Econ W 3&4

33 flashcards · Other · by Daniel F.

1. Law of Diminishing Marginal Utility

   The tendency for the additional utility gained from consuming an extra unit of a good to diminish as consumption increases beyond some point

2. The rational spending rule

   Spending should be allocated across goods so that the marginal utility per euro is the same for each good.

3. Preference ordering, ordinal utility, assumptions:

   Complete - any two bundles of goods can be comparable and decided upon Ordinal - any two bundles of goods can ordered Transitive - If (A>B), and (B>C), then (A>C) More is better - The individual’s utility (satisfaction level) is “increasing” in any good continuous - utility of bundles that differ only slightly in size or composition are still comparable These 5 allow us to calculate the utility function Preferences display a “Diminishing Marginal Rate of Substitution”, where things we have less…

4. Indifference Curve

   a smoothly convex curve that informs about combinations of two goods between which the individual is indifferent (same utility)

5. Marginal Rate of Substitution

   between two goods gives the slope of the indifference curve

6. budget constraint

   Y = Pa*A + Pb*B The consumer maximizes utility subject to the budget constraint The chosen bundle will be that for which the budget line is a tangent to an indifference curve. At this point the two slopes are equal

7. Consumer surplus

8. Producer surplus

9. Factors of production

   Inputs used in the production of a good or service.

10. Short run

    A period of time sufficiently short for at least some of the firm’s factors of production to be fixed.

11. Long run

    A period of time of sufficient length for all the firm’s factors of production to become variable

12. Law of diminishing returns

    Increased production of the good eventually requires ever-larger increases in the variable factor when some factors of production are fixed

13. Marginal cost

14. Profit

    Total revenue a firm receives from the sale of its products minus all costs (explicit & implicit) of production

15. Price-taker

    A firm that has no influence over the price at which it sells its product

16. perfectly competitive market

    A market in which all individual suppliers are price-takers

17. Imperfectly competitive firm

    A firm that has at least some influence over the price at which it sells its product

18. The characteristics of perfect competition

    All firms sell the same standardized product. The market has many buyers and sellers, each of which buys or sells only a small fraction of the total quantity exchanged. Productive resources are mobile. Buyers and sellers are well informed.

19. When is a firm profitable

20. (Pareto) Efficiency

    A situation where no further transaction is possible that will help some without harming other people

21. Markets will be (Pareto) efficient when

    Markets are perfectly competitive. Buyers and sellers are well informed. Transaction costs are low or absent. The demand and supply curves satisfy certain other restrictions (no externalities).

22. The reduction in economic surplus from a price ceiling will be underestimated when

    The consumers who receive product are not the consumers value the product the most Consumers take costly actions to enhance their chances of being served.

23. Deadweight loss

    The reduction in total economic surplus that results from the adoption of a policy

24. Accounting profit

    total revenue minus explicit costs

25. Economic profit

    total revenue minus explicit costs minus implicit costs has to be above 0 for someone to do something

26. Normal profit

    accounting profit minus economic profit (= opportunity cost)

27. When a firm’s accounting profit is equal to the opportunity cost of the resources supplied by the firm’s owners

    the firm’s economic profit is zero

28. For a firm to remain in business in the long run, it must

    earn an economic profit greater than or equal to zero

29. Two Functions of Price

    Rationing function of prices to distribute scarce goods to those consumers who value them the most

30. Allocation function of prices

    to direct resources away from overcrowded markets and toward markets that are undeserved

31. Profits and losses ensure that

    Supplies within a market are distributed efficiently (rationing function). Resources are allocated across markets to produce the most efficient possible mix of goods and services (allocative function). Markets with firms earning economic profits will attract firms/resources. Markets where firms are experiencing economic losses tend to lose firms/resources.

32. features of the long-run equilibrium

    The market outcome is efficient in the long run P = MC The market is fair The price the buyers pay is no higher than the cost incurred by sellers. The cost includes a normal profit.

33. importance of free entry and exit