Chapter 6 Flashcards
perfect knowledge
The assumption that households possess a knowledge of everything available in the market and that firms have all available information concerning wage rates, capital costs, technology and output prices.
perfect competition
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.
homogenous products
Undifferentiated outputs; products that are identical to or indistinguishable from one another.
budget constraint
The limits imposed on household choices by income, wealth, and product prices.
choice set/opportunity set
The set of options that is defined and limited by a budget constraint.
real income
The set of opportunities to purchase real goods and services available to a household as determined by prices and money income.
utility
The satisfaction a product yields.
marginal utility (MU)
The additional satisfaction gained by the consumption of use of one more unit of a good or service.
law of diminishing marginal utility
The more of any one good consumed in a given period, the less satisfaction (utility) generated by consuming each addition (marginal) unit of the same good.
utility-maximizing rule
Equating the ratio of the marginal utility of a good to its price for all goods.
diamond/water paradox
(1) the things with the greatest value in use frequently have little/no value in exchange and (2) the things with the greatest value in exchange have little/no value in use.
