Midterm 2 terms

Marginal revenue product of labor

The amount of revenue received for each additional unit of

labor.

Iso-quant

A curve on a graph that shows the different combinations of two inputs that create the same amount of an output (eg the different combinations of capital and labor that create the same amount of a good).

Sunk Costs

Costs that have already been paid and cannot be recovered.

Pareto Efficient 

An allocation is Pareto Efficient if it is on the Pareto frontier. A is Pareto Efficient if there is no point B such that moving from A to B 1) No one is worse off and 2)At least one person is strictly better off

Social Welfare Function

A function that measures the utility of society as a whole, rather than just individuals.

Marginal Revenue Product of Capital

additional revenue a firm earns by employing one more unit of capital (such as machinery or equipment). It is calculated by multiplying the marginal product of capital (MPK) by the marginal revenue (MR) of the output produced

Iso-Cost Curve

represents all combinations of two inputs—typically labor (L) and capital (K)—that a firm can purchase for a specific total cost. It is a straight line sloping downward

Price Discrimination

strategy where a firm with market power charges different prices to different consumers for the same product, based on their willingness to pay rather than production costs.

Natural Monopoly

when one firm can supply an entire market's demand at a lower cost than multiple competitors, driven by high fixed costs and economies of scale (constantly declining average total costs)

Pareto Dominance

where one allocation of resources is superior to another if at least one person is better off and no one is worse off. It defines efficiency: a state is Pareto optimal if no Pareto improvements—making someone better off without harming others—are possible

Perfectly Competitive Market

idealized market structure where equal and identical products are sold at marginal cost of production

Marginal cost

the change in total cost from producing one additional unit of a good or service

Pareto inefficiency 

(inside the Pareto frontier), when resources are allocated such that at least one person's welfare can be improved without making anyone else worse off.

endowments/ initial allocations

the initial bundle of goods, assets, or resources an agent possesses before tradingpa

pareto frontier

set of all Pareto efficient allocations where no individual can be made better off without making at least one other person worse off

social planner

hypothetical, benevolent decision-maker who seeks to maximize total social welfare (consumer plus producer surplus) or achieve Pareto efficiency

pure consumption economy

fixed quantity of each good
and the only economic activity is trade between consumers (i.e. there is no production.

Maximized utility 

consumers, facing limited income (budget constraint), choose a combination of goods that provides the highest total satisfaction, or utility

Pareto Improvement 

change in resource allocation that makes at least one person better off without making anyone else worse off. It represents a move toward economic efficiency (Pareto efficiency)

profit maximization

process where firms determine the optimal output and price level to achieve the highest total profit, occurring where marginal revenue (MR) equals marginal cost (MC).

Efficient allocation (of goods)

optimal distribution of goods and services, taking into account consumer's preferences.occurs when resources are distributed to maximize total societal welfare, specifically when the price of a good equals its marginal cost (P=MC)

Minimized Industry Cost

process of achieving a specific production output while utilizing the lowest total cost of inputs

inefficient allocation (of goods)

when resources are not distributed to their highest-valued use, failing to maximize total social surplus (consumer + producer surplus). allocation of resources does not maximize societal welfare, resulting in a loss of economic surplus

perfectly competitive market allocation

resources are allocated efficiently in the long run, achieving both allocative and productive efficiency

cost-efficient market production

When firms produce goods at the lowest possible average total cost. mc1 = mc2 for all pairs of firms

reallocation of production

the movement of resources (labor, capital) or market shares from less productive to more productive firms or sectors, driving aggregate productivity gains.

Social inefficiency 

occurs when resources are misallocated in trying to maximize social welfare, causing total societal costs to exceed benefits, typically resulting in a deadweight loss.

Pareto preferred

allocation where at least one person is better off and no one is worse off compared to an initial allocation. It implies a voluntary, mutually beneficial improvement.

equity / efficiency trade-off

When you may not like the outcomes provided to poor people in the market outcome and you may be willing to tolerate some inefficiency to reduce poverty.

total surplus

consumer and producer surplus

Utilitarian 

valuates economic actions by their ability to maximize total utility, or "happiness," defined as pleasure minus pain.

social welfare function

an expression that maps the distribution of income into a measure of social welfare.

Costless Redistribution

where income or wealth is transferred from one person to another without changing the total economic pie, assuming zero administrative costs and no disincentive effects on work or investment

Costly Redistribution

the economic efficiency losses (deadweight loss) that occur when income is transferred from high-earners to lower-earners through taxes and subsidies

diminishing marginal utility

as a consumer consumes more units of a specific good or service, the additional satisfaction (marginal utility) derived from each successive unit decreases

inefficient consumption

occurs when goods are not allocated/consumed to maximize total social welfare

deadweight loss

loss of total economic welfare—the sum of consumer and producer surplus—that occurs when a market is not in equilibrium, often due to government interventions (taxes, price controls) or monopolies.

Egalitarian

focuses on designing economic systems and policies that ensure fair and equal distribution of resources, income, and opportunities among individuals.

Substitution Effect

the change in a consumer’s consumption choices that results from a change in the
relative prices of two goods (opposite relationship between consumption of good 1 and price of good 1)

Complements

pairs of goods, such as peanut butter and jelly or printers and ink, that are consumed together.( direct relationship between price of good 1 and consumption of good 2 )

Income effect 

change in a consumer’s choices that results from a change in the purchasing power of the consumer’s income.

Inferior good 

a product that experiences decreased demand when consumer incomes rise, as people switch to higher-quality substitutes

market demand vs. consumer demand 

total quanity demnded by all consumers vs quanity a single consumer demands

normal good

a product or service whose demand increases when consumer income rises and decreases when income falls, representing a direct relationship between income and demand.

Marginal Product of Labor

incremental output from a small L, holding K fixed

marginal revenue product of labor

the additional revenue a firm earns by hiring one more unit of labor

Technological Effciency

Doesn’t Waste Any Inputs

Economic Effciency

input Use Depends on Input Prices

iso-costs

epresents all combinations of two inputs (usually labor and capital) that a firm can purchase for a specific total cost, given factor prices

marginal product of capital

additional output produced by employing one extra unit of capital (e.g., machinery, tools) while holding other inputs, such as labor, constant

Least cost production

the optimal combination of inputs (like labor and capital) that produces a given level of output at the lowest possible total cost

Perfect substitutes

goods that can always be used in place of one another. goods a consumer is willing to exchange at a constant rate with no loss of utility, possessing a constant marginal rate of substitution (MRS).

Fixed cost

the cost is necessary/ needed to begin production. Can only be avoided with shutting down business

Variable cost:

area under the MC curve. expenses that fluctuate directly with the level of production output, increasing as production rises and decreasing as it falls

High profits,

pi > 0: entry of firms 

Low profits, pi < 0

exit of firms 

Mutually improving trade 

when both parties gain more from the exchange than they would from producing both goods on their own.

Arbitrage

the practice of taking advantage of price differences in different markets to make a profit. reselling at lower price and selling at a higher price

Rawlsian social welfare function

computes society’s welfare as the welfare of worst off individual

egalitarian

describes a principle of equality where resources and welfare are distributed equally among all members of society.

3 requirements for effciency

1.) exchange effciency: allocation of goods across people is pareto effcient

2.) input effciency: making a higher amount of quantity of good 1 leads to lower quantity in another good

3.) output effciency: mix and amount of goods produced cant be changed w/o making producer or consumer worse off

First welfare theorem

Perfectly competitive markets in general equilibrium distribute resources pareto efficiently

lumpsum transfer

transfer to/ from an individual for which the size is unaffected by the individual’s choices

second welfare theorem

any given pareto efficient allocation in a perfectly competitive market is a general equilibrium outcome for some initial allocation

Market power

firms ability to influence market price of its product ( perfectly competitive firms don’t have this)

producer surplus

The difference between the amount a producer is willing to accept for a good or service (based on their cost of production) and the actual amount they receive when they sell it in the market. It represents the extra benefit or profit that producers gain from selling at a market price higher than their minimum acceptable price.

network good

a good whose value to each consumer increases with the number of other consumers of the product

product differentiation

imperfect substitutability across varieties of a product which increases competition

oligopoly

few competitors compete in a market

monopolistic competition

large number of firms selling in market but each product is different

markup

percentage of firms price that is greater than its marginal cost

lerner index

measure of firm’s markup/ level of market power