Exam 2 (Chapters 6, 7, and 8) Flashcards
The total satisfaction you derive from consumption; this could refer to either your total utility of consuming a particular good or your total utility from all consumption
Total utility
The change in your total utility from a one-unit change in your consumption of a good
Marginal utility
The more of a good a person consumers per period, the smaller the increase in total utility from consuming one more unit, other things constant
Law of diminishing marginal utility
The condition in which an individual consumer’s budget is exhausted and the last dollar spent on each good yields the same marginal utility; therefore, utility is maximized
Consumer equilibrium
The dollar value of the marginal utility derived from consuming each additional unity of a good
Marginal valuation
The difference between the most a consumer would pay for a given quantity of a good and what the consumer actually pays
Consumer surplus
Opportunity cost of resources employed by a firm that takes the form of cash payments
Explicit cost
A firm’s opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment
Implicit cost
A firm’s total revenue minus its explicit costs
Accounting profit
A firm’s total revenue minus its explicit and implicit costs
Economic profit
The accounting profit earned when all resources earn their opportunity cost
Normal profit
Any resource that can be varied in the short run to increase or decrease production
Variable resource
Any resource that cannot be varied in the short run
Fixed resource
A period during which at least on of a firm’s resources is fixed
Short run
A period during which all resources under the firm’s control are variable
Long run
A firm’s total output
Total product
The relationship between the amount of resources employed and a firm’s total product
Production function
The change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant
Marginal product
The marginal product of a variable resource increases as each additional unity of that resource is employed
Increasing marginal returns
As more of a variable resource is added to a given amount of another resource marginal product eventually declines and could become negative
Law of diminishing marginal returns
Any production cost that is independent of the firm’s rate of output
Fixed cost
Any production cost that changes as the rate of output changes
Variable cost
The sum of fixed cost and variable cost, or TC = FC + VC
Total cost
The change in total cost resulting from a one-unit change in output; the change in total cost divided by the change in output, or MC = change in TC/change in q
Marginal cost
Variable cost divided by output, or AVC = VC/q
Average variable cost
Total cost divided by output, or ATC = TC/q; the sum of average fixed cost and average variable cost, or ATC = AFC + AVC
Average total cost
Forces that reduce a firm’s average cost as the scale of operation increases in the long run
Economies of scale
Forces that may eventually increase a firm’s average cost as the scale of operation increase in the long run
Diseconomies of scale
A curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve
Long-run average cost curve
A cost that occurs when, over some range of output, long-run average cost neither increases nor decreases with changes in firm size
Constant long-run average cost
The lowest rate of output at which a firm takes full advantage of economies of scale
Minimum efficient scale
Important features of a market, such as the number of firms, product uniformity across firms, firm’s ease of entry and exit, and forms of competition
Market structure
A market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run
Perfect competition
A standardized product, a product that does not differ across producers, such as bushels of wheat or an ounce of gold
Commodity
A firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm that decides to produce must accept, or “take,” the market price
Price taker
The firm’s change in total revenue from selling an additional unity; a perfectly competitive firm’s marginal revenue is also the market price
Marginal revenue (MR)
To maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures
Golden rule of profit maximization
Total revenue divided by quantity, or AR = TR/q; in all market structures, average revenue equals the market price
Average revenue
A curve that shows how much a firm supplies at each price in the short run; in perfect competition, that portion of a firm’s marginal cost curve that intersects and rises above the low point on its average variable cost curve
Short-run firm supply curve
A curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, the horizontal sum of each firm’s short-run supply curve
Short-run industry supply curve
A curve that shows the relationship between price and quantity supplied by the industry once firms adjust in the long run to any change in market demand
Long-run industry supply curve
An industry that can expand or contract without affecting the long-run per-unit cost of production; the long-run industry supply curve is horizontal
Constant-cost industry
An industry that faces higher per-unit production costs as industry output expands in the long run; the long-run industry supply curve slopes upward
Increasing-cost industry
The condition that exists when production uses the least-cost combination of inputs; minimum average cost in the long run
Productive efficiency
The condition that exists when firms produce the output most preferred by consumers; marginal benefit equals marginal cost
Allocative efficiency
A bonus for producers in the short run; the amount by which total revenue production exceeds variable cost
Producer surplus
The overall well-being of people in the economy; maximized when the marginal cost of production equals the marginal benefit to consumers
Social welfare
