Definitions Flashcards
Ceteris paribus
The assumption that all other factors are held constant
Utility
The satisfaction gained by consumption of a good
Indifference curves
The curves formed by bundles of goods with the same utility
Marginal rate of substitution (MRS)
The rate at which a consumer would trade one good for another
Diminishing marginal rate of substitution
When a consumer has more of good A than good B, they are less willing to exchange good B for good A
Firm
An organisation that turns inputs (labour, capital and materials) into outputs
Labour (L)
Hours worked by employees
Capital (K)
Long lived inputs such as land and buildings
Production function
The various ways that a firm can turn inputs into outputs.
q = f(L,K)
K is fixed in short run
Output (q)
Goods and services
Marginal product of labour (MPL)
The additional output produced by adding one additional unit of labour holding all other factors constant
Average product of labour
The ratio of output provided to amount of labour
Law of diminishing marginal returns
States that if firms keeps increasing an input whilst keeping all other inputs constant, the increases in output will become smaller and smaller.
Isoquant
The combinations of input to achieve a certain level of output
Marginal rate of technical substitution
The rate at which a firm can replace one input with another while keeping output constant.
Returns to scale
How output changes when all inputs are proportionally changed
Opportunity cost
The value lost by taking an alternative choice
Fixed costs
Costs that do not vary with different levels of output (capital)
Variable costs
Costs that vary with increased output (material and labour)
Marginal costs
The change in total costs by producing an additional unit of output
Average total costs
Cost per unit of output
Isocost
The combinations of input that have the same cost
Marginal revenue
The change in revenue by producing one more unit of output
Perfect competition
When both consumers and firms are price takers and there is free entry to the market
Welfare
Consumer surplus + producer surplus
Producer surplus
The difference between the amount a good sells for and the minimum amount that a producer would be willing to sell it for
Consumer surplus
The difference between the maximum a consumer would be willing to buy for and the amount the good sells for
Deadweight loss
The change in welfare caused by a change in pricing
Ad valorem tax
Percentage of the value of the good that is taxed
Statutory incidence
Who is legally responsible for paying the tax
Economic incidence
Who bears the burden of the tax
Perfectly elastic supply
When the supply curve is horizontal
Price discrimination
Charging different consumers different prices
First degree price discrimination
Each consumer pays the maximum they are willing to pay
Second degree price discrimination
Price varies depending on quantity bought
Third degree price discrimination
Different groups of people pay differing prices
Interior solutions
When the optimal bundle lies in the middle of the budget constraint
Corner solutions
When the optimal bundle is on the ‘corner’ (the consumer consumes only one good)
Budget constraint
All possible combinations of goods that a consumer can purchase given income and prices of goods
Optimal point (in regards to budget constraint)
The tangent of an indifference curve to a budget constraint
Normal goods
Quantity demanded increased with increased income
Inferior goods
Demand decreases as income increases
Engel curve
Shows the relationship between quantity demanded and level of income
