# Shared Flashcard Set

## Details

Part 2 - Marginal Analysis
Chapters 6-11
96
Economics
Undergraduate 3
02/04/2014

## Cards Return to Set Details

Term
 law of diminishing marginal utility
Definition
 The principle that as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decrease.
Term
 utility
Definition
 The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services).
Term
 total utility
Definition
 The total amount of satisfaction derived from the consumption of a single product or a combination of products.
Term
 marginal utility
Definition
 The extra utility a consumer obtains from the consumption of 1 additional unit of a good or service; equal to the change in total utility divided by the change in the quantity consumed.
Term
 rational behavior
Definition
 Human behavior based on comparison of marginal costs and marginal benefits; behavior designed to maximize total utility.
Term
 budget constraint
Definition
 The limit that the size of a consumer's income (and the prices that must be paid for goods of a services) imposes on the ability of that consumer to obtain goods and services
Term
 utility-maximizing rule
Definition
 The principle that to obtain the greatest utility, a consumer should allocate money income so that the last dollar spent on each good or service yeilds the same marginal utility.
Term
 consumer equilibrium
Definition
 In marginal utility theory, the combination of goods purchased based on marginal utility (MU) and price (P) that maximizes total utility; the combination for goods x and y at which MU/P of x = PU/P of y. In indifference curve analysis, the combination of goods purchased that maximize total utility by enabling the consumer to reach the highest indifference curve, given the consumer's budget line (or budget constraint).
Term
 income effect
Definition
 A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product's price.
Term
 substitution effect
Definition
 (1) A change in the quantity demanded of a consumer good that results from a change in its relative exensiveness caused by a change in the product's price; (2) the effect of a change in the price of a resource on the quantity of the resource employed by a firm, assuming no change in its output.
Term
 behavioral economics
Definition
 The branch of economics that combines insights from economics, psychology, and neuroscience to give a better explanation of choice behavior than previous theories that incorrectly concluded that consumers were always rational, deliberate, and unemotional. Behavioral economics explains: framing effects, anchoring, mental accounting, the endowment effect, and how people are loss averse.
Term
 status quo
Definition
 The existing state of affairs; in prospect theory, the current situation from which gains and losses are calculated.
Term
 loss averse
Definition
 In prospect theory, the property of people's preferences that the pain generated by losses feels substantially more intense than the pleasure generated by gains.
Term
 prospect theory
Definition
 A behavioral economics theory of preferences having three main features: (1) people evaluate opinions on the basis of whether they generate gains or losses relative to the status quo; (2) gains are subject to diminishing marginal utility, while losses are subject to diminishing marginal disutility; and (3) people are loss averse.
Term
 framing effects
Definition
 In prospect theory, changes in people's decision-making caused by new information that alters the context, or "frame of reference," that they use to judge whether options are viewed as gains or losses.
Term
 anchoring
Definition
 The tendency people have to unconsciously base, or "anchor" the valuation of an item they are currently thinking about on previously considered but logically irrelevant information
Term
 mental accounting
Definition
 The tendency people have to create separate "mental boxes" (or "accounts") in which they deal with particular financial transactions in isolation rather than dealing with them as part of their overall decision-making process that considers how to best allocate their limited budgets using the utility-maximizing rule.
Term
 endowment effect
Definition
 The tendency people have to place higher valuations on items they own than on identical items that they do not own. P{erhaps caused by people being loss averse.
Term
 budget line
Definition
 A line that shows the different combinations of two products a customer can purchase with a specific money income, given the products' prices
Term
 indifference curve
Definition
 A curve showing the different combinations of two products that yield the same satisfaction or utility to a customer
Term
 marginal rate of substitution (MRS)
Definition
 The rate at which a consumer is willing to substitute one good for another (from a given combination of goods) and remain equally satisfied (have the same total utility); equal to the slope of a consumer's indifference curve at each point on the curve.
Term
 indifference map
Definition
 A set of indifference curves, each representing a different level of utility, that together show the preferences of a consumer.
Term
 equilibrium position
Definition
 In the indifference curve model, the combination of two goods at which a consumer maximizes his or her utility( reaches the highest attainable indifference curve), given a limited amount to spend (a budget constraint)
Term
 economic cost
Definition
 A payment that must be made to obtain and retain the services of a resource; the income a firm must provide to a resource supplier to attract the resource away from an alternative use; equal to the quantity of other products that cannot be produced when resources are instead used to make a particular product.
Term
 explicit costs
Definition
 The monetary payment a firm must make to an outsider to obtain a resource.
Term
 implicit costs
Definition
 The monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market; equal to what the resource could have earned in the best-paying alternative employment; includes a normal profit
Term
 accounting profit
Definition
 The total revenue of a firm less its explicit costs; the profit (or net income) that appears on accounting statements and that is reported to the government for tax purposes
Term
 accounting profit
Definition
 The total revenue of a firm less its explicity costs; the profit (or net income) that appears on accounting statements and that is reported to the government for tax purposes
Term
 economic profit
Definition
 The total revenue of a firm less its economic costs (which include both explicit and implicit costs); also called "pure profit" and "above-normal profit".
Term
 short run
Definition
 (1) In microeconomics, a period of time in which producers are able to change the quantities of some but not all of the resources they employ; a period in which some resources (usually plant) are fixed and some are variable. (2) In macroeconomics, a period in which nominal wages and other input prices do not change in response to a change in the price level.
Term
 long run
Definition
 (1) In mircoeconomics, a period of time long enough to enable producers of a product to change the quantities of all the resources they employ; period in which all resources and costs are variable and no resources or costs are fixed. (2) In macroeconomics, a period sufficiently long for nominal wages and other input prices to change in response to a change in a nation's price level
Term
 total product (TP)
Definition
 The total output of a particular good or service produced by a firm (or a group of firms or the entire economy)
Term
 marginal product (MP)
Definition
 The additional output produced when 1 additional unit of a resource is employed (the quantity of all other resources employed remaining constant); equal to the change in total product divided by the change in the quantity of a resource employed.
Term
 average product (AP)
Definition
 The total output produced per unit of a resource employed (total product divided by the quantit
Term
 law of diminishing returns
Definition
 The principle that as successive increments of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decrease.
Term
 fixed costs
Definition
 Any cost that in total does not change when the firm changes its output; the cost of fixed resources.
Term
 variable costs
Definition
 A cost that in total increases when the firm increases its output and decreases when the firm reduces its output.
Term
 total cost
Definition
 The sum of fixed cost and variable cost
Term
 average fixed cost (AFC)
Definition
 A firm's total fixed cost divided by output (the quantity of product produced).
Term
 average variable cost (AVC)
Definition
 A firm's total variable cost divided by output (the quantity of product produced).
Term
 average total cost (ATC)
Definition
 A firm's total cost divided by output (the quantity of product produced); equal to average fixed cost plus average variable cost
Term
 marginal cost (MC)
Definition
 The extra (additional) cost of producing 1 more unit of output; equal to the change in total cost divided by the change in output (and, in the short run, to the change in total variable cost divided by the change in output).
Term
 economies of scale
Definition
 Reductions in the average total cost of producing a product as the firm expands the size of its plant (its output) in the long run; the economies of mass production.
Term
 diseconomies of scale
Definition
 Increases in the average total cost of producing a product as the firm expands the size of its plant (its output) in the long run.
Term
 constant returns to scale
Definition
 Unchanging average total cost of producing a product as the firm expands the size of its plant (its output) in the long run
Term
 minimum efficient scale (MES)
Definition
 The lowest level of output at which a firm can minimize long-run average total cost.
Term
 natural monopoly
Definition
 An industry in which economies of scale are so great that a single firm can produce the product at a lower average total cost than would be possible if more than one firm produces the product.
Term
 pure competition
Definition
 A market structure in which a very large number of firms sells a standardized product, into which entry is very easy, in which the individual seller has no control over the product price, and in which there is no nonprice competition; a market characterized by a very large number of buyers and sellers.
Term
 pure monopoly
Definition
 A market structure in which one firm sells a unique product, into which entry is blocked, in which the single firm has considerable control over product price, and in which nonprice competition may or may not be found.
Term
 monopolistic competition
Definition
 A market structure in which many firms sell a differentiated product, into which entry is relatively easy,
Term
 oligopoly
Definition
 A market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms), and in which there is typically nonprice competition.
Term
 imperfect competition
Definition
 All market structures except pure competition; includes monopoly, monopolistic competition, and oligopoly.
Term
 price taker
Definition
 A seller (or buyer) that is unable to affect the price at which a product or resource sells by changing the amount it sells (or buys).
Term
 average revenue
Definition
 Total revenue from the sale of a product divided by the quantity of the product sold (demanded); equal to the price at which the product is sold when all units of the product are sold at the same price.
Term
 total revenue (TR)
Definition
 The total number of dollars received by a firm (or firms) from the sale of a product; equal o the total expenditures for the product produced by the firm (or firms); equal to the quantity sold (demanded) multiplied by the price at which it is sold.
Term
 marginal revenue
Definition
 The change in total revenue that results from the sale of 1 additional unit of a firm's product; equal to the change in total revenue divided by the change in the quantity of the product sold.
Term
 break-even point
Definition
 An output at which a firm makes a normal profit (total revenue = total cost) but not an economic profit
Term
 MR = MC rule
Definition
 The principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost.
Term
 short-run supply curve
Definition
 A supply curve that shows the quantity of a product a firm in a purely competitive industry will offer to sell at various prices in the short run; the portion of the firm's short-run marginal cost curve that lies above its average-variable-cost curve.
Term
 long-run supply curve
Definition
 As it applies to macroeconomics, a supply curve for which price, but not real output, changes when the demand curves shifts; a vertical supply curve that implies fully flexible prices.
Term
 constant-cost industry
Definition
 An industry in which the expansion by the entry of new firms has no effect on the prices firms in the industry must pay for resources and thus no effect on production costs.
Term
 increasing-cost industry
Definition
 An industry in which the expansion through the entry of new firms raises the prices firms in the industry must pay for resources and therefore increases their production costs.
Term
 decreasing-cost industry
Definition
 An industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs.
Term
 productive efficiency
Definition
 The production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum and marginal product per dollar's worth of input is the same for all inputs
Term
 allocative efficiency
Definition
 The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal, and at which the sum of consumer surplus and producer surplus is maximized
Term
 consumer surplus
Definition
 The difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of a product and its market price; the triangular area below the demand curve and above the market price.
Term
 producer surplus
Definition
 The difference between the actual price a producer receives (or producers receive) and the minimum acceptable price; the triangular area above the supply curve and below the market price.
Term
 creative destruction
Definition
 The hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies.
Term
 pure monopoly
Definition
 A market structure in which one firm sells a unique product, into which entry is blocked, in which the single firm has considerable control over product price, and in which nonprice competition may or may not be found.
Term
 barriers to entry
Definition
 Anything that artificially prevents the entry of firms into an industry.
Term
 simultaneous consumption
Definition
 The same-time derivation of utility from some product by a large number of consumers
Term
 network effects
Definition
 Increases in the value of a product to each user, including existing users, as the total number of users rises.
Term
 X-inefficiency
Definition
 The production of output, whatever its level, at a higher average (and total) cost than is necessary for producing that level of output
Term
 rent-seeking behavior
Definition
 The actions by persons, firms, or unions to gain special benefits from the government at the taxpayers' or someone else's expense.
Term
 price discrimination
Definition
 The selling of a product to different buyers at different prices when the price differences are not justified by differences in cost.
Term
 socially optimal price
Definition
 The price of a product that results in the most efficient allocation of an economy's resources and that is equal to the marginal cost of the product
Term
 fair-return price
Definition
 The price of a product that enables its producer to obtain a normal profit and that is equal to the average total cost of producing it.
Term
 monopolistic competition
Definition
 A market structure in which many firms sell a differentiated product, into which entry is relatively easy, in which the firm has some control over its product price, and in which there is considerable nonprice competition
Term
 product differentiation
Definition
 A strategy in which one firm's product is distinguished from competing products by means of its design, related services, quality, location, or other attributes (except price)
Term
 nonprice competition
Definition
 Competition based on distinguishing one's product by means of product differentiation and then advertising the distinguished product to consumers
Term
 four-firm concentration ratio
Definition
 The percentage of total industry sales accounted for by the top four firms in the industry.
Term
 Herfindahl index
Definition
 A measure of the concentration and competitiveness of an industry; calculated as the sum of the squared percentage market shares of the individual firms in the industry.
Term
 excess capacity
Definition
 Plant resources that are underused when imperfectly competitive firms produce less output than that associated with achieving minimum average total cost.
Term
 oligopoly
Definition
 A market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence (except when ther is collusion among firms), and in which there is typically nonprice competition.
Term
 homogeneous oligopoly
Definition
 An oligopy in which the firms produce a standardized product
Term
 differentiated oligopoly
Definition
 An oligopoly in which firms produce a differentiated product
Term
 strategic behavior
Definition
 Self-interested economic actions that take into account the expected reactions of others.
Term
 mutual interdependence
Definition
 A situation in which a change in price strategy (or in some other strategy) by one firm will affect the sales and profits of another firm (or other firms). Any firm that makes such a change can expect the other rivals to react to the change.
Term
 interindustry competition
Definition
 The competition for sales between the products of one industry and the products of another industry
Term
 import competition
Definition
 The competition that domestic firms encounter from the products and services of foreign producers.
Term
 game theory
Definition
 A means of analyzing the business behavior of oligopolists that uses the of strategy associated with games such as chess and bridge.
Term
 collusion
Definition
 A situation in which firms act together and in agreement (collude) to fix prices, divide a market, or otherwise restrict competition
Term
 kinked-demand curve
Definition
 The demand curve for a noncollusive oligopolist, which is based on the assumption that rivals will match a price decrease and will ignore a price increase.
Term
 price war
Definition
 Successive and continued decreases in prices charged by firms in an oligopolistic industry. Each firm lowers its price below rivals' prices, hoping to increase its sales and revenues at its rivals' expense.
Term
 cartel
Definition
 A formal agreement among firms (or countries) in an industry to set the price of a product and establish the outputs of the individual firms (or countries) or to divide the market for the product geographically
Term
 price leadership
Definition
 An informal method that firms in an oligopoly may employ to set the price of their product. One firm (the leader) is the first to announce a change in price, and the other firms (the followers) soon announce identical or similar changes.
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