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North > ECON 2020 > Flashcards

ECON 2020 Flashcards

1
Q

UTILITY

A

the satisfaction a consumer obtains from the
consumption of a good or service

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2
Q

Utility is measured in

A

utils

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3
Q

TOTAL UTILITY

A

the total satisfaction a person derives
from consuming some specific quantity; TU and Qd move TOGETHER; TU = Σ MU

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4
Q

MARGINAL UTILITY

A

the additional utility a consumer
derives from an additional unit of a good

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5
Q

LAW of DIMINISHING MARGINAL UTILITY

A

MU and Qd move OPPOSITE

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6
Q

Marginal Utility=

A

ΔTU / ΔQ
NOTE: As MU falls, willingness to pay falls as well

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7
Q

BUDGET LINE/CONSTRAINT

A

line that shows the different consumption bundles a consumer can purchase with a specific money income

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8
Q

CONSUMPTION BUNDLE

A

the combination of goods and services
consumed by an individual
NOTE: the price of a consumption bundle cannot exceed the consumer’s total income

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9
Q

INCOME=

A

(Qx * Px) + (Qy * Py)

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10
Q

OPP. COST of X =

A

max Qy / max Qx = Px / Py

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11
Q

FACTORS THAT CHANGE THE BUDGET LINE

A
  1. Income- decrease or increase in available funds.
  2. Price of Y- A change in price causes a rotation of the budget line
  3. Price of X- A change in price causes a rotation of the budget line
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12
Q

MARGINAL UTILITY PER DOLLAR=

A

MU/P

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13
Q

If we buy stuff to maximize total utility,maximize total utility, and we stop buying stuff when all income is spent, then…
What Do We Buy First?

A

The good that gives us the most (marginal utility)

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14
Q

For utility maximization, the consumer must get the same amount of utility from the last dollar spent on each good.
In other words, consumers reach the optimal consumption bundle when:

A
  1. All income is spentAll income is spent
  2. MUx / Px = MUy / Py
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15
Q

OPTIMAL CONSUMPTION BUNDLE

A

the bundle that maximizes total utility

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16
Q

If prices change, we either have to…

A

rewrite the table or use a graph

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17
Q

INDIFFERENCE CURVE

A

a line that shows the consumption bundles
that yield the same amount of total utility

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18
Q

Properties of (Most) Indifference Curves

A
  1. ICs are downward sloping
  2. ICs farther from the origin represent a greater level of TU
  3. ICs never cross
  4. ICs are bowed inward
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19
Q

Slope =

A

ΔQy / ΔQx

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20
Q

MARGINAL RATE OF SUBSTITUTION

A

the ratio of the marginal utility of one good to the marginal utility of another;

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21
Q

MRS =

A

MUx/MUy

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22
Q

PRINCIPLE OF DIMINISHING MRS

A
  • the more of good X a person consumes in proportion to good Y, the less Y the consumer is willing to substitute for X; MRS decreases as Qx increases
  • the MRS changes along an IC because of diminishing
    marginal utility
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23
Q

RELATIVE PRICE

A

The ratio of the price of one good to the price of the
other

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24
Q

RP=

A

Px / Py
NOTE: slope of budget line = - Px / Py

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25
Q

Thus, we can find the optimal bundle by setting
MRS =

A

RP or MUx/MUy = Px/Py

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26
Q

RELATIVE PRICE RULE

A

At the optimal consumption bundle, MRS = RP

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27
Q

PERFECT SUBSTITUTES

A

goods for which the marginal rate of substitution is constant, no matter how much of each is consumed

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28
Q

PERFECT COMPLEMENTS

A

goods that a consumer will consume in the same ratio regardless of their relative price

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29
Q

PROFIT (Π)=

A

Π = Total Revenue – Total Cost= Total Revenue – Total Cost

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30
Q

TR =

A

P * Q

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31
Q

TC can be defined multiple ways:

A
  1. Accounting Π = TR – Explicit cost
  2. Economic Π = TR – Economic cost
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32
Q

implicit cost

A

which for a producer is the
forgone income from employing resources in their next-best use.

33
Q

NORMAL PROFIT

A
  1. the firm is doing just as well as it could in another industry
  2. Accounting profit = Implicit Cost
  3. Economic profit = $0
34
Q

SHORT RUN

A

an amount of time insufficient to allow plant
capacity to vary. Also, firms may shutdown production, but they cannot exit the market.

35
Q

PLANT CAPACITY

A

the size of the building and amount of
capital equipment

36
Q

LONG RUN

A

all costs are variable; entry and exit are possible

37
Q

FIXED COSTS:

A
  1. cannot be varied in the short run
  2. do not change as output changes
  3. still exist when output falls to zero
  4. usually associated with capital
38
Q

VARIABLE COSTS

A

costs that change as output changes; go to zero during shutdown

39
Q

Total Cost =

A

Total Fixed Cost + Total Variable Cost

40
Q

Average Fixed Cost =

A

TFC / Q

41
Q

Average Variable Cost =

A

TVC / Q

42
Q

Average Total Cost =

A

TC / Q = AFC + AVC

43
Q

Marginal Cost =

A

ΔTC / ΔQ

44
Q

MARGINAL COST

A

the additional cost associated with a
1 unit increase in output1 unit increase in output

45
Q

TOTAL PRODUCT =

A

Q = Σ MPL

46
Q

MC =

A

MC = Wage / MPLL

47
Q

MPL=

A

MPL= ΔQ / ΔL

48
Q

MARGINAL PRODUCT of LABOR -

A
  • the additional output produced by one more unit of labor
49
Q

As returns (MPL) diminish,

A

marginal cost increases

50
Q

Economies of Scale/Increasing Returns to Scale ––

A

as q rises, LRATC falls

51
Q
A
52
Q

Diseconomies of Scale/Decreasing Returns to Scale ––

A

as q rises, LRATC rises

53
Q

Law of Diminishing Marginal returns.

A

As successive units of a variable resource are added to a fixed resource,the marginal product of the variable resource eventually decreases. Only applies in the short run. Explains why the short run cost curves eventually increase as output increases.

54
Q

Factors that shift long run curves:

A
  1. INPUT PRICES – input prices and cost curves move together
  2. TECHNOLOGY – as technology improves, costs fall

3.REGULATION/TAXES –REGULATION/TAXES – taxes and costs move
together

55
Q

Monopolistic Competition-

A

– many firms, close subs

56
Q

Perfect Competition –

A

many firms, perfect subs

57
Q

Oligopoly –

A

– few firms

58
Q

Monopoly –

A

– one firm

59
Q

Implications of Perfect Competition

A
  1. No individual can affect Pe or Qe
  2. Firm Ed = ∞; no advertising
  3. Firms are price takers(set q only)
  4. LR Π= 0
60
Q

Characteristics of Perfect Competition

A
  1. Many, small buyers and sellers
  2. Standardized products(perfect subs)
  3. Perfect information
  4. No barriers to entry
61
Q

When a firm produces and sells an additional unit of a good,

A

TR and TC both increase.

62
Q

TC =

A

TC = MC

63
Q

TR =

A

TR = MR

64
Q

MARGINAL REVENUE –

A

the additional revenue earned from selling 1 additional unit

65
Q

Firms find the profit-maximizing level of output (q*) where

A

MR=MC

66
Q

TR =

A

TR = P * q

67
Q

PROFIT MAXIMIZATION RULE

A

Firms find the profit-maximizing level of output (q*) where MR = MC

68
Q

 EXAMPLE:
 P = $30; MC = 2 + 4q
 Find q*

A

SOLUTION:
 MR = MC
 P = MR = 30
 30 = 2 + 4q
 28 = 4q
 q* = 7 units

69
Q

EXAMPLE:
 P = $30; q* = 7 units
 Find Π if ATC = $25

A

SOLUTION:
 Π = TR – TC = (PQ) – (ATCQ)= (P – ATC) * Q
 Π = (30 – 25) * 7
 Π = 5 * 7 = $35

70
Q

TR =

A

TR = P * q

71
Q

TC =

A

TC = ATC * q

72
Q

Π =

A

Π = TR – TC (Π > 0 if P > ATC)

73
Q

TC =

A

TC = ATC * q

74
Q

BREAKING EVEN

A

(P = ATC)

75
Q

SHUTDOWN RULE

A

-If P ≥ AVC then the firm should produce q* where≥ MR = MC
-If P < AVC then the firm should shutdown (q* = 0)

76
Q

Breakeven Price:

A

Breakeven Price: P = min ATC

77
Q

Shutdown Price:

A

Shutdown Price: P = min AVC

78
Q

Opp. cost of X =

A

Opp. cost of X = max Qy / max

79
Q

Optimal Bundle =

A

Optimal Bundle = Income / low P

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