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ECON 115a Midterm Vocab
All the terms from psets for micro definitions
38
Economics
10/17/2010

Term
 Marginal Rate of Substitution
Definition
 The marginal rate of substitution (MRS) measures how much of x2 you would be willing to give up to get an extra unit of x1. In utility terms, MRS = MU1/MU2 which is the absolute value of the slope of the indifference curve.
Term
 Perfect Substitutes
Definition
 Two goods x1 and x2 are perfect substitutes if the consumer’s marginal rate of substitution between the two goods is constant.
Term
 Price-taking Firm
Definition
 A price-taking firm does not have the ability to individually affect the prevailing price in the market for its output. In a perfectly competitive market, all firms are price takers.As a result, each can sell as much as it produces at the market price.
Term
 Marginal Product of Labor
Definition
 The marginal product of labor measures how much extra outputis produced when the number of workers increases by one (holding all other inputs to production fixed.
Term
 Iso-cost line
Definition
 line showing all possible combinations of inputs that can be purchased for a total given cost
Term
 Production Function
Definition
 function of the form Output=F(Inputs), giving the amount of output a firm can produce from given amounts of inputs using efficient production methods
Term
 Technological Efficiency
Definition
 a situation where it is impossible to produce larger output from the same amount of inputs. It implies that inputs are not wasted.
Term
 Consumer Surplus
Definition
 Consumer surplus is difference between price paid and marginal willingness to pay summed over all buyers in the market.
Term
 Variable Cost
Definition
 Variable cost is the part of a firm's cost that varies with output.
Term
 Pareto Preferred
Definition
 A point is Pareto preferred if one person can be made better off without anyone being made worse off.
Term
 Law of Demand
Definition
 An increase in price of good A leads to a decrease in consumption of good A (in other words, demand slopes down)
Term
 Inferior Good
Definition
 A good is an inferior good if an increase in income reduces demand for the good.
Term
 Excess Supply
Definition
 When quantity supplied exceeds quantity demanded.
Term
 Incidence (or burden) of a Tax
Definition
 The incidence of a tax indicates how much of a tax burden is borne by various market participants.
Term
 Inelastic Demand
Definition
 We say that demand is inelastic when the elasticity of demand is greater than -1 (that is, between -1 and 0)
Term
 Budget Constraint
Definition
 Budget constraint identifies all of the consumption bundles a consumer can afford, given the prices of all goods and income.
Term
 Money metric utility
Definition
 A utility function where utility is measured in terms of dollars. In other words, a utility function of the form U(X,M) = u(x)+m, where m is money spent on everything except for x and x is an arbitrary other good. In this case there is a constant marginal utility of money and therefore the utility received from x, is in terms of dollars.
Term
 Indifference curve
Definition
 Starting with any alternative, an indifference curve shows all the other alternatives that a consumer likes equally well.
Term
 Opportunity Cost
Definition
 The opportunity cost of some resource is the value of the best alternative use of that resource.
Term
 Income Effect
Definition
 The income effect is the change in the quantity of a good a consumer demands because of a change in income, holding prices constant.
Term
 Marginal Revenue Product
Definition
 The MRP of some input factor is the change in revenue due to a unit increase in that input. It is also correct if you say that it is the marketvalue of the extra product per unit increase of the input. Mathematically, MRPL = pMPL in the case of labor.
Term
 Consumer Surplus
Definition
 Consumer surplus is the monetary difference between what a consumer is willing to pay for the quantity of the good purchased and the actual cost of the good.
Term
 Diminishing marginal returns
Definition
 A good exhibits diminishing marginal returns if the marginal cost of producing the good (that is, the per unit production cost) is increasing in the quantity produced.
Term
 Equilibrium
Definition
 In the market for a particular commodity, the equilibrium is defined by a price and quantity such that there are no forces acting to increase or reduce the equilibrium price. That is, there is neither a surplus of the good nor a shortage of the good at the equilibrium price. Algebraically, it is the point at which the supply and demand curves intersect.
Term
 Elasticity of demand
Definition
 percentage change in the quantity demanded of a good divided by the percentage change in price of the good
Term
 Scarcity
Definition
 Something is scarce if it has a value in an alternate use.
Term
 Complement
Definition
 Two goods are complements (in consumption) if an increase in the price of one leads to a decrease in the consumption of the other holding all else equal.
Term
 Normal Good
Definition
 A good is a normal good if an increase in income leads to an increase in consumption of that good.
Term
 Elasticity of Supply
Definition
 The percentage change in quantity supplied for a one percent change in price
Term
 Marginal Utility
Definition
 the extra increment of utility you receive for the next additional unit you consumed
Term
 Substitution Effect
Definition
 The effect on consumption of a compensated price change. The substitution effect involves a movement along an indifference curve to a point where the slope of the indifference curve is the same as the slope of the new budget line.
Term
 Perfect Complements
Definition
 Two goods such that that if the price of one rises, consumption of the other falls according to a fixed consumption ratio.
Term
 Perfectly Competitive Firm
Definition
 Firm that is a price taker in input and output markets; It’s too small to affect price; It operates under perfect information.
Term
 A Production Function
Definition
 a function of the form Output = f(Inputs), giving the amount of output a firm can produce from given amounts of inputs using efficient production methods.
Term
 Cost Function
Definition
 A firm’s Cost Function describes the total cost of producing each possible level of output. It is a function of the form Total Cost = C(Output).
Term
 Fixed Cost
Definition
 These are costs that must be incurred by a firm to have any Q. They do not vary with Q.
Term
 Producer Surplus
Definition
 The difference between what producers supply and the price they actually receive. The level of producer surplus is the area above the supply curve and below the market price.
Term
 Pareto Efficient
Definition
 An allocation of resources is Pareto efficient if the only reallocation that could make any person better off would make someone worse off.
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