Microeconomics Flashcards
Production theory states:
How businesses decide the quantities of outputs to produce in response to demand.
Marginal product is:
The change in output resulting from the addition of an extra unit of input.
The law of diminishing marginal returns states:
Adding extra units of inputs results in smaller increases in output.
3 stages of production theory:
Increasing-decreasing-negative (marginal returns)
What is the short run period?
The short run is when only the variable inputs (usually labour) can be changed.
What is the long run period?
All inputs and costs are variable. No diminishing return.
Consumption theory is:
How people decide to spend their money based on their individual preferences and budget constraints.
3 basic assumptions of human behaviour:
- Utility maximization
- Decreasing marginal utility
- Never satisfied
What is the “indifference curve”?
An indifference curve is a chart showing various combinations of two goods or commodities that consumers can choose.
What does a point along the indifference curve show?
A consumer has an equal preference for the various combinations of goods shown along the curve.
Why can the indifference curve never intersect?
Because different indifference curves cannot show the same level of satisfaction.
What is MRS in indifference curve?
MRS is marginal rate substitution;
the rate at which the consumer is willing to give up or substitute one good for another.
What is the “budget line”?
The set of combinations of two goods that a consumer can buy given the level of income and the prices of the goods.
What does a shift in budget line indicate?
Increase/decrease in income.
What is the “substitution effect”?
What is the “income effect”?
According to Keynesian consumption theory, consumption depends on:
Level of disposable income.
What is consumption function?
Relates the input of factors of production to the output of goods
What is sunk cost?
Expenses that cannot be recovered even in the future.
e.g. rent, advertisement fee
