- quantity v income - if pos slope- normal good - if neg slope-inferior good

- violates the law of demand - has a positive slope demand curve

- as keep adding labor the output increases by smaller and smaller amts, eventually going negative - starts when marginal product goes down

Exam 2 Flashcards by Annie Cutting

Consumer’s optimal choice definition

tangent of the constraint and indifference curve

- find the pt on the budget constraint that is on the highest indifference curve

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consumer’s optimal choice equation

MRSxy=Px/Py

marginal rate of substitution = price ratio

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price ratio

Px/Py

how many units of ‘y’ HAVE to give up to get one more unit of ‘x’

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marginal rate of substitution

MUx/MUy

-how many units of ‘y’ WILLING to give up for one more unit of ‘x’

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if MRS>price ratio, then

level of utility rises

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an increase in income (for normal goods) causes

the budget constraint to shift to the right parallel

- new optimal is made

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income consumption curve

-connection of all the optimal points

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Engel curve

quantity v income
if pos slope- normal good
if neg slope-inferior good

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change in price effect on the budget constraint

curve rotates out off the y-intercept

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total effect

=substitution effect+income effect

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substitution effect

-as prices rise, buy more of the relatively cheaper goods

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income effect

-change in consumers’ consumption choices that result from a change in purchasing power of income

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to extract substitution effect

take new budget constraint and shift in parallel until it’s tangent to the old indifference curve
new point is A’
the difference in Q between A and A’ is the substitution effect

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to extract the income effect

take new budget constraint and shift in parallel until it’s tangent to the old indifference curve
new point is A’
the difference in Q between B and A’ is the substitution effect

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law of demand 2 reasons why

as price decreases the Qd increases
1. the good gets relatively cheaper than substitutes (buy more)
2. the real income increases

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the income effect (inferior goods)

will be neg.

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Giffen good

violates the law of demand

- has a positive slope demand curve

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production function

Q=f(K,L)

Q-KaLb

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variable input

Q can be changed over a relatively short period of time

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fixed input

Q can’t be changed over time

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long run

period of time that is long enough that all inputs can be variable

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short run

period of time where at least one input is fixed

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Increasing the amt of labor…

can take advantage of specialization and division of labor

- increasing returns

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diminishing returns

as keep adding labor the output increases by smaller and smaller amts, eventually going negative
starts when marginal product goes down

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average product of labor=

total output/#workers

marginal product of labor

increase of output for hiring one more worker

MPL>APL then APL

rises | cause producing more than the average

MPL

falls | cause producing less than the average

isoquants

series of lines that show all combinations of inputs that produce the same level of output

marginal rate of technical substitution=

=ΔK/ΔL ALSO the slope of the isoquant -the rate at which one input can be substituted for another without altering the total level of output -WILLING

optimal input combination

MPL/MPK=w/r

w/r

have to | price ratio

opportunity costs

economic costs; what you give up when you make a decision

accounting costs

something that involves an outlay of money

total economic costs

=opp costs+acct. costs

economic profit

TR-economic costs

accounting profits

=TR-accting costs

sunk costs

costs that once paid cannot be recovered

sunk cost fallacy

- the mistake that you make when you let sunk costs affect future decisions - everyone does it sometimes...rational behavior

perfect competition

many firms; identical products; no barriers to entry

typical firm in perfect competition

- horizontal demand curve - price taker - no impact on the market price - perfectly elastic demand - if charged above market price, then sales go to 0 immediately

marginal revenue

increase in TR from selling one more unit

if MR>MC

produce

when MR=MC in perfect competition

stop producing because at profit maximization

short run supply curve

the portion of the MC curve that lies above the AVC curve

if P>ATC then

firms make a profit

short run firm will produce at a loss as long as,

producing reduces the size of the loss

long run equilibrium

MC=ATC (low point)

when more firms enter the industry:

-supply increases -no profits-no more entry -P=ATC still make accounting profit not economic

normal profit

making money but no more than @ next best alternative (no economic profit)

firm working at a loss in the long run

can't do it | -exit industry cause of repeated losses

as long as P>AVC

the firm should produce in the short run

when P

the firm should shut down in the short run

minimum of the AVC curve

the shut down point

If P

leave the industry in the long run

Constant cost industry

- total costs do not change with total industry output - long run supply curve horizontal - demand goes up, profit increases, more firms enter the industry, goes back to original price level

Increasing cost industry

- total costs increase with increases in industry output - positive sloping long run supply curve - demand goes up, price goes up, more firms enter, production costs go up, price level ends up being higher than the originial

decreasing cost industry

- total costs decrease with increases in industry output - neg. sloping long run supply curve - demand goes up, price goes up, more enter, production costs go down, price levels lower than original

Does price change more in the long run or the short run?

-the short run b/c the LRE stays the same and the short run price falls

Does industry wide Q change more in the short run or the long run?

- the long run b/c more firms exit the market cause P go down - demand and supply change making it more significant