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Econ 101 > Midterm 2 > Flashcards

Midterm 2 Flashcards

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1
Q

Utility

A

Satisfaction, happiness

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2
Q

Total Utility (TU)

A

Total satisfaction received from a product

TU=Sum of MU

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3
Q

Marginal Utility (MU)

A

Additional satisfaction gained from consuming one more unit of a product.
- Tangent of TU
MU=TU/Q

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4
Q

Law of Diminishing Marginal Utility (LDMU)

A

marginal utility will decrease after a certain point when we continue to consume goods.
The utility the consumers derive from successive units of a particular product.

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5
Q

Maximum Utility

A

Maximum utility is attained when the marginal utility from the last dollar spent are equal.

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6
Q

Consumer Decision

A

A utility-maximizing consumer (household) allocates expenditures so that the marginal utility obtained from the last dollar spent on each product is equal.

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7
Q

Maximizing Utility Methods

A
  • MUx/Px=MUy/Py
  • MUx/MUy=Px/Py
  • MB=MC
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8
Q

Market demand curve

A

Shows relationship between a product’s price and the amount demanded by all consumers together.

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9
Q

Calculating market demand

A

Add all individual demand curves (Add Qd’s from each - add horizontally)

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10
Q

Real income

A

Income expressed in terms of purchasing power of money income; the quantity of goods and services that can be purchased with the money income

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11
Q

Substitution effect

A

The change of quantity demanded due to a change in relative price, holding real income constant

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12
Q

Income effect

A

The change in quantity demanded of a product when there is a change in real income

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13
Q

Normal good

A
  • Substitution effect is negative

- Income effect is positive

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14
Q

Inferior good

A
  • Substitution effect is negative

- Income effect is positive

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15
Q

Giffen good

A

An inferior good where the income effects outweigh the substitution effect causing it to be positively sloped

  • Substitution effect is negative
  • Income effect is really positive
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16
Q

Conspicuous consumption good

A
  • Products consumed for “snob appeal”, only bought because it is expensive, shows status, more designer goods
  • Substitution effect is positive
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17
Q

Consumer surplus

A

The difference between the total value that the consumers place on all units consumed of a product, and the payment they actually make to purchase the product

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18
Q

Demand curve price

A

Value consumer is willing to pay, maximum P consumer will buy at
- Reservation price

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19
Q

Market price

A

Value consumer must pay, price tag on item

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20
Q

Paradox of values

A

Just because good A is more expensive than good B doesn’t mean that it’s more valuable
- Mistaking TU for MU

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21
Q

Indifference(II) curve

A

All combinations of x and y that yield a given level of happiness.
- TU is constant (change in TU is zero)

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22
Q

II curve assumptions

A
  1. Consumer can rank preferences
  2. Preferences are transitive (A over B, B over C, so A over C)
  3. More is better “MIB”
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23
Q

II curve characteristics

A
  1. Infinite number increasing away from the origin
  2. Downward sloping
  3. Cannot cross
  4. Convex from the origin
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24
Q

Utility function

A

TU=TU(x, y)

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25
Q

II curve equation

A

ΔX(MUx)+ΔY(MUy)=0

so ΔTU is 0

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26
Q

Slope of II curve

A

Marginal rate of substitution

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27
Q

Marginal rate of substitution

A

The amount of one product that a consumer is willing to give up to get one more unit of another product and remain indifferent

  • Always negative
  • Slope of II curve
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28
Q

Budget line characteristics

A
  1. All points use up consumers entire income
  2. Points between budget line and origin are points that don’t entirely use up consumers income.
  3. Points above the budget line indicate combinations of products that cost more than the consumer’s income (impossible)
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29
Q

Budget line

A

All possible consumption combinations of two goods, given income (Y) and the prices of two goods

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30
Q

Slope of budget line equation and meanings

A
  • -Px/Py
  • ratio of relative prices
    or
  • opportunity cost
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31
Q

Income consumption line (BL when Y changes)

A

Change in income relative to constant price.

- positive, parallel shift

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32
Q

Price consumption line (BL when relative price changes)

A

Shows consumer’s purchases react to a change in one price with money income and other price held constant.
- negative, rotation shift

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33
Q

Firms

A

Self-contained, profit maximizing entity that produces and sells goods and services.
- is an economic construct (not always a business)

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34
Q

Single (sole) proprietorship

A

A form that has one owner who is personally responsible for the firm’s actions and debts.
- Owner has unlimited liability

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35
Q

Partnership

A

A firm with two or more joint owners, both responsible for the firm’s actions and debts

  • two sole proprietorships acting as one
  • joint liability, still unlimited
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36
Q

Company/corporation

A

A firm that has a legal existence separate from that of the owners

  • See it as a separate person or “separate legal entity”
  • Shareholder has unlimited liability
37
Q

Limited liability partnership

A

A partnership but the liability is limited to the company

38
Q

Crown-corporation (state-owned enterprise)

A

Firm owned by government

39
Q

Non-profit/non-governmental organization

A

Provides free services (covers their costs)

40
Q

Capital

A

Net worth, amount of assets that exceed liability

41
Q

Physical capital

A

Office space, factories, equipment (K)

42
Q

Financial capital

A

Funds raised by the business to carry one its ventures

43
Q

Equity finance

A

Granting share of control of company in return for the gift of money

  • share or stock (business term)
  • gifting: company money when buying stocks
44
Q

Debt finance

A

Borrowing money

  • bond (economic term) > loaning=buying bonds
  • debt instrument
  • IOU
45
Q

Corporate social responsibility (CSR)

A

Obligation of business policy to be compatible with social goals and values

  • increases sales
  • “signaling device”
  • “halo effect”
46
Q

Profit equation

A

P=TR-TC

47
Q

Total revenue equation

A

TR=P*Q

48
Q

Production

A

Firms turning inputs into outputs

  • inputs = factors of production
  • outputs = goods and services, commodities, TP, Q
49
Q

Production function

A

Q=f(inputs)

50
Q

Intermediate products

A

All outputs that are used as inputs by other producers in a further stage of production

51
Q

Cost

A

Value of inputs

52
Q

Explicit cost

A

Costs that actually involve purchase of a good or service

- same as accounting cost

53
Q

Implicit cost

A

The difference between the revenue received from the sale of output and the opportunity cost of the inputs used to make the output.

  • economic cost
  • opportunity cost
  • negative economic cost=economic loss
54
Q

Sunk cost

A

Assets that have lost their value

55
Q

Accounting profit equation

A

AP=TR-accounting costs

- aka net income

56
Q

Economic profit formula

A

TR-TC or TR-OC

- pure profit

57
Q

Normal profit

A

Is actually a cost, the cost of entrepeneurship

58
Q

What does zero economic profit mean?

A

The firm is allocatively efficient

59
Q

Allocatively efficient

A

When the last unit provides a marginal benefit to consumers equal to marginal cost of production

60
Q

T/F: Can you make accounting profits and zero pure profit?

A

True

61
Q

What does positive economic profit signal?

A

For the firm to enter the industry

62
Q

What does negative economic profit signal?

A

For the firm to exit the industry

63
Q

Short run

A

Operating decisions, at least one factor of production is fixed (besides Technology)

64
Q

Long run

A

Planning decisions, all factors vary (except Technology)

65
Q

Very long run

A

Growth decisions, all factors vary (even Technology)

66
Q

T/F: Can short run be a very long time?

A

True, SR, LR and VLR aren’t measures of time, but instead are based on the variables available

67
Q

Total product (TP)

A

Total amount produced by a firm during some time period

- Mother of all curves

68
Q

Mother of all curves

A

Total product curve

69
Q

Average product (AP)

A

Total product divided by the number of units of the variable factor used in production
- AP=TP/L
(L is labour, or N)
- Slope of rate

70
Q

Marginal product (MP)

A

Change in total production divided by change in variable units

  • MP=ΔTP/ΔN
  • Slope of tangent
71
Q

Apex of average product curve

A

Point of diminishing average productivity

72
Q

Apex of marginal product curve

A

Point of diminishing marginal productivity

73
Q

Law of Diminishing Marginal Product/Returns (LDMR)

A

The hypothesis that if increasing quantities of a variable factor are applied to a given quantity of fixed factors, the marginal product of the variable factor will eventually decrease

74
Q

Total cost (TC)

A

Total cost of producing any given level of output

- TC=TFC+TVC

75
Q

Total fixed cost (TFC)

A

All costs of production that do not vary with level of output

  • Overhead cost (ex. rent)
  • Constant (straight line)
76
Q

Total variable cost (TVC)

A

Total costs of production that vary with the level of output

- Rises when output rises, lowers when output lowers

77
Q

What does total cost and total variable cost have in common?

A

Same tangent slopes (they are parallel, with TC on top and starting from TFC, while TVC starts from origin)

78
Q

Average total cost (AC or ATC)

A

Total cost of producing a given output divided by the number of units of output

  • aka unit cost
  • AC=AFC+AVC
79
Q

Average fixed cost (AFC)

A

Total fixed cost divided by number of units per output

- AFC=TFC/Q

80
Q

Average variable cost (AVC)

A

Total variable cost divided by the number of units of output

  • First declines, reaches minimum, then starts to increase
  • AVC=TVC/Q
81
Q

Marginal cost (MC)

A

The increase in total cost resulting from increasing output by one unit

  • same as marginal variable cost (MVC)
  • MC=0+MVC or MC=MVC
  • MC=ΔTC/ΔQ
82
Q

Marginal variable cost (MVC)

A

Equivalent to marginal cost

  • MVC=MC
  • MVC=ΔTVC/ΔQ
83
Q

Marginal fixed cost (MFC)

A

Fixed costs are zero as they do not change as output rises

- MC=0

84
Q

Why are cost curves shaped as ‘U’s?

A

Due to the law of diminishing marginal returns (LDMR)

85
Q

Capacity

A

The largest output that can be produced without encountering rising average cost per unit
- Capacity of firm is minimum short run average total cost (SRAC)

86
Q

Excess capacity

A

A firm that is producing at an output less than the point of minimum average cost

87
Q

Technical efficiency

A

Minimizing the quantity (Q input) of all inputs to produce a given output

88
Q

Economic efficiency

A

Minimizing the cost (Pinput*Qinput) of all inputs to produce a given output.

Econ 101 (2 decks)

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