Vocab Second Midterm Flashcards
Marginal Utility
The change in total utility a person receives from consuming one additional unit of a good or service
Law of diminishing marginal utility
The principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time
Budget Constraint
The limited amount of income available to consumers to spend on goods and services
Income Effect
The change in the quantity demanded of a good that results from the effect of a change in price
Substitution Effect
The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power.
Network Externality
A situation in which the usefulness of a product increases with the number of consumers who use it.
Opportunity cost
The highest valued alternative that must be given up to engage in an activity
Endowment effect
The tendency of people to be willing to sell a good they already own even if they are offered a price that is greater than the price that they would be willing to pay to buy the good if they didn’t already own it.
Utility
Enjoyment or satisfaction people receive from consuming goods or services.
Law of diminishing marginal utility
consumers experience diminishing marginal satisfaction as they consume more of a good or a service. Every additional unit tends not to be as good as the one before.
Budget constraint
limited amount of income with which to purchase goods or services
Indifference curve
Combination of consumption bundles that give a specific consumer the same utility
Why can’t indiference curves ever cross?
Because of transitive preferences. Sally prefers apples to bananas, sally prefers bananas to carrots, if they intersect the crossing violates transitive preferences.
Technology
The processes a firm uses to turn inputs into outputs of goods and services
Technological change
A change in the ability of a firm to produce a given level of output with a given quantity of inputs
Short run
The period of time during which at least one of a firm’s inputs is fixed
long run
the period of time in which a firm can vary all its inputs, adopt new technology and increase or decrease the size of its physical plant
Total cost
the cost of all the inputs a firm uses in production (VC+FC)
Variable costs
Costs that change as output changes
Fixed costs
costs that remain as output changes
Opportunity Cost
The highest valued alternative that must be given up to engage in an activity
Explicit cost
A cost that involves spending money
Implicit Cost
A nonmonetary opportunity cost
Marginal product of labor
the additional output a firm produces as a result of hiring one more worker
Law of diminishing return
The principle that at some point adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginl product of the variavle input to decline
Average product of labor
The total output produced by a firm divided by the quantity of workers
Marginal cost
The change in a firm’s total cost from producing one more unit of a good or service
Average fixed cost
FC / Q
Average Variable Cost
VC / Q
Average Total Cost
TC /Q
Constant returns to scale
A situation in which a firm’s long-run average costs remain unchanged as it increases output
Minimum efficient scale
The level of output at which all economies of scale are exhausted.
Diseconomies of scale
The situation i which a firm’s long-run average costs rise as the firm increases output
Monopolistic Competition
A market structure in which barriers to entry are low and many firms compete by selling similar but not identical products
Profit
TR-TC or (P-ATC)xQ
Marketing
All the activities necessary for a firm to sell a product to a consumer
Brand Management
The actions of a firm intended to maintain the differentiation of a product over time
Inputs
In the short run, at least one input is fixed, in the long run ALL inputs are variable
Long Run Average Cost (LRAC)
Lowest cost at which a firm can produce a given quantity of output in the long run
Economies of scale
long run average costs fall as output increases
Maximum efficient scale
level of output at which diseconomies of scale begin
Perfectly Competitive Market (3 Requirements)
1) There must be buyers and many firms, all of which are small relative to the market
2) All firms in the market must sell identical products
3) There must be no barriers to new firms entering the market.
Price taker
A buyer or seller that is unable to affect the market price
Profit
TR-TC
Average Revenue (AR)
Total revenue divided by the quantity of the product sold.
Marginal Revenue (MR)
The change in total revenue from selling one more unit of a product
Change in TR / Change in TC
Marginal =
Change in
Sunk Cost
A cost that has already been paid and cannot be recovered
Economic Profit
A firm’s revenues minus all its costs, implicit and explicit
Economic Loss
The situation in which a firm’s total revenue is less than its total cost, including all implicit costs
Long-run compeititive equilibrium
the situation in which the entry and exit of firms has resulted in the typical firm breaking even
long-run supply curve
A curve that shows the relationship in the long run between market price and quantity supplied
Productive efficiency
The situation in which a good or service is produced at the lowest possible cost
Allocative efficiency
A state of the economy in which producion represents consumer preferences.
Perfectly Competitive Market Requirements
1) Many buyers and sellers
2) Identical products
3) No barriers for entry for new sellers
Monopoly
A firm that is the only seller of a good or service that does not have a close substitute
Patent
The exclusive right to a product for a period of 20 years from the date the patent application is filed with the government
Copyright
A government-granted exclusive right to produce an sell a creation
Public franchise
A government designation that a firm is the only legal provider of a good or service
Natural monopoly
A situation in which economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms.
3 effects of monopolies
1) Monopoly causes a reduction in consumer surplus
2) Monolopy causes a dead weight loss, which represents a reduction in economic efficiency
3) Monopoly causes an increase in producer surplus
Market power
The ability of a firm to charge a price greater than marginal cost
Collusion
An agreement among firms to charge a proce greater than marginal cost
Antitrust laws
Laws aimed at eliminating collusion and promoting competition among firms
Horizontal merger
A merger between firms in the same industry
Vertical merger
A merger between firms at different stages of production of one good
Monopolistically Competitive Market Requirements
1) Many Sellers
2) Differentiated products
3) low barriers to entry
Monopoly market structure requirements
1) single firm
2) unique product
3) entry blocked
Barriers to entry in monopolies
1) government action
2) control of a key resource
3) network externalities
antitrust policies
to impede several firms from colluding together, behaving like a monopolist, and splitting profit.
Oligopoly Market Structure Characteristics
1) Few Firms
2) Identical or differentiated products
3) difficult for new firms to enter
Dominant Strategy
Best for one player no matter what the other player does
Nash Equilibrium
Each player chooses their best strategy, given the strategies chosen by other players
Prisoner’s dilemma
Each player has a dominant strategy and when each plays it, the resulting payoffs are lower than if each player had played the dominated strategy.
