Equating the ratio of the marginal utility of a good to its price for all goods
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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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capital intensive technology
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Technology that relies heavily on capital instead of human labor
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economic profit
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profit that accounts for both explicit costs and opportunity costs
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firm
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an organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand
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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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law of diminishing returns
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when additional units of a variable input are added to fixed inputs, after a certain point, the marginal product of the variable input declines
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long run
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The 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/or 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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normal rate of return
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a rate of return on capital that is just sufficient to keep owners and investors satisfied. For relatively risk-free firms, it should be nearly the same as the interest rate on risk-free government bonds.
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optimal method of production
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the production method that minimizes cost for a given level of output
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production
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The process by which inputs are combined, transformed, and turned into outputs
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production function/total product function
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A numerical or mathematical expression
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production technology
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The quantitative relationship between inputs and outputs
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profit
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the difference between total revenue and total cost
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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) or production and firms can neither enter or exit the industry
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total cost
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The total of (1) out of pocket costs and (2) opportunity cost of all factors of production
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total revenue
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The amount received from the sale of the product (q x P)
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economic profit
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profit that accounts for both explicit costs and opportunity costs
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average fixed cost (AFC)
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Total fixed cost divided by the number of units of output; a per-unit measure of fixed costs
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average total cost (ATC)
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Total cost divided by number of units output
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average variable cost (AVC)
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Total variable cost divided by the number of units of output
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fixed cost (FC)
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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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marginal cost
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The increase in total cost that results from producing 1 more unit of output. Marginal costs reflect changes in variable costs.
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marginal revenue
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The additional revenue that a firm takes in when it increases output.
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spreading overhead
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The process of dividing total fixed costs by more units of output. Average fixed cost declines as quantity rises.
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total cost (TC)
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Total fixed costs plus total variable costs
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total fixed costs (TFC)
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The total of all costs that do not change with output even if the output is zero
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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 decided to produce (Pxq)
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total variable cost (TVC)
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The total of all costs that vary with output in the short run
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total variable cost curve
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A graph that shows the relationship between total variable cost and
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variable cost
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A cost that depends on the level of production chosen
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breaking even
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