# Shared Flashcard Set

## Details

Econ test three
heck
48
Economics
03/06/2013

Term
Definition
 To maximize utility
Term
 Utility
Definition
 the satisfaction a consumer obtains from the consumption of a good or service
Term
 Utility facts
Definition
 -Utility is measured in utils -we CANNOT compare the utils assigned to a good by multiple people -we CAN compare the utils assigned to multiple goods by one person
Term
 Total Utility
Definition
 The total satisfaction a person derives from comsuming some specific quantity; TU increases as Qd increases; TU=ΣMU
Term
 Marginal Utility
Definition
 The additional utility a consumer derives from an additional unit of a good MU=ΔTU
Term
 Law of diminishing MU
Definition
 As Qd rises, MU falls (As MU falls, willingness to pay falls as well)
Term
 When do we stop buying stuff?
Definition
 When we run out of money
Term
 Budget line/constraint
Definition
 line that shows the different consumption bundles a consumer can purchase with a specific money income   (the price of a consumption bundle cannot exceed consumer's total income)
Term
 Consumption bundle
Definition
 the combination of goods and services consumed by an individual
Term
 Income (formula)
Definition
 (Qx*Px)+(Qy*Py)
Term
 Opportunity cost of X (formula)
Definition
 max Qy/max Qx= Px/Py
Term
 Factors that change the budget line
Definition
 1. Income 2. Price of Y 3.Price of X
Term
Definition
 The good that gives us the most marginal utility per dollar   MU/P
Term
 Utility maximization rule (consumer equilibrium)
Definition
 TU is maximized when: 1. All income is spent 2. MUx/Px=MUy/Py
Term
 Optimal consumption bundle
Definition
 the bundle that maximizes total utility
Term
 Indifference curves
Definition
 a line that shows the consumption budles that yield the same amount of total utility
Term
 Properties of (most) indifference curves
Definition
 1. IC's are downward sloping 2. IC's farther from the origin represent a greater level of TU 3. IC's never cross 4. IC's are bowed inward
Term
 Calculating the slope of IC's
Definition
 slope= ΔQy/ΔQx OR (along an IC) -MUx/MUy
Term
 Marginal rate of substitution
Definition
 the ratio of the marginal utility of one good to the marginal utility of another; MRs=MUx/MUy
Term
 Principle of diminishing MRs
Definition
 The more of good x a person consumes in proportion to good y, the less y the consumer is willing to substitute for x MRs decreases as Qx increases
Term
 Relative price
Definition
 The ratio of the price of one good to the price of the other; RP=Px/Py
Term
 Optimal bundle (formula in terms of RP)
Definition
 MRs=RP MUx/MUy=Px/Py
Term
 Relative price rule
Definition
 at the optimal consumption bundle, MRs=RP
Term
 Special indifference curves
Definition
 Perfect substitutes Perfect complements
Term
 Perfect substitutes
Definition
 goods for which the marginal rate of substitution is constant, no matter how much of each is consumed
Term
 Perfect Complements
Definition
 Goods that a consumer will consume in the same ratio regardless of their relative price
Term
 Profit (∏) (formula)
Definition
 Total revenue- Total cost
Term
 Total revenue (formula)
Definition
 P*Q
Term
 Total cost (2 formulas)
Definition
 1. Accounting- ∏=TR-explicit cost 2. Economic- ∏= TR-economic cost
Term
 Economic cost (used in economic profit)
Definition
 includes the implicit cost, which for a producer is the forgone income from employing resources in their next best use
Term
 Normal profit
Definition
 1. the firm is doing just as good as it could in another industry 2. Accounting profit=implicit cost 3. Economic profit=\$0
Term
 short run
Definition
 an amount of time insufficient to allow plant capacity to vary. Also, firms can shut down production, but they cannot exit the market.
Term
 Plant capacity
Definition
 the size of the building and amount of capital equipment
Term
 long run
Definition
 all costs are variable, entry and exit are possible
Term
 Short run costs
Definition
 Fixed Variable Total  Avg fixed Avg variable Avt total Marginal
Term
 Fixed costs
Definition
 1. Cannot be varied in the SR 2. Do not change as output changes 3. Still exist when output falls to zero 4. Usually associated with capital
Term
 Variable cost
Definition
 Costs that change as output changes; go to zero during shutdown
Term
 Total Cost  (formula)
Definition
 Total fixed+total variable
Term
 Average fixed Cost
Definition
 TFC/Quantity
Term
 AVG variable cost
Definition
 TVC/Q
Term
 AVG total cost
Definition
 TC/Q or afc+avc
Term
 Marginal cost
Definition
 ΔTC/ΔQ
Term
 Law of diminishing (marginal) returns LDMR
Definition
 as successive units of a variable resource are added to a fixed resource, the marginal product of the variable resource eventually decreases
Term
 Marginal product of labor
Definition
 The additional output produced by one more unit of a variable imput; MPl=ΔQ/ΔL
Term
 Total product (formula)
Definition
 Q=ΣMPl
Term
 Economies of scale/increasing returns of scale
Definition
 as q rises, LRATC falls
Term
 Diseconomies of scale/ decreasing returns to scale
Definition
 as q rises, LRATC rises
Term
 Factors that shift LR cost curves
Definition
 1. input prices- input prices and cost curves move together 2. regulation/taxes- taxes and cost move together 3. technology- as technology improves, costs fall
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