Chapter 5-8 Flashcards
What is marginal utility ?
the amount of satisfaction a consumer gets from having one more good or service. .
What is the law of diminishing marginal utility?
additional utility decreases with every unit added
What is the price of elasticity of demand?
change in quantity demanded of a good or service divided change in price.
What is the price of elasticity?
percent change of quantity demanded/supplied divided by change in price
What is the price elasticity of supply?
change in quantity supplied divided by change in price
What does “elastic” demand or supply mean?
It means there was a high responsiveness to price change
What does “inelastic” demand or supply mean?
It means there was a low responsiveness to price change.
What is tax incidence?
how the burden of a tax is divided between consumers and producers
What happens to tax when demand is elastic?
The buyer pays the tax
What happens to tax when demand is inelastic?
The firm pays the tax
What happens to elasticity in the long run?
In the long run elasticity becomes greater because the consumer have more options in the long run than the short run
What is utility?
satisfaction
What are the two approaches of maximizing utility
- Calculate marginal utility per dollar
- Show it graphically
What is the substitution effect?
it occurs when the price of good changes and people choose the lower price good over the higher price good
What is the income effect?
A higher price causes a reduction in buying power leading to a person buying less of that good.
How does a price increase of a good affect the budget constraint?
It causes the line to move inward
What is the Labor-Leisure Budget Constraint?
shows the relationship between working and leisure. Depending on the utility maximizing choice a person may choose to work more or take more time off.
What causes the backward bending labor supply curve?
a rise in wages causes less hours of labor
What are explicit costs?
out of pocket costs
What are implicit costs?
the cost of resources already owned by the firm that could have been put to some other use
What is accounting profit?
total revenue minus explicit costs
What is economic profit?
total revenue minus total costs
What are the four different market structures?
- Perfect competition
- Monopolistic competition
- Oligopoly
- Monopoly
What are factor payments?
What the firm pays for the use of factors in production (e.g. raw materials, rent, wages)
What are average costs?
total costs divided by quantity of output
What are variable costs?
cost of variable inputs (e.g. labor)
What are fixed costs?
cost of fixed inputs
What is average variable costs?
variable costs divided by quantity of output
What are marginal costs?
additional costs of producing one more unit of output
What are the 4 assumptions of perfect competition?
- Firms produce a identical product
- There are many buyers and many sellers
- Sellers and buyers have information to make rational decisions
- Firms can enter and leave at anytime
What is a price taker?
A perfectly competitive firm. The pressure of competing firms forces them to accept the equilibrium price.
What are the two ways of maximizing profit?
- marginal revenue=marginal costs
- total revenue > total costs
How can you tell if the a firm makes profit?
If the market price if higher than the firms cost of production
How can you tell if the firm is not making profit?
If the market price is lower than the firms cost of production
If a firm doesn’t make money does it shutdown immediately or stay in the market?
If a firm that is able to pay it’s fixed costs even though they are not making profit will continue to limp along.
In the long run how to firms enter and exit the market?
Firms will enter the market and expand so long as they are profitable. A firm will exit when in the long run it has greatly reduced production to the point where the losses are too great to continue.
