ECON 2020 Exam 3 Terms

ECON 2020 Macy Finck

Utility

The satisfaction a consumer obtains from the consumption of a good or service.

Total Utility (TU)

The total satisfaction a person derives from consuming some specific quantity; TU & Qd move Together.

Marginal Utility (MU)

The additional utility a consumer derives from an additional unit of a good.

Law of Diminishing Marginal Utility

As more of a good is consumed, the marginal utility derived from each additional unit decreases.

Budget Line/Constraint

A line that shows the different consumption bundles a consumer can purchase with a specific money income.

Consumption Bundle

The combination of goods and services consumed by an individual.

Optimal Consumption Bundle

The bundle that maximizes total utility.

Opportunity Cost

The maximum quantity of one good that must be given up to obtain one more unit of another good.

Indifference Curve (IC)

A line that shows the consumption bundles that yield the same amount of total utility.

Marginal Rate of Substitution (MRS)

The ratio of the marginal utility of one good to the marginal utility of another.

Principle of Diminishing MRS

The more of good X a person consumes in proportion to
good Y, the less Y the consumer is willing to substitute for good Y, the less Y the consumer is willing to substitute for
X; X; MRS decreases as Qx increases.

Perfect Substitutes

Goods for which the marginal rate of substitution is constant, no matter how much of each is consumed.

Perfect Complements

Goods that a consumer will consume in the same ratio regardless of their relative price.

Implicit Costs

Plant Capacity

The size of the building and amount of capital equipment.

Marginal Product of Labor

The additional output produced by one or more units of labor.

Economics of Scale

As q rises, LRATC falls

Diseconomies of Sale

Standardized Products

(perfect subs)

Products that are identical and produced in large quantities, allowing for mass production efficiencies.

Price Taker

A firm that accepts the market price for its products and cannot influence it due to the competitive nature of the market.

Fixed Costs

1. cannot be varied in the short run

2. do not change as output changes

3. still exist when output falls to zero

4. usually associated with capital

Variable Costs

Costs that change as output changes and go to zero during a shutdown.

Marginal Cost (MC)

The additional cost associated with a 1 unit increase in output.

Profit (Π)

The difference between total revenue and total cost.

Short Run

An amount of time insufficient to allow plant capacity to vary.

Long Run

A period where all costs are variable, and firms can enter or exit the market.

Market Structure

The organizational characteristics of a market that influence the nature of competition and pricing.

Marginal Revenue (MR)

The additional revenue earned from selling one more unit of a good.

Profit Maximization Rule

Firms find the profit-maximizing level of output where marginal revenue equals marginal cost.

Short Run

An amount of time insufficient to allow plant capacity to vary. Also, firms may shutdown production, but they cannot exit the market.

Long Run

All costs are variable; entry and exit are possible.

Normal Profit

1. the firm is doing just as well as it would in another industry

2. Accounting profit = Implicit Cost

3. Economic Profit = $0

Variable costs

Costs that change as output changes; go to zero during shutdown.