Introduction to Microeconomics Exam 2

Consumption Function

 the relationship between consumption and income (o.t.c) 

Marginal Propensity to consume (MPC)

 the fraction of a change in income that is spent on consumption; the change in consumption divided  by the change in income that caused it. 

Marginal Property to save (MPS)

The fraction of a change in income that is saved; the change in income that is saved; the change in income that caused it  

Saving Function

the relationship between saving and income (o.t.c) 

Net Wealth

the value of assets minus liability 

Life-Style Model of Consumption and Saving

Young people borrow, middle agers pay off debts and save, and older people draw down their savings; on average net savings over a lifetime are small. 

Investment Function

the relationship between the amount businesses plan to invest and the economy’s income. (o.t.c)

Government Purchase Function

The relationship between the government purchases and economy’s income (o.t.c)

Net Exports

the relationship between net exports and the economy’s income, (o.t.c) 

Explicit Cost

opportunity cost of resources employed by a firm that takes the form of cash payments. 

Implicit Cost:

A firm’s opportunity cost of using its own resources or those provided by its owners without corresponding cash payments. 

Accounting Profit

A firm’s total revenue minus its explicit cost. 

Economic Profit

A firm’s total revenue minus its explicit and implicit cost.

Normal Profit

The accounting profit earned when all resources earn their opportunity cost.

Variable Resources

Any resource that can be varied in the short run to increase or decrease production. 

Fixed Resources

Any resource that cannot be varied in the short run.

Short Run

A period during which at least one of a firm’s resources is fixed.

Long Run

A period during which all resources under the firm’s control are variable.

Total Product

the total output produced by a firm

Production Product

the relationship between the amount of resources employed and a firm’s total product. 

Marginal Product

The change in total product that occurs when the use of a particular resource increases by one unit, all other resources are constant. 

Increasing Marginal Returns

the marginal product of a variable resource increases as each additional unit of that resource is employed.

Law of Diminishing Marginal Returns

As a variable resource is added to a given amount.

Fixed Cost:

Any production cost that is independent of the firm’s rate of output.

Variable Cost

Any production cost that changes as the rate of output changes.

Total Cost:

The sum of fixed cost and variable cost, or TC = FC + VC

Average Variable Cost

 Variable Cost divided by output or AVC = VC/q

Average Total Cost

Total cost divided by output, or ATC = TC/q; the sum of average fixed cost and average variable cost or ATC = AFC + AVC

Long Run Average Cost Curve

A curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firms varies; also called planning curve.

Economies of Scale

Forces that reduce a firm’s average cost as the scale of operation increases in the long run. 

Diseconomies of Scale

Forces that may eventually increase a firm’s average cost as the scale of operation increases in the long run

Constant Long Run Average Cost

A cost that occurs when, over some range of output, long run average cost neither increases or decreases with changes in firm size.

Production Function

Identifies the maximum quantities of a particular goods or services that can be produced per time period with various combinations of resources, for a given level of technology. 

Isoquant Curve

A curve that shows all technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output. 

Marginal Rate of Technical Substitution (MRTS)

The rate at which labor substitutes for capital without affecting output. 

Isocost Line

Identifies all combinations of capital and labor the firm can hire for a given total cost. 

Expansion Path

The line formed by connecting tangency points

Total Utility

the total satisfaction a consumer services from consumption; it could refer to either the total utility of consuming a particular good or the total utility from all consumption. 

Marginal Utility

The change in total utility derived from a one-unit change in consumption of a good. 

Law of Diminishing Marginal Utility

The more of a good person consumers per period, the smaller the increase in total utility from consuming one more unit.

Consumer Equilibrium

The condition in which an individual consumer’s budget is spent and the last dollar spent on each good yields the same marginal utility; therefore, utility is maximized

Marginal Valuation

the dollar value of the marginal utility derived from consuming each additional unit of a good.

Consumer Surplus

the difference between the maximum amount that a consumer is willing to pay for a given quantity of a good and what the consumer actually pays

Indifference Curve

shows all combinations of goods that provide the consumer with the same satisfaction, or the same utility (the consumer finds all combinations on a curve equally preferred)

Marginal Rate of Substitution

the number “A” you are willing to give up to get more of “B” neither gaining or losing utility in the process.

The Law of Diminishing Rate of Substitution

States that as your consumption of “A” increases, the amount of “B” you are willing to give up to get another “A” declines.

Indifference Map

A graphical representation of a consumer's tastes. Each curve reflects a different level of utility.

Budget Line

Depicts all possible combinations given their prices and your budget

Market Structure

the important features of a market, such as the number of firms, product uniformity across firms, firms’ ease of entry and exit and forms of competition.

Perfect Competition

A market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run.

Commodity

A standardized product, a product that does not differ across producers, such as bushels of wheat or an ounce of gold.

Marginal Revenue

the change in revenue from selling an additional unity, in perfect competition, marginal revenue is also the market price. 

Golden Rule of Profit Maximization

to maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures. 

Average Revenue

total revenue divided by output, or AR = TR/q; in all market structures, average revenue equals the market price. 

Short-Run Firm Supply Cost

A curve that shows the quantity a firm supplies at each price in the short run; in perfect competition, that portion of a firm’s marginal cost curve that intersects and rises above the low point on its average variable cost curve.

Short-Run Industry Supply Curve

A curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, the horizontal sum of each firm’s short-run supply curve. 

Long-Run Industry Supply Curve

A curve that shows the relationship between price and quantity supplied by the industry once the firms adjust to any change in market demand. 

Constant-Cost Industry

An industry that can expand or contract without affecting the long run per-unity cost of production the long-run industry supply curve is horizontal. 

Increasing-Cost Industry

An industry that faces higher per-unity production costs as industry output expands in the long run; the long run industry supply curve slopes upward. 

Producer Efficiency

 the condition that exists when market output is produced using the least-cost combinations of inputs; minimum average cost in the long run. 

Allocative Efficiency

 the condition that exists when firms produce the output most preferred by consumers; marginal benefit equals marginal cost.

Producer Surplus

A bonus for producers in the short run; the amount by which total revenue from production exceeds variable costs. 

Social Welfare

the overall well-being of people in the economy; maximized when the marginal cost of production equals the marginal benefit to consumers.

Monopoly

A sole supplier of a product with no close substitutes.

Barrier to entry

An impediment that prevents new firms from entering an industry and competing on an equal basis with existing firms.

Patent

 A legal barrier to entry that grants the holder the exclusive right to sell a product for twenty years from the date the patent is filed.

Innovation

the process of turning an invention into a marketable product

Price Maker

 A firm that must find the profit maximizing price when the demand curve for its output slopes downward.

Deadweight Loss of Monopoly

 No loss to society when a firm uses its market power to restrict output and increase prices. 

Rent Seeking

Activities undertaken by individuals or firms to influence public policy in a way that will increase their incomes

Economies of Scale (Monopoly)

• Already defined 

• Sometimes a monopoly occurs when a firm experiences economies of scale, as reflected by a downward sloping long run average cost curve.

Price Maker

A firm that must find the profit maximizing price when the demand curve for its output slopes downward.

Price Discrimination

Increasing profit by changing different groups of consumers different prices for the same product.

Perfect Price Discrimination

Charging a different price for each unit sold. 

Monopolistic Competition

A market structure with many firms selling products that are substitutes but different enough that each firm’s demand curve slopes downward; firm entry is relatively easy. 

• These type of firms are price makers 

• Barriers to entry is low 

• But there are enough sellers that they behave competitively. 

• They can act independently or interdependently. 

Product Differentiation

Products differentiate themselves 4 different ways: 

1. Physical Difference (packaging, colors, weight) 

2. Location (spital differentiation price/convenience stores)

3. Service (free delivery, guarantees, toll free numbers)

4. Product Image (endorsement, all natural, starbucks, image/brand, loyalty, environmentally, friendly) 

Excess Capacity

the difference between a firm’s profit - maximizing quantity and the quantity that minimizes average cost. [In monopolistic competition, firms fall short of producing the quantity that would achieve the lowest average cost…as opposed to perfect competition] 

Oligopoly

A market structure characterized by a few firms whose behavior is interdependent.

Undifferentiated Oligopoly

An oligopoly that sells a commodity or a product that does not differ across suppliers, such as steel or a barrel of oil.

Differentiated Oligopoly

An oligopoly that sells products that differ across suppliers, such as automobiles or breakfast cereal.

Collusion

An agreement among firms to increase economic  profit by dividing the market or fixing the prices.

Cartel

A group of firms that agree to coordinate the production and pricing decisions to act like a monopolist.

Price Leader

A firm whose price is adopted by other firms in the industry.