Unit 2 Microeconomics- decisions on the margin Flashcards
The margin
When firms or consumers make small changes and evaluate the outcomes of their decisions
Marginal Utility
Benefit or satsifaction gained from consuming one more unit of a product.
Total utility
Total benefit gained from consuming a product
Diminishing marginal utility
On consumption of each additional unit of a good, the consumer gains a smaller number of utils.
Marginal cost
The additional cost of consuming or producing one more unit of a good.
What does price reflect?
The utility the consumer will gain from consumption of the good.
What equation can be used to decide the optimal level of production or consumption?
Marginal cost=Marginal benefit
What is the optimal output for the firm?
Marginal cost=marginal revenue
What is the optimal consumption for the consumer?
Marginal Utility= Marginal Cost
What are sunk costs?
Costs already paid for and non returnable
How should a rational economist treat sunk costs when making decisions on the margin?
Ignore them
What is allocative efficiency?
When P=MC, when society produces the goods which meet consumer preferences
What is productive efficiency?
When society produces goods at lowest average cost per unit.
What is economic efficiency?
When allocative and productive efficiency have been achieved
What is pareto efficiency?
When it is impossible to make one person better off without making another person worse off.
