test 2 Flashcards

1
Q

rational behavior (for consumer)

A

maximize utility subject to budget constraint
rational economic agents are constantly evaluating the benefits and costs of their actions
“constrained optimization problem” - consumers attempting to reach an outcome, however, they are limited by what is affordable
consumer behavior is analyzed by cardinal utility or ordinal utility theory

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2
Q

tastes and preferences

A

establishes consumers utility
cardinal utility - how customers evaluate the benefits received from various goods and services
ordinal utility - based on preference rankings (when consumer decides between two goods to determine which is better)
no numerical value
compares one market combination with another

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3
Q

budget constraint

A

expenditures on goods and services = total income
determines the affordable consumption options that are available in a given period
based on market prices and consumer income
(Px x X) + (Py x Y) = M

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4
Q

who developed cardinal utility theory

A

early neoclassical economists
marshall, jevons, walras

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5
Q

utility (cardinal utility)

A

is quantifiable
total utility measured in utils
the ability of products to satisfy customer wants or needs (measure of satisfaction)

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6
Q

TU and MU functions

A

TU - total utility (cardinal utility) - measurable level of wellbeing, satisfaction, or benefits provided from consuming goods and services (for single good or multiple), measured in numerical units (util)
MU - marginal utility - rate of change in consumer utility (satisfaction) caused by adjusting the consumption level of a product
MU = change (TUx)/change X
MU is one of the first applications of marginal analysis - economic agents make decisions based on marginal outcomes

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7
Q

law of diminishing marginal utility

A

the more consumers have of a product, the less incremental, added benefit (marginal utility) they receive by consuming an additional unit
utility increases at a decreasing rate

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8
Q

utility maximizing outcome for two products
cardinal utility

A

tells us how rational consumers would choose their goods
(Px x X) + (Py x Y) = M = amount of money able to spend
outcome can be used to confirm law of demand
utility maximization is MUx/Px = MUy/Py
available income is spent AND marginal utility per dollar ratio is equal

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9
Q

what happens during disequilibrium outcome

A

consumers will adjust their purchases by consuming more of one good to account for less of the other
a predictable adjustment in consumption to reach their maximum outcome

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10
Q

cardinal utility approach and the law of demand

A

law of demand applies to a rational, utility-maximizing consumer in the cardinal utility approach

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11
Q

how did ordinal utility theory become

A

early 20th century
hicks, allen, fischer
foundation of modern consumer behavior theory

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12
Q

ordinal utility - what do consumers do

A

maximize total utility
same as cardinal utility

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13
Q

how is utility measured in ordinal utility theory

A

qualitative because tastes and preferences are based on general rankings
consumers can subjectively tell whether a good provides more satisfaction than another option

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14
Q

how are consumer tastes and preferences illustrated (ordinal utility)

A

combinations are illustrated with indifference curves and preference maps
preference rankings - a consumer establishes a preference order of bundles

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15
Q

how is budget constraint for goods illustrated

A

graphically with budget line and equation
y= M/Py - (Px/Py)x
M=consumer income

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16
Q

when does consumer equilibrium occur (ordinal utility)

A

at the market basket where the budget line is tangent to the highest attainable I curve
the budget line and indifference maps are combined
the combination is affordable and on the highest attainable indifference curve
consumer will move to new equilibrium outcome if: a change in market prices of the goods, a change in consumer income, a change in tastes or preferences

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17
Q

result of disequilibrium outcome (ordinal utility)

A

consumer makes a predictable adjustment in consumption

18
Q

what do I curves and budget lines show

A

outcomes for normal and inferior goods as consumer income changes
I curves - show combinations of two products that provide a customer with the same overall level of satisfaction
budget lines - based on budget constraint

19
Q

how does law of demand combine with ordinal utility

A

LOD applies to a utility maximizing consumer because a consumer reaches a new equilibrium outcome when there is a change in price

20
Q

production function of firm theory

A

summarizes the relationship between the quantity of inputs (factors of production) employed by a firm and the level of output (q) produced
production inputs - labor (L), raw materials (RM), capital (K)

21
Q

fixed vs variable inputs

A

fixed - ex. size of production facility, amount of land available
variable - ex. labor, energy, raw materials

22
Q

long run vs short run

A

long run - allows firm to consider production and cost outcomes when all inputs can be varied in employment
short run - must have at least 1 fixed factor, fixed and variable factors are employed, has one fixed input and alters variable input to change output

23
Q

short run productivity measures

A

productivity - the relationship between a firms output and the inputs required to produce the level of output
applied to individual variable factors of production
labor productivity is widely used (expressed by comparing total output with the units of labor services required to produce output)

24
Q

total product (TP)

A

short run productivity
output per period (q) given the employment of the variable input
TP(variable factor) = q

25
marginal product (MP)
short run productivity the rate of change in total product attributable to changing the employment of the variable input MP(variable factor) = change q/change (variable factor)
26
average product (AP)
short run productivity output per unit of the variable factor AP(variable factor) = q/(variable factor)
27
law of diminishing returns (marginal product)
as a firm increases its employment of a variable input, the additional output will eventually decline output increases at a decreasing rate - as each additional unit of output produced requires a higher number of added inputs, the firm faces diminishing returns
28
total cost (TC)
short run cost function TC = total fixed costs + total variable costs
29
total fixed cost (TFC)
short run cost function fixed costs do not change with the level of output produced TFC = capital costs (Pk) * capital (K)
30
total variable cost (TVC)
short run cost function based on how much output is produced by the firm TVC = wages (w) * labor (L)
31
average total cost (ATC)
per unit ATC = total cost (TC)/output (q)
32
average fixed cost (AFC)
per unit AFC = total fixed cost (TFC)/output (q)
33
average variable cost (AVC)
per unit AVC = total variable cost (TVC)/output (q)
34
MC
per unit marginal cost - the rate of change in the firms total cost due to a change in output MC = change in total cost(TC)/change in output (q) = dTC/dq
35
cost minimizing factor employment to produce a target output
minimize TC = LTC = (Pk x K) + (w x L) firms can choose from multiple input combinations to produce the desired output
36
increasing returns to scale
IRS - the firms output changes by a larger proportion when greater technical efficiency is obtained as the firm moves from small to large scale operations higher output
37
decreasing returns to scale
DRS - the firms output changes my a smaller proportion
38
constant returns to scale
CRS - the firms output changes by the same proportion net gains and losses cancel each other out
39
economies of scale (EOS)
long run average cost reductions in long run average cost as output expands rate of change in output is proportionately grater than the rate of change in the long run total cost
40
constant returns to scale (CRS)
long run average cost long run average cost is constant as output changes
41
diseconomies of scale (DOS)
long run average cost increases in long run average cost as output expands the rate of change in output is proportionately less than the rate of change in long run total cost