Mid-Sem Definitions (Part B)
Terms in this set (33)
pleasure or satisfaction people get from economic activity. Use utility to describe preferences.
complete (individual can state which of any two things they prefer, or are indifferent to), transitive (non-cyclical), and monotonic (more is better).
a curve showing the combinations of two goods that leave the consumer with the same level of utility. MRS is along the same IC, its absolute value.
Choice, budget constraint and preferences (IC) lead to demand function. We focus on the observable changes in quantity and price.
Individual Demand Curve
Graph of a relationship between price of a good and quantity demanded of that good by a single person. Each point on demand curve shows what a person is willing to pay for 1 more unit of good at that quantity. Demand curve slopes downward because marginal willingness to pay drops with units consumed.
The total quantity of a good or service demanded by all potential buyers.
Change due to substituting one good for another keeping real income constant (stay on IC).
Change in quantity demanded due to change in real income (move to new IC with constant prices).
Price of the last unit consumed
Maximum amount a person is willing to pay for quantity of that good, minus, what they actually pay. Area under DC and above price line.
Unit free measure of responsiveness.
Not always sure what the future holds. Random eg. coin toss. Lack of information eg "to catch a thief."
Relative frequency with which an event occurs.
The average outcome from an uncertain gamble.
Gamble with an expected value of zero
Expected Utility Model
Compare risky or uncertain choices by comparing EV utility for each choice.
The tendency of people to refuse to accept fair gambles.
Diminishing Marginal Utility of Income
Each additional dollar that an individual earns brings less additional utility. One more dollar for a poor person brings different utility to one more dollar of a billionaire.
Production function (possible ways to produce) which leads to cost (cheapest ways to produce) and lastly supply (the most profitable ways to produce).
Any organisation that turns inputs into outputs
Additional output produced by using one more unit of a particular input (everything else constant)
A curve that shows all the combinations of two inputs, such as capital and labor, that will produce the same level of output.
Rate of Technical Substitution
The amount by which one input can be reduced when one more unit of another input is added while holding output constant. The negative of the slope of an isoquant. Tends to be diminishing.
All costs relevant to an economic decision.
Costs that have already been incurred and cannot be recovered. Not relevant for future decisions.
Recorded payments, too narrow because they do not include opportunity costs.
Total revenue minus total cost.
Economies of Scale
AC falls as output increases.
Diseconomies of Scale
AC rises as output increases.
Local improvements; does one more unit of output increase profit? (profit = revenue - tc)
extra revenue from the sale of one additional unit of output.
a firm or individual whose decisions regarding buying or selling have no effect on the prevailing market price of a good.
Marginal and Inframarginal Effects
1. Firms facing a downward sloping demand curve
2. Selling 1 more unit of output means dropping price on all units
3. Marginal = get new price on 1 extra unit
4. Inframarginal = lose the drop in price on all original units