chapters 6-12, midterm 2
Economics 101 with Hansen at University of Wisconsin - Madison
About this deck
By: Ali Tackett
Textbook:
Principles of Microeconomics Value Package (includes MyEconLab with E-Book 1-semester Student Access )
Created: 2011-11-08
Size: 76 flashcards
Views: 65
Textbook:
Principles of Microeconomics Value Package (includes MyEconLab with E-Book 1-semester Student Access )Created: 2011-11-08
Size: 76 flashcards
Views: 65
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budget constraint
the limits imposed on household choices by income, wealth, and product prices
I = Px • Qx + Py • Qy
if I increases - outward parallel shift
if Px increases - inward rotation in BC
if Px decreases - outward rotation in BC
choice set/opportunity set
the set of options that is defined and limited by a budget constraint
(area underneath budget constraint line in graph)
real income
the set of opportunities to purchase real goods and services available to a household as determined by prices and money income
utility
the satisfaction a product yields
marginal utility
the additional satisfaction gained by the consumption or use of one more unit of a good or service
MU = ΔTU/ΔQx
total utility
the total amount of satisfaction obtained from consumption of a good or service
law of diminishing marginal utility
the more of any one good consumed in a given period, the less satisfaction (utility) generated by consuming each additional (marginal) unit of the same good.
utility-maximizing rule
equating the ratio of the marginal utility of a good to its price for all goods
diamond/water paradox
a paradox stating that 1) the things with the greatest value in use frequently have little or no value in exchange and 2) the things with the greatest value in exchange frequently have litter or no value in use.
income effect
change in Qx demanded that is attributable to the welfare change that accompanies the price change
-feel you have higher income so you buy more (if normal good) and price is lower
(qx2 – qx')
diff bw E2 and E' in graph
substitution effect
change in Qx demanded when Px changes and consumer utility is kept constant
(qx' – qx1)
difference between E1 and E' in graph
labor supply curve
a curve that shows the quantity of labor supplied at different wage rates. its shape depends on how households react to changes in the wage rate.
financial capital market
the complex set of institutions in which suppliers of capital (households that save) and the demand for capital (firms wanting to invest) interact.
production
process where inputs are combined and turned into outputs
firm
an organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand
profit
-the difference between total revenue and total cost
- TP = (AR – AC)•Q* ---> if you add more to cost than to revenue, profit decreases
total revenue
the amount received from the sale of the product (q • P)
total cost
the total of 1) out of pocket costs and 2) opportunity cost of all factors of production
= out of pocket costs + normal rate of return on capital + opp. cost of each factor of prod.
normal rate of return
a rate of return on capital that is just sufficient to keep owners and investors satisfied. for relatively risk-free firms, it should be nearly the same as the interest rate on risk-free government bonds
short run
the period of time for which two conditions hold: the firm is operating under a fixed scale (fixed factor) of production and firms can neither enter nor exit an industry
long run
that period of time for which there are no fixed factors of production: firms can increase or decrease the scale of operation and new firms can enter and existing firms can exit the industry
optimal method of production
the production method that minimizes cost
production technology
the quantitative relationship between inputs and outputs
labor-intensive technology
technology that relies heavily on human labor instead of capital
capital-intensive technology
technology that relies heavily on capital instead of human labor
production function
a numerical or mathematical expression of a relationship between inputs and outputs. it shows units of total product as a function of units of inputs.
marginal product
the additional output that can be produced by adding one more unit of a specific input, ceteris paribus.
law of diminishing returns
when additional units of a variable input are added to fixed inputs, after a certain point, the marginal product of the variable input declines.
average product
the average amount produced by each unit of a variable factor of production
TP
QL
fixed cost
any cost that does not depend on the firms' level of output. these costs are incurred even if the firm is producing nothing. there are no fixed costs in the long run
variable cost
a cost that depends on the level of production chosen
total cost
variable costs + fixed costs
total fixed costs
the total of all costs that do not change with output even if output is zero
average fixed cost
total fixed cost divided by the number of units of output; a per-unit measure of fixed costs
TFC/Q
spreading overhead
the process of dividing total fixed costs by more units of output. average fixed cost declines as quantity rises
total variable cost
the total of all costs that vary with output in the short run
total variable cost curve
a grave that shows the relationship between total variable cost and the level of a firm's output
marginal cost
the increase in total cost that results from producing one more unit of output. marginal costs reflect changes in variable costs
TVC↑ amount
average variable cost
total variable cost divided by the number of units of output
TVC/Q
average total cost
total cost divided by the number of units of output
TC/Q
perfect competition
-many firms, small rel. to industry
-producing identical products
-no firm is large enough to have control over prices
-free entry and exit to industry (no barriers)
-individ. firms are price takers
homogeneous products
undifferentiated products, products that are identical to, or indistinguishable from, one another
marginal revenue
the additional revenue that a firm takes in when it increases output by one additional unit. in perfect competition, P = MR
breaking even
the situation in which a firm is earning exactly a normal rate of return
shutdown point
the lowest point on the AVC curve. when price falls below the min. point on AVC, total revenue is insufficient to cover variable costs and the firm will shut down and bear loses equal to and below fixed costs
short-run industry supply curve
the sum of the marginal cost cures (above AVC) of all the firms in an industry
increasing returns to scale (economies of scale)
an increase in a firm's scale of production leads to lower costs per unit produced
ex: roommates splitting rent, 50 people on a bus instead of 50 people driving cars, assembly line
LRAC ↓
as Qinput ↑, Qoutput ↑ by more
constant returns to scale
an increase in a firm's scale of production has no effect on costs per unit produced
LRAC has horizontal slope
decreasing returns to scale (diseconomies of scale)
an increase in a firm's scale of production leads to higher costs per unit produced
LRAC ↑
as Qinput ↑, Qoutput ↑ by less
optimal scale of plant
the scale of plant that minimizes average cost
long-run competitive equilibrium
when P = SRMC = SRAC = LRAC and profits are zero
derived demand
the demand for resources (inputs) that is dependent on the demand for the outputs those resources can be used to produce
productivity of an input
the amount of output produced per unit of that input
marginal product of labor (MPL)
the additional output produced by one additional unit of labor
marginal revenue product (MRP)
the additional revenue a firm earns by employing one additional unit of input
MRPL = MPL • PX
- what additional employee is work to firm
- revenue they will bring in
factor substitution effect
the tendency of firms to substitute away from a factor whose price has risen and toward a factor whose price has fallen
if Pk increases, then K decreases (hire less) less of complementary inputs but ^ demand for subs. inputs
output effect of a factor price increase (decrease)
when a firm decreases (increases) its output in response to a factor price increase (decrease), this decreases (increases) the demand for all factors
with higher costs (Pk) - produce less output - use less of all inputs
demand-determined price
the price of a good that is in fixed supply; it is determined exclusively by what households and firms are willing to pay for the good
pure rent
the return to any factor of production that is in fixed supply
technological change
the introduction of new methods of production or new products intended to increase the productivity of existing inputs or to raise marginal products
shifts in input demand
1) technological change
2) price increase/demand increase
3) change in the quantity of other inputs
4) change in price of other inputs
partial equilibrium analysis
the process of examining the equil. conditions in individual markets and for households and firms separately
-only working in one market (equilibrium in individual markets)
general equilibrium
the condition that exists when all markets in an economy are in simultaneous equilibrium
-equilibrium in optimization in all markets at same time
efficiency
the condition in which the economy is producing what people want at least possible cost
pareto efficiency or pareto optimality
a condition in which no change is possible that will make some members of society better off without making some other members of society worse off
market failure
occurs when resources are misallocated or allocated inefficiently. the result is waste or lost value
public goods or social goods
goods and services that bestow collective benefits on members of society. generally, no one can be excluded from enjoying their benefits.
ex - national defense
externality
a cost or benefit imposed or bestowed on an individual or a group that is outside, or external to, the transaction
imperfect information
the absence of full knowledge concerning product characteristics, available prices and so on.
consumer equilibrium
MUx = Px
MUy Py
when the BC is tangent to indifference curve
Marginal rate of substitution
rate at which consumer is willing to substitute good x for good y
MUx = Px = MRS
MUy Py <---------***in equilibrium**
price effect
qx2 – qx1 = substitution effect + income effect
relationships between ATC and MC
-MC intersects ATC at min point
-ATC lags behind MC even more than AVC
-ATC often follows MC but lags behind bc it is an average over all units of output
-it is exactly the same as relationship between AVC and MC
demand for an input depends on:
1) value of the input: only as valuable as output it produces - Px
2) productivity of an output: amount of output produced per unit of input - MPL
sources of market failure
- imperfect info
- imperfect markets (lower quantity, raise prices)
- externalities - cost or benefit to 3rd party
- public goods - non-excludable
3 decisions made by firms
- how much output to supply
- how to produce that output
- how much of each input to demand
About this deck
By: Ali Tackett
Textbook: Principles of Microeconomics Value Package (includes MyEconLab with E-Book 1-semester Student Access )
Created: 2011-11-08
Size: 76 flashcards
Views: 65
Textbook:
Principles of Microeconomics Value Package (includes MyEconLab with E-Book 1-semester Student Access )Created: 2011-11-08
Size: 76 flashcards
Views: 65
About StudyBlue
STUDYBLUE makes things that make you better at school.
Things like online flashcards with photos and audio.
Things like personalized quizzes and friendly reminders about when (and what) to study next.
Think of it as a digital backpack™: access to all of your study materials online and on your phone.
STUDYBLUE exists to make studying efficient and effective for every student, for free. Join us.
“I have used this website for three exams, and I see a huge difference in my test results.”
Naj
Naj