Chapters 8-14 Flashcards
Total Utility
the total benefit a person gets from the consumption of goods. More consumption gives more utility
Marginal Utility
the change in total utility that results from a unit-increase in the quantity of the good consumed. As the quantity of a good increases, the marginal utility from it decreases. This decrease in marginal utility as the quantity of the good consumed increases is the principle of diminishing marginal utility.
Consumer equilibrium
the situation in which a person has allocated all of their available income in the way that maximizes total utility.
Marginal utility per dollar
the marginal utility from a good that results from spending one more dollar on it. It equals the marginal utility from a good divided by its price
Utility-maximizing rule
a consumer’s total utility is maximized by following the rule of spending all available income and equalize the marginal utility per dollar for all goods
Demand curve slopes downward when…
the price of a good falls, the quantity demanded of that good increases
Behavioral economics
studies the ways in which limits on the human brain’s ability to compute and implement rational decisions, influence economic behavior
Bounded rationally
is rationality that is bounded by the computing power of the human brain
Bounded will-power
is the less than perfect willpower that prevents us from making a decision that we know, at the time of implementing the decision, we will later regret
Bound self-interest
is the limited self-interest that sometimes results in suppressing our own interests to help others
Endowment effect
is the tendency for people to value something more highly simply because they own it
Neuroeconomics
is the study of the activity of the human brain when a person makes an economic decision
Budget line
describes the limits to the household’s consumption choices. It is a constraint on consumption choices. A person can afford any point that is on or inside the budget line, but cannot afford any point that is outside the budget line.
Budget equation
expenditure = income
Real income
the income expressed as a quantity of goods the household can afford to buy.
Relative price
is the price of one good divided by the price of another good. It is the magnitude of the slope of the budget line. It shows how many of a certain object must be foregone to see an additional unit of another object.
Change in the price of a good on the x-axis changes…
the slope of the budget line
Change in money income brings a…
parallel shift of the budget line. The slope of the budget line doesn’t change because the relative price doesn’t change.
Indifference curve
is a line that shows combinations of goods among which a consumer is indifferent. At specific points a person can choose 2 movies for example and drink 6 cases of soda a month.
Marginal rate of substitution (MRS)
measures the rate at which a person is willing to give up good y to get an additional unit of good x, while at the same time remaining indifferent (remaining on the same indifferent curve)
Magnitude of the slope of the indifference curve
measures the marginal rate of substitution
If the indifference curve is relatively steep…
the MRS is high (the person is willing to give up a large quantity of y to get a bit more of x)
If the indifference curve is relatively flat…
the MRS is low (the person is willing to give up a small a quantity of y to get more of x)
A diminishing marginal rate of substitution
is the key assumption of consumer theory. It is a general tendency for a person to be willing to give up less of good y to get one more unit of good x, while at the same time remaining indifferent as the quantity of good x increases.
The shape of the indifference curves reveals the…
degree of substitutability between two goods
The consumer’s best affordable choice is…
on the budget line, on the highest attainable indifference curve, has a marginal rate of substitution between the two goods equal to the relative price of the two goods
The price effect
is the effect of a change in the price of a good on the quantity of the good consumed
The income effect
is the effect of a change in income on the quantity of a good consumed
For a normal good, a fall in price always increases…
the quantity consumed
The substitution effect
is the effect of a change in price on the quantity bought when the consumer remains on the same indifference curve. It is the first reason why the demand curve skiers downward
For a normal good, the income effect…
reinforces the substitution effect and is the second reason why the demand curve slopes downward
For an inferior good, when income increases…
the quality bought decreases. The income effect is negative and works against the substitution effect. As long as the substitution effect dominates, the demand curve still sloped downward.
To isolate the income effect
we reverse the hypothetical pay cut and restore the consumer’s income to its original level
To isolate the substitution effect
we give the consumer a hypothetical pay cut
If the negative income effect is stronger than the substitution effect
a lower price for inferior goods brings a decrease in the quantity demanded and the demand curve slopes upward. This case does not appear to occur in the real world.
The best affordable choices determine…
spending patterns. Changes in prices and incomes change the best affordable point and change consumption patterns.
A firm
an institution that hires factors of production and organizes them to produce and sell goods and services. A firm’s goal is to maximize profit. If a firm fails to maximize profit, the firm is either eliminated or taken over by another firm that seeks to maximize profit
Profit…
equal total revenue minus total cost
Economic profit is equal…
to total revenue minus total cost, with total cost measured as the opportunity cost of production
A firm’s main objective…
profit maximation
Short run
is a time frame in which the quantity of one or more resources used in production is fixed. For most firms, the capital, called the firm’s plant, is fixed in the short run. Other resources like labor, raw materials, and energy can be changed in the short run. Short-run decisions are easily reversed.
Long run
is a time frame in which the quantities of all resources, including the plant size, can be varied. Long run decisions are not easily reversed.
Sunk cost
is a cost incurred by the firm and cannot be changed. If a firm’s plant has no resale value, the amount paid for it is a sunk cost. Sunk costs are irrelevant to a firm’s current decisions.
To increase output in the short run….
a firm must increase the amount of labor employed. Three concepts describe the relationship between output and the quantity of labor employed: total product, marginal product, average product.
Total product
is the total output produced in a given period
Marginal product
of labor is the change in total product that results from a one-unit increase in the quantity of labor employed, with all other inputs remaining the same
Average product of labor
is equal to total product divided by the quantity of labor employed
As the quantity of labor employed increases…
total product increases, marginal product increases initially, but eventually decreases, average product decreases
Total product curve
separates attainable output level from unattainable output levels in the short run
Diminishing marginal returns
arises because each additional worker has less access to capital and less in which to work. They are so pervasive that they are elevated to the status of a “law”
Law of diminishing returns
states that as a firm uses more of a variable input with a given quantity of fixed inputs, the marginal product of the variable input eventually diminishes
When marginal product is below average product…
average product decreases
When marginal product equals average product…
average product is at is maximum
To produce more output in the short run…
the firm must employ more labor, meaning it must increase its costs
Total cost
is the cost of all resources used
Total fixed cost
is the cost of the firm’s fixed inputs. Fixed costs do not change with output
Total variable cost
is the cost of the firm’s variable inputs. Variable costs do change with output
Total cost equals
total fixed cost plus total variable cost
Marginal cost
is the increase in total cost that results from a one-unit increase in total product
With increasing marginal returns…
marginal cost falls as output increases
With diminishing marginal returns…
marginal cost rises as output increases
Average fixed cost
is total fixed cost per unit of output
Average variable cost
is total variable cost per unit of output
Average total cost
is total cost per unit of output
The AVC curve is U shaped because
MP exceeds AP, which brings rising AP and falling AVC. EVentually, MP falls below AP, which brings falling AP and rising AVC
The ATC curve is U shaped because
ATC falls at low output levels because AFC is falling quickly
The ATC curve is the vertical sum of…
the AFC curve and the AVC curve. AFC curve slopes downward as output increases
MC is at its maximum at the same output level at which MP is at its
maximum
When MP is rising
MC is falling
AVC is at its minimum at the same output level at which AP is at its
maximum
When AP is rising
AVC is falling
An increase in productivity shifts the product curves
upward and the cost curves downward
If a technological advance results in the firm using more capital and less labor
fixed costs increase and variable costs decrease. Average total cost increases at low output levels and decreases at high output levels
An increase in the price of a factor of production
increases costs and shifts the cost curves
An increase in fixed cost shifts the total cost and average total cost curves
upward but does not shift the marginal cost curve
An increase in a variable cost shifts the total cost, average total cost, and marginal cost curves
upward
The firm’s production function
is the relationship between the maximum output attainable and the quantities of both capital and labor
The marginal product of capital
is the increase in output resulting from a one-unit increase in the amount of capital employed, holding constant the amount of labor employed
The long run average cost curve is made up from the
lowest ATC for each output level
The long run average cost curve
is the relationship between the lowest attainable average total cost and output when both the plant and labor are varied.
Economies of scale
are features of a firm’s technology that lead to falling long run average cost as output increases
Diseconomies of scale
are features of a firm’s technology that lead to rising long-run average cost as output increases
Constant returns of scale
are features of a firm’s technology that lead to constant long run average cost as output increases
Minimum efficient scale
is the smallest quantity of output at which the long run average cost reaches its lowest level
If the long run average cost curve is U shaped
the minimum point identifies the minimum efficient scale output level
