Midterm 2 Flashcards
Implicit cost
Cost not involved in money
Measured by value in $, of benefits forgone
Explicit cost
Cost that involves money
Irrational behavior
Misperceiving opp cost, overconfidence, unrealistic expectations, counting $ unequally, loss aversion, status quo bias
Marginal utility
Change in total utility by consuming one additional unit of good
MU = changeTU/changeQ
Diminishing marginal utility vs negative marginal utility
Diminishing: each additional unit consumed adds less to total utility than the last unit
Negative: consuming product reduces total utility
Marginal analysis
Making how much decisions
Opportunity cost
Explicit cost + implicit cost
Economic profit
Revenue - explicit cost - implicit cost
Marginal cost
Additional cost from producing one more unit of a good
= change in total cost / change in quantity of output
MU > MC
Purchase item
Gaining more utility than the cost
MU less than MC
Buy one less item
Gain less utility than the cost
MU = MC
Don’t buy more or less
Optimal point
Substitution effect
Consumers will substitute into the item that is less expensive
Income effect
Price change will cause us to be richer or poorer
EX: price of care rise, purchase will leave less money for other items
Giffen good
product that people consume more of as the price rises and vice versa
For any good, as the price of the good rises, the substitution effect makes consumers purchase less of it, and more of substitute goods
