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Microeconomics Chapters 7-9 Week 3
Terms in this set (63)
A measure in the satisfaction received from possessing or consuming goods and services; concept used to represent the degree to which goods and services satisfy wants
diminishing marginal utility
the principle that the more of a good that one obtains in a specific period of time, the less the additional utility yielded by an additional unit of that good
the additional utility derived from consuming one more unit of a good or service; it is the utility that an additional unit of a good or service yields; When marginal utility is zero, total utility is at its maximum
a measure of the total satisfaction derived from consuming quantity of some good or service; total utility increases until dissatisfaction sets in.
principle of diminishing marginal utility
marginal utility declines with each additional unit of a good or service that the consumer obtains.
equimarginal principle/ consumer equilibrium
to maximize utility, consumers must allocate their scarce incomes among goods in such a way as to equate the marginal utility per dollar of expenditure on the last unit of each good purchased. -As long as the marginal utility per dollar obtained from the last unit of all products consumed is the same, the consumer is in equilibrium and will not reallocate income. Formula: MUa/Pa=MUb/Pb=MUc/Pc=MUx/Px
Why does the demand curve slope down?
As the price of a good falls, the quantity demanded of that good rises. Price is up and down, quantity is right to left, so demand curve slopes down; market demand is the summation of individual demands
How do consumers decide what to buy?
Choose the purchase that yields the greatest marginal utility per dollar of expenditure. (Whatever brings the greatest satisfaction... but everything in too much quantity will eventually be dissatisfying)
market demand curve
summation of all individual demand curves
the understanding that perfect information is not likely to be available, and that as a result people make decisions that in hindsight look irrational , but in reality are the rational results of a brain that is economizing
the study of decision making assuming that people are rational in a broad sense.
the joint study by economists and biologists that attempts to determine how the brain handles economic decisions; combines neurology and economics
lacking any preference
a curve showing all combinations of two goods that the consumer is indifferent among ( that give the consumer the same amount of utility); it indicates what the consumer is willing to buy.
a complete set of indifference curves; in the positive quadrant of a graph
a line showing all the combinations of goods that can be purchased with a given level of income; indicates what the consumer is able to buy
budget line and indifference curve
together, they determine the combinations of goods that the consumer is both willing and able to buy
where does consumer equilibrium occur?
At the point where the budget line just touches, or is tangent to, an indifference curve
law of diminishing marginal returns
when successive equal amounts of a variable resource are combined, output that can be attributed to each additional unit of the variable resource will eventually decline; As successive units of a variable resource are added to the fixed resources, the additional output produced will initially rise but will eventually decline.
What does the supply curve show?
shows that as a price rises, everything else held constant, the quantity of that good or service a firm is willing to offer for sale rises
Why do diminishing marginal returns occur?
Because the efficiency of variable resources depends on the quantity of the fixed resources.
average total cost
the per unit cost, derived by dividing total cost by the quantity of output
the change in cost caused by a change in output, derived by dividing the change in total cost by the change in the quantity of output; incremental costs
Expenses that a business has in supplying goods and/or services.
total fixed costs
payments to resources whose quantities cannot be changed during a fixed period of time- the short run
total variable costs
payments for additional resources used as output increases
average fixed cost
the total fixed cost divided by total output
average variable cost
total variable cost divided by total output
U-shaped due to the law of diminishing marginal returns
When does average cost rise?
When marginal cost is greater than average cost
when does average cost decline?
When marginal cost is less than average cost
short-run average total cost (SRATC)
the total cost of production divided by the total quantity of output produced when at least one resource is fixed
economies of scale
the decrease in per unit costs as the quantity of production increases and all resources are variable; result from specialization and technology
diseconomies of sale
the increase in per unit costs as the quantity of production increases and all resources are variable; occurs because coordination and communication become more difficult as size increases
means size; all resources change when scale changes
long-run average-total-cost curve (LRATC)
the lowest-cost combination of resources with which each level of output is produced when all resources are variable; there is no law dictating a u-shaped LRATC curve... law of diminishing marginal returns dictates the U shape of the short-run cost curves; gets its U shape from economies and diseconomies of scale
constant returns to scale
unit costs remain constant as the quantity of production is increased and all resources are variable
minimum efficient scale (MES)
the minimum point of the long-run average-total-cost curve; the output level at which the cost per unit of output is the lowest; output of a firm that is at the minimum point of a long-run average-total-cost curve; varies from industry to industry
what is the relationship between costs and output in the short run?
p 169; ATC- cost per unit of output, total costs divided by the quantity of output produced. ATC falls when marginal cost is less than ATC and rises when marginal cost is greater than ATC.
What is the relationship between costs and output in the long run?
p 169; everything is variable in the long run and p 170; long run is planning horizon.. once size is selected the firm is operating in the short run
total physical product (TPP)
the maximum output that can be produced when successive units of a variable resource are added to dices amounts of other resources.
average physical product (APP)
output per unit of resource
marginal physical product (MPP)
the additional quantity that is produced when one additional unit of a resources is used in combination with the same quantities of all other resources
TPP, APP, MPP reflect the law of diminishing marginal returns. They show that as a variable resource is increased, output initially rises at an accelerating pace, then at a slower pace, and then may eventually decline.
Result of the law of diminishing marginal returns
The shape of the productivity curves and the U shape of the cost curves are the result of the law of diminishing marginal returns
To produce where marginal revenue equals marginal cost
the market structures of oligopoly and monopolistic competiton
4 market structures
perfect competition, monopoly, monopolistic competition, and oligopoly
market structure in which many firms are producing a non differentiated product and entry is easy, demand curve for a perfectly competitive firm is a horizontal line at the market price P=MR
market structure in which only one firm supplies the product and entry cannot occur. Demand is downward sloping, and the marginal-revenue curve lies below the demand curve. P>MR
market structure in which many firms are producing differentiated products and entry is easy. Demand curve is downward sloping, and marginal revenue is less than demand and less than price. P>MR
market structure in which a few firms are producing either standardized or differentiated products and entry is possible but not easy. Firms are interdependent. Shape of demand curve depends on how firms interact- what form their interdependence takes
net operating income; total revenue less total costs, doesn't include opportunity cost of the owner's capital. Greater than economic profit. Also normal profit is the accounting profit when economic profit is zero.
ownership; funds investors or owners put into a firm
accounting profit minus the opportunity cost of equity capital; the difference between total revenue and the full cost of inputs; can be positive, negative, or zero.
negative economic profit
total revenue is less than total costs, including opportunity costs.
zero economic profit
total revenue equal to total costs, including opportunity costs.
the accounting profit that corresponds to a zero economic profit
positive economic profit
total revenue in excess of total costs, including opportunity costs
How do firms decide how much to supply?
The supply rule for all firms is to supply the quantity at which the firm's marginal revenue and marginal cost are equal.
What is a market structure?
A model of the producing and selling environments in which firms operate. The three characteristics that define market structure are the number of firms, the ease of entry, and whether the products are differentiated.
What is the role of economic profit in allocating resources?
Economic profit indicates whether resources will remain in their current activity or be distributed to a different activity.
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