19 terms

Microeconomics - consumer surplus - Test 3

consumer-surplus Costs-Production

Terms in this set (...)

Consumer Surplus
is the difference between what consumers are willing and able to
pay for a good and what they actually pay for the good.
Demand curves
depict the various quantities that buyers would be willing and able to
purchase at different prices.
The area beneath the demand curve
is the total amount that consumers are willing
and able to pay for a good.
pricing is done at the margin, at the equilibrium, consistent with the marginal
utility of the last good consumed.
Due to the Law of Diminishing Marginal Utility
we know this equilibrium price is set in
proportion with the last good consumed and is lower than prices that the most
motivated buyers would be willing and able to pay; therefore, buyers keep much of what they would have been willing and
able to pay for the goods they received
Consumer surplus equals buyers' willingness and ability to pay for a good minus the
amount they actually pay for it.
• Consumer surplus measures the benefit buyers get from participating in a market.
• Consumer surplus can be computed by finding the area below the demand curve and
above the price.
Total Revenue
The amount a firm receives for the sale of its output.
Total Cost
The market value of the inputs a firm uses in production
is the firm's total revenue minus its total cost.
Profit = Total revenue - Total cost
The Production Function
The production function shows the relationship between quantity of inputs used
to make a good and the quantity of output of that good
Marginal Product
The marginal product of any input in the production process is the increase in
output that arises from an additional unit of that input.
Diminishing Marginal Product
Diminishing marginal product is the property whereby the marginal product of an
input declines as the quantity of the input increases.
• Example: As more and more workers are hired at a firm, each additional
worker contributes less and less to production because the firm has a limited
amount of equipment.
Diminishing Marginal Product
The slope of the production function measures the marginal product of an input,
such as a worker.
- When the marginal product declines, the production function becomes flatter.
Costs of production may be divided into fixed costs and variable costs.
Fixed costs
Fixed costs are costs that do not vary with the quantity of output produced
Variable costs
Variable costs are costs that vary with the quantity of output produced
Total Costs
Average Costs
Average costs can be determined by dividing the firm's costs by the quantity of
output it produces.
The average cost is the cost of each typical unit of product.
Determining Average Costs
Average Costs
- Average Fixed Costs (AFC)
- Average Variable Costs (AVC)
- Average Total Costs (ATC)