Lecture 2 Flashcards
Indifference curve
A representation of the combinations of two goods that provide equal satisfaction to a consumer.
Individual demand curve
A curve showing the quantity of a good that a single consumer will buy at each price.
Price elasticity of demand
A measurement of how much the quantity demanded of a good changes when its price changes.
Income elasticity of demand
A measurement of how the quantity demanded of a good changes with a change in consumer income.
Substitution effect
The change in consumption of a good due to a change in its price, while maintaining the same utility level.
Normal good
A good for which demand increases when income increases.
Inferior good
A good for which demand decreases as consumer income increases.
Marginal product
The additional output produced when one more unit of an input is added.
Production function
A function that shows the maximum output a firm can produce with given inputs.
Isoquant
A curve that represents all combinations of inputs that produce the same level of output.
Price-consumption curve
A curve showing the utility-maximizing combinations of two goods as the price of one changes.
Income-consumption curve
A curve that shows how consumption of goods changes as consumer income changes.
Engel curve
A curve that relates the quantity of a good consumed to the consumer’s income.
Substitutes
Goods where an increase in the price of one leads to an increase in the demand for the other.
Complements
Goods where an increase in the price of one leads to a decrease in the demand for the other.
Giffen good
A good for which demand increases when its price rises, due to the income effect outweighing the substitution effect.
Consumer surplus
The difference between what a consumer is willing to pay for a good and the amount they actually pay.
Network externality
A situation where the demand for a good is affected by how many other people purchase or use it.
Bandwagon effect
A positive network externality where consumers purchase a good because others are doing so.
Snob effect
A negative network externality where consumers desire a good because it is exclusive or rare.
Substitution effect (Income and Substitution Effects)
The change in the quantity of a good consumed as its price changes, while utility is held constant.
Income effect (Income and Substitution Effects)
The change in the quantity of a good consumed resulting from a change in consumer purchasing power due to a change in income.
Total effect
The overall change in consumption of a good due to both substitution and income effects combined.
Market demand curve
A curve that shows the total quantity of a good that all consumers in a market will buy at each price.
Elastic demand
A situation where a small change in price leads to a large change in quantity demanded (elasticity > 1).
Inelastic demand
A situation where a change in price results in a small change in quantity demanded (elasticity < 1).
Perfectly inelastic demand
A situation where changes in price have no effect on the quantity demanded (elasticity = 0).
Perfectly elastic demand
A situation where the quantity demanded changes infinitely with even the smallest price change (elasticity = infinity).
Unitary elastic demand
A situation where the percentage change in price results in an equal percentage change in quantity demanded (elasticity = 1).
Economies of scale
A situation where increasing the level of output leads to a lower average cost per unit produced.
Diseconomies of scale
A situation where increasing the level of output leads to a higher average cost per unit produced.
Returns to scale
The rate at which output changes when all inputs are increased proportionally.
Increasing returns to scale
A situation where output more than doubles when all inputs are doubled.
Constant returns to scale
A situation where output doubles when all inputs are doubled.
Decreasing returns to scale
A situation where output less than doubles when all inputs are doubled.
Production function
A mathematical representation of how inputs (like labor and capital) are transformed into outputs.
Marginal product of labor (MPL)
The additional output produced by using one more unit of labor, holding other inputs constant.
Marginal product of capital (MPK)
The additional output produced by using one more unit of capital, holding other inputs constant.
Law of diminishing marginal returns
A principle stating that as more units of a variable input are added to fixed inputs, the additional output produced eventually decreases.
Average product of labor
The total output produced divided by the number of labor units employed.
Marginal cost (MC)
The additional cost incurred by producing one more unit of output.
Average total cost (ATC)
Total cost divided by the quantity of output produced.
Fixed cost (FC)
Costs that do not vary with the level of output and must be paid even if production is zero.
Variable cost (VC)
Costs that change as the level of output changes.
Sunk cost
A cost that has already been incurred and cannot be recovered, and therefore should not affect future decision-making.
Economic cost
The total cost of production, including both accounting costs and opportunity costs.
Accounting cost
The actual expenses incurred in production, including depreciation.
Isoquant
A curve that shows all the combinations of two inputs that yield the same level of output.
Isocost line
A curve that shows all the combinations of inputs that can be purchased for a given total cost.
Marginal rate of technical substitution (MRTS)
The rate at which one input can be reduced while maintaining the same level of output by increasing the amount of another input.
Perfectly substitutable inputs
Inputs that can be replaced with each other at a constant rate in production without affecting output.
Perfectly complementary inputs
Inputs that must be used together in fixed proportions to produce output.
User cost of capital
The annual cost of owning and using a capital asset, including depreciation and interest.
Rental rate of capital
The cost per year of renting one unit of capital.
Expansion path
A curve that shows the cost-minimizing combination of inputs as a firm increases its output level.
Economies of scope
The cost savings that occur when a firm produces multiple products together rather than separately.
Diseconomies of scope
A situation where producing multiple products together is more costly than producing them separately.
Learning curve
A graphical representation showing how labor hours required per unit of output decrease as cumulative output increases due to learning and efficiency improvements.
Cost-output elasticity
The percentage change in cost resulting from a 1% change in output.
Long-run average cost (LAC)
A curve that shows the lowest average cost of production when all inputs are variable.
Long-run marginal cost (LMC)
The change in total cost from producing one additional unit of output when all inputs are variable.
Short-run average cost (SAC)
A curve that shows the average cost of production when at least one input is fixed.
Fixed inputs
Inputs that cannot be changed in the short run, such as buildings or machinery.
Variable inputs
Inputs that can be adjusted in the short run to increase or decrease production, such as labor.
