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Util
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amount of utilities from something
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cardinal utility
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the size of the utility difference between two bundles of goods is supposed to have some sort of significance in choosing combinations
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ordinal utility
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ranks goods relative to one another
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indifference curve
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shows all combinations of goods that provide the consumer with the same satisfaction, or the same utility (the consumer finds all combinations on a curve equally preferred)
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Marginal Rate of Substitution (MRS)
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the rate at which a consumer would be willing to trade off one good for another
Slope of the indifference curve
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slope of indifference curve
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MUx/MUy
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law of diminishing marginal utility
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consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time
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Why are indifference curves downward sloping, non intersecting, and convex
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reflects consumer preferences that:
more in preferred to less
preferences are consistent
diminishing marginal utility(MRS)
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Where does consumer equilibrium occur on graph?
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where indifference curve is tangent to the budget constraint line because that's the highest attainable curve
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consumer equilibrium
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where a consumer's budget is fully on each good and utility is maximized.
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What causes the consumer's budget line to shift?
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change in income or prices
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what happens when the consumer budget line shifts
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changes the point of consumer equilibrium
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What happens when the price of something x falls?
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the budget line rotates outwards, allowing consumers to reach higher indifference curves
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How may the government address a negative externality
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taxation
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What is the goal of a tax
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to create a wedge between the price consumers pay and the price firms receive
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Pigouvian Tax
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a tax on a good with external costs
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Firm
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uses resources to produce outputs that sell. maximize profit
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Three versions of a firm
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proprietorship
partnership
corporations
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Proprietorship
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A form of business organization with one owner who takes all the risks and all the profits
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Partnership
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two or more owners who share all profits and liabilities of the firm
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Corporation
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owned by stockholders who share in its profits but are not personally responsible for its debts
owners not involved in production or decisions
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What defines the market structure?
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the level of competition
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perfectly competitive market
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many firms, each producing identical output, with no barriers preventing new firms from joining in the long run
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long run
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all inputs can be varied
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short run
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at least one input is fixed (held constant)
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pure monopoly
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one firm sells a unique product,
single firm has control over product price
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Oligopoly and Monopoly
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Control by a small number of firms vs control by one firm
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What are the similarities between al firms, regardless of market structure?
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subject to diminishing returns in the short run, same types of costs, and technology constraints, and all attempt to maximize profits
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profit
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total revenue - total cost
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total revenue
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price x quantity sold
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Total Economic Cost (TC)
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explicit cost + implicit cost
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explicit costs
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costs that require a firm to spend money
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implicit costs
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opportunity costs for the use of resources that they do not need to $$ pay with
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example of implicit cost
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firm owns building. decides to use it to produce goods. implicit cost is the loss of the rent they could have made from leasing the building
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Accounting perspective of profit
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total revenue - total explicit costs
no implicit cost included
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economic profit
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total revenue - (explicit costs + implicit costs)
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Do accountants or economists have greater profits?
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accountants because they ignore implicit costs
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zero economic profit
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normal profit
total revenue = all costs, including opportunity costs
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What happens when total revenue exceeds total economic costs?
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economic profit is positive
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economic loss
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total revenue is less than its total cost, including all implicit costs
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best examples of fixed costs (seen in the short run)
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factory capacity, rent, capital equipment
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variable inputs
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inputs that can be changed in the short run
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best example and goal of variable inputs
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labor
can change in order to increase/decrease output
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What is constraint by the limited/fixed input of the short run?
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amount of output that can be produces
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When can new firms enter the market?
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in the long run
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What is an example of a long run decision?
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changing the firms scale of production or capacity
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What does the production method chosen by a firm depend on?
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technology and input prices
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production function
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the relationship between quantity of inputs used to make a good and the quantity of output of that good
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what is the relationship like between output and input in the production function
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increases at increasing rate then increases at a decreasing rate, then decreasing
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marginal product (MP)
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change in output/change in input
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law of diminishing returns
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how adding additional units of a variable first increase, but eventually decrease marginal productivity
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average product
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total product - units of labor
average units per labor
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When will the average product increase?
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when the marginal product of an additional input os greater than the average product
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When will the average product decrease
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when marginal product is less than the average product
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economic profit
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total revenue - explicit costs - implicit costs
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Total Cost (TC)
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FC + VC
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What are the firms variable costs with an output level of zero?
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zero
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What are the firms total costs with a variable cost of zero?
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equal to the fixed costs
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Average costs (AC)
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total costs per unit of output produced
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Average Total Cost (ATC)
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TC/Q
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Average Fixed Cost (AFC)
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TFC/Q
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Average Variable Cost (AVC)
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VC/Q
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When does total cost increase
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when output increases
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What does a TFC graph look like
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straight horizontal line
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what's the distance between TC and TVC on a graph?
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TFC
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What does the graph of ATC and AVC look like and why?
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initially decrease, hit minimum, then increase because as you get more output, they increase
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What does the graph of AFC look like and why?
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decreases over the entire range of output because divining the average by bigger and bigger numbers
"spreading the overhead"
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Marginal Cost (MC)
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extra cost from producing one more unit of a product
Change total cost/change in output=
change TVC/ change Q
because TFC does not change
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What is marginal cost related to?
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AVC and ATC
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How will you remember what the graph of the MC, ATC, and AVC looks like?
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as long as MC is below both averages, it pulls them down to decrease
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Where does MC intersect ATC and AVC?
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at their minimum points
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What does the MC curve look like as it interacts ATC and AVC?
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it is increasing
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How do firms increase output?
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adding variable inputs like labor
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Because of the Law of diminishing returns, what is the relationship between marginal product (MP) and marginal cost (MC)
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MC falls as Mp rises, and rises as MP falls
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wage equation
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W= (change in total cost/change in labor)
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Interpersonal Utility Comparison
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comparing the utility one person receives from a good, service, or activity with the utility another person receives from the same good, service, or activity
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endowment effect
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the tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it
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Framing
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the way an issue is posed
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price elasticity of demand
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the sensitivity of demand to changes in price
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price elasticity of supply
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the sensitivity of supply to changes in price
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Income Elasticity
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sensitivity of demand for a product relative to changes in income
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If income goes up and you want more,
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superior good
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if income goes up, you want less,
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inferior good
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cross-price elasticity of demand
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a measure of how much the quantity demanded of one good responds to a change in the price of another good
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total revenue test
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a method of measuring elasticity by comparing total revenues
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Elastic
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demand is very sensitive to a change in price
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perfectly elastic
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flat, horizontal demand curve; consumers are perfectly price sensitive
"E" graph
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relatively elastic
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price elasticity of demand is greater than 1 but less than infinity
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Inelastic
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demand is not very sensitive to price changes
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perfectly inelastic
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quantity does not respond at all to changes in price
vertical line
zero
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relatively inelastic
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less than 1, greater than 0
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unitary elastic
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describes demand whose elasticity is exactly equal to 1
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Determinants of Elasticity of Demand
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availability of substances (medicine vs soda) (+)
Time (H2O at store vs amusement park)(+)
Value (compared to your budget) (+) (gum vs gem)
Luxury good (elastic) vs necessities (inelastic)
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tax revenue
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government income due to taxation
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tax burden
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a measurement of taxes paid as a proportion of income
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Who pays the burden of a tax on elastic goods?
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producers
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Who pays the burden of a tax on inelastic goods?
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consumers
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substitution effect
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when consumers react to an increase in a good's price by consuming less of that good and more of other goods
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When Cross Price elasticity is positive,
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substitue goods
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When cross price elasticity is negative?
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complimentary goods
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income effect
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the change in consumption resulting from a change in real income
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Water-Diamond Paradox
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Diamonds have a much higher price but a lower value than water. Water has a much higher value but a lower price than diamonds.
explains why MU can be lower than TU
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marginal utility per dollar
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the additional utility from spending one more dollar on that good or service
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Consumer Optimum
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A choice of a set of goods and services that maximizes the level of satisfaction for each consumer, subject to limited income
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budget constraint
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the limit on the consumption bundles that a consumer can afford
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division of labor
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Division of work into a number of separate tasks to be performed by different workers
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specilization of labor
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Devolopment of skills in a specific kind of work
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Why do we practice division of labor/specialization?
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When workers devote their energies to a single component of a productive task, they can produce more goods than if each performed the tasks.
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law of diminishing returns
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the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline
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economies of scale
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When businesses see an increase in returns/output
As output increases, cost of production decreases
left side of long run graph
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constant returns to scale
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as input doubles, output doubles
middle/flat part of long run graph
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diseconomies of scale
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as output increases, average costs increase
decreasing returns of scale
double input, less than double output
right side of long run graph
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What is the output that is expanding in the long run
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something fixed in short run, now changing
plant capacity, buildings/location
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Why does the price elasticity of demand equation need absolute value?
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Because the ratio between price and quantity demanded is inverse due to the law of demand
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When is demand elastic?
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when the elasticity is greater than 1
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What items are considered luxury?
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items consumers can easily live without
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Where is demand price elastic?
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on the top portion of the curve
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Where is price inelastic?
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on the bottom portion of the curve
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What does information on a product's price elasticity of demand help a firm with?
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predicting the impact of a price change on revenue and profit
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Total Revenue
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Price x Quantity
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What happens when you lower the price while demand is inelastic?
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leads to a decrease in total revenue
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Where is demand unit elastic?
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The midpoint of the curve
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When is demand price elastic?
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where total revenue increases as price falls
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where is demand unit elastic?
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where total revenue is maximized
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where is demand price inelastic?
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Were total revenue decreases as price falls
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Elastic demand arrow relationships
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inverse
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inelastic demand arrow relationships
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direct
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Which elasticities have absolute value and which don't?
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Income and cross elasticity do not
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What happens to the curve when income changes?
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it shifts
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When is something a normal good
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when the income elasticity is positive
buying more of it
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When is something an inferior good
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when the income elasticity is negative
buying less of it
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What does a positive cross elasticity mean?
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goods are substitutes
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what does a negative cross elasticity mean?
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goods are compliments
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How can you tell by math when something is perfectly elastic
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horizontal line as graph and zero on denominator
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