Lecture Notes Flashcards
Explicit cost
Outlay of money
Ex. Travel costs to attend a game. Price of game ticket etc.
David Ricardo
Principles of political economy and taxes, 1817
Argued each country should specialize in it’s comparative advantage and then trade its specialties with other and each would be better off
Implicit cost
Not an outlay of money, often own resources used to acquire object
Ex: lost wages to attend game
Time
Demand Schedule
How much is demanded at every price
Supply Scedule
How much is supplied at every price
Equilibrium
A price at which demand equals supply
Adam smith the wealth of nations, 1776
Every individual neither intends to promote the public interest nor knows how much he is promoting it. He intends only his own gain, and he is in this led by an invisible hand to promote an end which has no part in his intention.
Efficient
If efficient, can’t rearrange trades to make someone better off without making someone else worse off
Competitive equilibrium
Can’t increase profits by different traders, holding the number of traders constant
Profit
Profit = revenue - cost
P= R - C
Revenue
Revenue equals price times quantity
R = P x Q
Total cost
Total cost equals fixed cost plus variable cost
TC = FC + VC
Variable costs
Cost that increase as output is increased
Fix cost
Cost of inputs
Average cost
Average cost equals ( total cost) divided by quantity
AC = (TC) / Q
AC = (FC)/ Q + (VC)/ Q
AC = AFC + AVC
Marginal cost
The increase in cost from one more unit of output
related to variable cost but not the same
Cost rules
If MC > AC, AC is rising
if MC < AC then AC is falling
If MC = AC, AC is neighing rising nor falling
Where MC = AVC, AVC is at a minimum
How much to produce in order to maximize profits
If price is greater than minimum AVC, produce output for which P=MC
If price is less than minimum AVC produce nothing
Law of supply
If the price of a good or service increases, Sellers are willing to supply more of it
short run supply curve is upward sloping because marginal cost is rising
Marginal utility
Increasing utility for one more unit of a good
Marginal rate of substitution
(Marginal utility of good A) / (marginal utility of good B)
Diminishing marginal utility
Marginal utility of a good declines as a consumer gets more that good
Maximizing utility
PA/PB = (MU A)/(MU B)
MU B/PB = MU A/PA
Normal good
Increase in income increases demand for this good
Inferior good
Increase in income decreases demand for this good
Law of demand
If the price of a good or service increases, buyers tend to demand less per period
Buyers turn to substitutes (the substitution effect)
Buyers have less purchasing power (the income effect)
Surplus (consumer and producer)
Consumer surplus; willing to pay minus expenditures
producer surplus: revenue minus cost of production
Change in revenue
Delta R = Delta Q / Q + Delta P / P + (Delta Q / Q) (Delta P / P)
Or ^R/R = ^Q/Q + ^P/P
