22 terms

Marginal Utility Level 3

The Law of Diminishing Marginal Utility
As more of a good or service is consumed the total utility will increase at a decreasing rate (i.e the marginal utility will decrease)
Equi-Marginal Rule
Consumer equilibrium is reached when the marginal utility of the last dollar spent on each commodity is equal
Marginal Utility
Is the total amount of satisfaction a consumer gains from consuming all units of a particular good
Optimal Purchase Rule
A consumer may continue consumption up to the point where P=MU not beyond
An explanation of why MU leads to the downward sloping demand curve
As consumption increases MU decreases. The rational consumer attempting to maximise his/her satisfaction will be prepared to purchase to where P=Mu. Consumers will only purchase additional units at lower prices. The individual demand curve is therefore derived from the individial MU curve.
Perfect Competition
Is a market situation in which no firm or individual is able to influence the working market.
A market structure that has a larger number of firms selling goods and services which are close substitutes to those of competitors.
A small number of firms produce goods or services which are close substitutes for example oil companies.
Single seller of a good or service for which there are few if any substitutes eg Tranzrail
Sole buyer of a product e.g NZ dairy board
Supernormal profit
A return more than sufficient to keep entrepreneurs in their present activity. MR=Mc, AR>AC
Non-price competition
Involves firms trying to make their product appear different to similar products by using strategies such as packaging, competitions, location.
Product differentiation
Attracting costumers by making a product appear different and superior to the competitions product. Includes packaging and sponsorship.
Product variation
Attracting customers by making real changes to a product that make it different and superior than competitors.
Vertical product variation
Where firms introduce different models of the same product, each targeted and apppealing to different groups of consumers eg. diet coke and coke zero
Product modificiation
Attracting customers or gaining market share by developing or improving their product. This can be achieved by adding new and improved features to the product.
Fixed cost
Costs that are constant regardless of level of output
Diminishing Returns
Occurs in the short run when there is at least one fixed input; the additions to output at some stage start to decrease.
Marginal Costs
Marginal cost is the addition to total costs of an extra unit of output. Initially increasing return and more efficient use of resources leads to falling MC but in the short run diminishing returns wil eventually set in because the extra cost of producing the next unit is greater than the average.
Deadweight loss
Deadweight loss is the loss of allocative efficeincy resulting from a restriction of output away from the allocatively efficient level
Normal profit
A return sufficient to keep entreprenuers in their present activity. Normal profit is minimum level sufficient to keep a producer in business. It is where all costs including oportunity costs of production are fully covered.
Subnormal Profit
A return insufficient to keep entreprenuers in their present activity.