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
Thus, we can find the optimal bundle by setting MRS =
RP or MUx/MUy = Px/Py
26
RELATIVE PRICE RULE
At the optimal consumption bundle, MRS = RP
27
PERFECT SUBSTITUTES
goods for which the marginal rate of substitution is constant, no matter how much of each is consumed
28
PERFECT COMPLEMENTS
goods that a consumer will consume in the same ratio regardless of their relative price
29
PROFIT (Π)=
Π = Total Revenue – Total Cost= Total Revenue – Total Cost
30
TR =
P * Q
31
TC can be defined multiple ways:
1. Accounting Π = TR – Explicit cost 2. Economic Π = TR – Economic cost
32
implicit cost
which for a producer is the forgone income from employing resources in their next-best use.
33
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
34
SHORT RUN
an amount of time insufficient to allow plant capacity to vary. Also, firms may shutdown production, but they cannot exit the market.
35
PLANT CAPACITY
the size of the building and amount of capital equipment
36
LONG RUN
all costs are variable; entry and exit are possible
37
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
38
VARIABLE COSTS
costs that change as output changes; go to zero during shutdown
39
Total Cost =
Total Fixed Cost + Total Variable Cost
40
Average Fixed Cost =
TFC / Q
41
Average Variable Cost =
TVC / Q
42
Average Total Cost =
TC / Q = AFC + AVC
43
Marginal Cost =
ΔTC / ΔQ
44
MARGINAL COST
the additional cost associated with a 1 unit increase in output1 unit increase in output
45
TOTAL PRODUCT =
Q = Σ MPL
46
MC =
MC = Wage / MPLL
47
MPL=
MPL= ΔQ / ΔL
48
MARGINAL PRODUCT of LABOR -
- the additional output produced by one more unit of labor
49
As returns (MPL) diminish,
marginal cost increases
50
Economies of Scale/Increasing Returns to Scale ––
as q rises, LRATC falls
51
52
Diseconomies of Scale/Decreasing Returns to Scale ––
as q rises, LRATC rises
53
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.
54
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
55
Monopolistic Competition-
– many firms, close subs
56
Perfect Competition –
many firms, perfect subs
57
Oligopoly –
– few firms
58
Monopoly –
– one firm
59
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
60
Characteristics of Perfect Competition
1. Many, small buyers and sellers 2. Standardized products(perfect subs) 3. Perfect information 4. No barriers to entry
61
When a firm produces and sells an additional unit of a good,
TR and TC both increase.
62
TC =
TC = MC
63
TR =
TR = MR
64
MARGINAL REVENUE --
the additional revenue earned from selling 1 additional unit
65
Firms find the profit-maximizing level of output (q*) where
MR=MC
66
TR =
TR = P * q
67
PROFIT MAXIMIZATION RULE
Firms find the profit-maximizing level of output (q*) where MR = MC
68
 EXAMPLE:  P = $30; MC = 2 + 4q  Find q*
SOLUTION:  MR = MC  P = MR = 30  30 = 2 + 4q  28 = 4q  q* = 7 units
69
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
70
TR =
TR = P * q
71
TC =
TC = ATC * q
72
Π =
Π = TR – TC (Π > 0 if P > ATC)
73
TC =
TC = ATC * q
74
BREAKING EVEN
(P = ATC)
75
SHUTDOWN RULE
-If P ≥ AVC then the firm should produce q* where≥ MR = MC -If P < AVC then the firm should shutdown (q* = 0)
76
Breakeven Price:
Breakeven Price: P = min ATC
77
Shutdown Price:
Shutdown Price: P = min AVC
78
Opp. cost of X =
Opp. cost of X = max Qy / max
79
Optimal Bundle =
Optimal Bundle = Income / low P