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| When consumers make choices about the quantity of goods and services to consume, it is presumed that their objective is to maximize total utility. In maximizing total utility, the consumer faces a number of constraints, the most important of which are the consumer's income and the prices of the goods and services that the consumer wishes to consume. The consumer's effort to maximize total utility, subject to these constraints, is referred to as the consumer's problem. The solution to the consumer's problem, which entails decisions about how much the consumer will consume of a number of goods and services. |
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Short run: Some inputs fixed, some inputs variable
All production takes place in the short run. |
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| Defined: Percent change in Q d due to a 1 percent change in Income |
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Scope implies joint production, that is, more than one output.
Some outputs are produced together.
Lumber and paper,
Orchards and honey,
Beef and leather hides.
Here, the by-product in the production of one good is an input in the production of another good.
The idea here is that goods are cheaper (less costly) to produce concurrently than separately. |
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They cannot intersect, and they
Have a negative slope.
Show all combinations of inputs (L and K) capable of producing a constant level of output.
An isoquant shows the extent to which the firm in question has the ability to substitute between the two different inputs at will in order to produce the same level of output. |
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is a good that decreases in demand when consumer income rises, unlike normal goods, for which the opposite is observed.[1] Normal goods are those for which consumers' demand increases when their income increases. [2] Inferiority, in this sense, is an observable fact relating to affordability rather than a statement about the quality of the good. As a rule, too much of a good thing is easily achieved with such goods, and as more costly substitutes that offer more pleasure or at least variety become available, the use of the inferior goods diminishes.
cheaper brand of car. |
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Profit maximization may be thwarted when the goals of owners (or principals) diverge from the goals of workers (or agents).
You cannot closely monitor workers because it costs too much.
The way you fix the problem is by making the worker a part of the company with bonus's, commission, stock option, and profit sharing. |
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A special type of Inferior Goods.
With Giffen Goods the good takes a very large proportion of the consumer’s income.
Thus, for this highly unusual good, the Income effect dominates.
And, as you know the Income effect is of the opposite sign of the Sub. Effect. |
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| A consumer's budget line characterizes on a graph the maximum amounts of goods that the consumer can afford. |
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| Law of Diminishing Returns |
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| If equal increments of an input are added (and if the quantities of other inputs are held constant), the resulting increments of product will decrease beyond some point - this is, the marginal product of the input will eventually diminish. |
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| measures the responsiveness of the demand for a good to a change in the price of another good. |
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| If the demand for one good is indirectly related to the price of some other good, then these goods are considered to be complements. Here, the two goods are consumed together. |
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Basically industry refers to a product where as firm means a company engaged in business related to that particular product and plant is a place where the manufacturing of that product takes.
The industry sets the price. |
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CS is the difference between the maximum amount the consumer is willing to pay for the current consumption of good X and the amount he actually pays.
In a sense, the consumer usually gets more than he pays for.
As a general rule, CS is maximized when the market is left alone to find Eq’m P without government intervention. |
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| is the cost related to the next-best choice available to someone who has picked among several mutually exclusive choices.[1] It is a key concept in economics. It has been described as expressing "the basic relationship between scarcity and choice."[2] The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently.[3] Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be considered opportunity costs. |
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| Income and Substitution effect |
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Definition
Substitution Effect:
The change in the quantity of X due to a change in its price holding the level of utility constant. (He stays on the same IC.)
The substitution effect is always negative. That is, it is always the opposite of the change in price.
Income Effect:
The change in quantity of X demanded (Q d) due to a change in the consumer’s real income.
Movement to a different IC. |
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| If the demand for one good is directly related to the price of some other good, then these goods are considered to be substitutes. Here, one good is used in place of the other. |
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| Consumers face trade-offs in their purchase decisions, since their income is limited and choices are numerous. In order to make choices, consumers must combine budget constraints (what they can afford), and preferences (what they would like to consume). |
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Long run: All inputs variable
This is a “planning horizon” in which certain decisions have not yet been made. |
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| is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. |
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| Is a line that shows all combinations of inputs which cost the same total amount. |
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MRTS KL is defined as the change in one input (K) per unit change in the other input (L) so as to maintain a constant level of Q.
MRTS KL = ΔK / ΔL
MRTS KL is the slope of a tangent to an isoquant. |
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| Economies of scale arise when the cost per unit falls as output increases. Economies of scale are the main advantage of increasing the scale of production and becoming ‘big’. |
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| Utility Maximization / Function |
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Definition
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| Indifference Curve Analysis |
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Definition
The aim of indifference curve analysis is to analyse how a rational consumer chooses between two goods. In other words, how the change in the wage rate will affect the choice between leisure time and work time.
Indifference analysis combines two concepts; indifference curves and budget lines (constraints)
The indifference curve
An indifference curve is a line that shows all the possible combinations of two goods between which a person is indifferent. In other words, it is a line that shows the consumption of different combinations of two goods that will give the same utility (satisfaction) to the person.
For instance, in Figure 1 the indifference curve is I1. A person would receive the same utility (satisfaction) from consuming 4 hours of work and 6 hours of leisure, as they would if they consumed 7 hours of work and 3 hours of leisure. |
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Definition
| normal goods are any goods for which demand increases when income increases and falls when income decreases but price remains constant, i.e. with a positive income elasticity of demand.[1][2] The term does not necessarily refer to the quality of the good. |
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