ECON 2020 Flashcards by Friday Boyer

UTILITY

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

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Utility is measured in

utils

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TOTAL UTILITY

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

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MARGINAL UTILITY

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

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LAW of DIMINISHING MARGINAL UTILITY

MU and Qd move OPPOSITE

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Marginal Utility=

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

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BUDGET LINE/CONSTRAINT

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

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CONSUMPTION BUNDLE

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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INCOME=

(Qx * Px) + (Qy * Py)

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OPP. COST of X =

max Qy / max Qx = Px / Py

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FACTORS THAT CHANGE THE BUDGET LINE

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

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MARGINAL UTILITY PER DOLLAR=

MU/P

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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?

The good that gives us the most (marginal utility)

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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:

All income is spentAll income is spent
MUx / Px = MUy / Py

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OPTIMAL CONSUMPTION BUNDLE

the bundle that maximizes total utility

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If prices change, we either have to…

rewrite the table or use a graph

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INDIFFERENCE CURVE

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

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Properties of (Most) Indifference Curves

ICs are downward sloping
ICs farther from the origin represent a greater level of TU
ICs never cross
ICs are bowed inward

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Slope =

ΔQy / ΔQx

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MARGINAL RATE OF SUBSTITUTION

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

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MRS =

MUx/MUy

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PRINCIPLE OF DIMINISHING MRS

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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RELATIVE PRICE

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

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RP=

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

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

RP or MUx/MUy = Px/Py

RELATIVE PRICE RULE

At the optimal consumption bundle, MRS = RP

PERFECT SUBSTITUTES

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

PERFECT COMPLEMENTS

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

PROFIT (Π)=

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

TR =

P * Q

TC can be defined multiple ways:

1. Accounting Π = TR – Explicit cost 2. Economic Π = TR – Economic cost

implicit cost

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

NORMAL PROFIT

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

SHORT RUN

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

PLANT CAPACITY

the size of the building and amount of capital equipment

LONG RUN

all costs are variable; entry and exit are possible

FIXED COSTS:

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

VARIABLE COSTS

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

Total Cost =

Total Fixed Cost + Total Variable Cost

Average Fixed Cost =

TFC / Q

Average Variable Cost =

TVC / Q

Average Total Cost =

TC / Q = AFC + AVC

Marginal Cost =

ΔTC / ΔQ

MARGINAL COST

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

TOTAL PRODUCT =

Q = Σ MPL

MC =

MC = Wage / MPLL

MPL=

MPL= ΔQ / ΔL

MARGINAL PRODUCT of LABOR -

- the additional output produced by one more unit of labor

As returns (MPL) diminish,

marginal cost increases

Economies of Scale/Increasing Returns to Scale ––

as q rises, LRATC falls

Diseconomies of Scale/Decreasing Returns to Scale ––

as q rises, LRATC rises

Law of Diminishing Marginal returns.

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.

Factors that shift long run curves:

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

Monopolistic Competition-

– many firms, close subs

Perfect Competition –

many firms, perfect subs

Oligopoly –

– few firms

Monopoly –

– one firm

Implications of Perfect Competition

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

Characteristics of Perfect Competition

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

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

TR and TC both increase.

TC =

TC = MC

TR =

TR = MR

MARGINAL REVENUE --

the additional revenue earned from selling 1 additional unit

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

MR=MC

TR =

TR = P * q

PROFIT MAXIMIZATION RULE

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

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

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

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

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

TR =

TR = P * q

TC =

TC = ATC * q

Π =

Π = TR – TC (Π > 0 if P > ATC)

TC =

TC = ATC * q

BREAKING EVEN

(P = ATC)

SHUTDOWN RULE

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

Breakeven Price:

Breakeven Price: P = min ATC

Shutdown Price:

Shutdown Price: P = min AVC

Opp. cost of X =

Opp. cost of X = max Qy / max

Optimal Bundle =

Optimal Bundle = Income / low P