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Microeconomics Unit 2
Vocabulary
40
Economics
Undergraduate 2
03/10/2008

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Term
Utility
Definition
the enjoyment or satisfaction that people receive from consuming goods and services
Term
Marginal Utility
Definition
The change in total utility a person receives from consuming one additional unit of a good or service
Term
Law of Diminishing Marginal Utility
Definition
The principal that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time.
Term
Budget Constraint
Definition
the limited amount of income available to consumers to spend on goods and services
Term
Income Effect
Definition
The change in the quantity demanded of a good that results from the effect of a change in the price on consumer purchasing power, holding all other factors constant.
Term
Substitution Effect
Definition
The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power.
Term
Network Externality
Definition
The situation where the usefulness of a product increases with the number of consumers who use it.
Term
Behavioural Economics
Definition
The study of situations in which people make choices that do not appear to be economically rational.
Term
Opportunity Cost
Definition
The highest-valued alternative that must be given up to engage in an activity.
Term
Endowment Effect
Definition
the tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it.
Term
Sunk Cost
Definition
A cost that has already been paid and cannot be recovered
Term
Indifference Curve
Definition
A curve that shows the combination of consumption bundles that give the customer the same utility.
Term
Marginal Rate of Substitution (MRS)
Definition
the slope of an indifference curve, which represents the rate at which a consumer would be willing to trade off one good for another.
Term
Technology
Definition
the process a firm uses to turn inputs into outputs of goods and services
Term
Technological Change
Definition
A change in the ability of a firm to produce a given level of output with a given quantity of inputs
Term
Short Run
Definition
The period of time during which at least one of the firm's inputs is fixed.
Term
Long Run
Definition
the period of time in which a firm can vary all of its inputs, adopt new technology, and increase or decrease the size of its physical plant
Term
Total Cost (TC)
Definition

the cost of all the inputs a firm uses in production.

 

TC = FC + VC 

Term
Variable Costs (VC)
Definition
costs that change as output changes.
Term
Fixed Costs (FC)
Definition
costs that remain constant as output changes
Term
Explicit Cost
Definition
a cost that involves spending money
Term
Implicit Cost
Definition
a nonmonetary opportunity cost
Term
Production Function
Definition
the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs.
Term
Marginal Product of Labor
Definition
the additional output a firm produces as a result of hiring one additional worker
Term
Law of Diminishing Returns
Definition
the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline.
Term
Average Product of Labor (APL)
Definition

the total output produced by a firm divided by the quantity of workers

 

APL = Q/L 

Term
Marginal Cost (MC)
Definition

the change in a firm's total cost from producing one more unit of a good or service.

 

MC = ΔTC / ΔQ 

Term
Average Fixed Cost (AFC)
Definition

fixed cost divided by the quantity of output produced.

 

AFC = FC / Q

Term
Average Variable Cost (AVC)
Definition

variable cost divided by the quantity of output produced.

 

AVC = VC / Q 

Term
Average Total Cost (ATC)
Definition

the sum of the average fixed cost plus the average variable cost.

 

ATC = AFC + AVC 

Term
Long-run Average Cost Curve
Definition
a curve showing the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed.
Term
Economics of Scale
Definition
the situation when a firm's long-run average costs fall as it increases output.
Term
Constant Returns to Scale
Definition
the situation when a firm's long-run average costs remain unchanged as it increases output.
Term
Minimum Efficient Scale
Definition
the level of output at which all economies of scale are exhausted.
Term
Diseconomies of Scale
Definition
the situation when a firm's long-run average costs rise as the firm increases output.
Term
Perfectly Competitive Market
Definition
a market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.
Term
Price Taker
Definition
a buyer or seller that is unable to affect the market price.
Term
Profit
Definition

total revenue minus total cost

 

Profit = TR - TC 

Term
Average Revenue (AR)
Definition

total revenue divided by the quantity of the product sold

 

AR = TR / Q 

Term
Marginal Revenue (MR)
Definition

change in total revenue from selling one more unit of a product

 

MR = ΔTR / ΔQ

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