Learn: Econ 203 Midterm

Microeconomics

the study of how individuals and firms make decisions in a world of scarcity

7 Fundamental Principles

1. people face tradeoffs

2. the cost of something is what you give up to get it

3. rational people think at the margin

4. people react to incentives

5. trade can make everyone better off

6. markets efficiently organize economic activity

7. governments can improve market outcomes

Opportunity Cost

value of the best alternative you give up plus any money the choice itself makes you spend

Law of Demand

other things being equal, as the price of a good rises, the quantity demanded of a good falls

Market Demand

sum of all individual demands for a good or service

Shifts in the Demand

income (normal vs. inferior goods), price of related goods (substitutes and complements), number of buyers, consumer tastes, expectations

Law of Supply

other things being equal, as the price of a good rises, the quantity supplied will rise

Market Supply

sum of the supplies of all sellers of a good or service

Shifts in Supply

input prices, costs, number of sellers, expectations

Surplus

quantity supplied is greater than quantity demanded

Shortage

quantity demanded is greater than quantity supplied

Price Elasticity of Demand

(% change in quantity demanded) / (% change in price)

Revenue

price x quantity

Price Ceiling

maximum price sellers can charge (binding if below equilibrium price)

Price Floor

minimum price sellers can charge (binding if above equilibrium price)

Quota

a maximum quantity (binding if below the equilibrium quantity); price comes from demand curve

Mandate

a minimum quantity (binding if above the equilibrium quantity); price comes from supply curve

Completeness

when facing a choice between any two bundles of goods, a consumer can rank them so that only one of the following relationships is true: prefers first, prefers second, or is indifferent

Transitivity

a consumer's preferences over bundles is consistent in the sense that, if the consumer prefers bundle A to bundle B and prefers bundle B to bundle C, they must also prefer bundle A to bundle C

More is Better

more of a commodity is better than less of it

Indifference Curve

the set of all bundles of goods that a consumer views as being equally desirable

Indifference Map

a complete set of indifference curves that summarize a consumer's tastes or preferences

Utility

a set of numerical values that reflect the relative rankings of various bundles of goods

Utility Function

the relationship between utility values and every possible bundle of goods

Marginal Utility

the extra utility that a consumer gets from consuming the last unit of a good

Marginal Rate of Substitution (MRS)

the maximum amount of one good a consumer will sacrifice to obtain one more unit of another good

Budget Constraint (Budget Line)

the bundles of goods that can be bought if the entire budget is spent on those goods at given prices

Opportunity Set

all the bundles a consumer can buy, including all the bundles inside the budget constraint and on the budget constraint

Marginal Rate of Transformation (MRT)

slope of the budget line

Corner Solution

the best bundle can sit on an axis, with zero of one good

Firm

an organization that converts inputs such as labor, materials, and capital into outputs, the goods and services that it sells

Private Sector

firms owned by individuals or other nongovernmental entities whose owners try to earn a profit

Public Sector

firms and organizations that are owned by governments or government agencies

Nonprofit Sector

organizations neither government-owned nor intended to earn a profit

Capital Services (K)

use of long-lived inputs such as land, buildings(factories, stores), and equipment (machines, trucks)

Labor Services (L)

hours of work provided by managers, skilledworkers (architects, economists, engineers, plumbers), and less-skilledworkers (custodians, construction laborers, assembly-line workers)

Materials (M)

natural resources and raw goods (oil, water, wheat)and processed products (aluminum, plastic, paper, steel)

Production Function

the relationship between the quantities of inputs used and the maximum quantity of output that can be produced, given current knowledge about technology and organization

Short Run

a period so brief that at least one factor of production cannotbe varied practically

Long Run

a lengthy enough period that all factors of production can be varied

Fixed Input

a factor of production that a firm cannot practically varyin the short run

Variable Input

a factor of production that a firm can easily vary during the relevant period

Total Product of Labor

the amount of output (or total product) that can be produced by a given amount of labor

Marginal Product of Labor

the change in total output, resulting from using an extra unit of labor, holding other factors (capital) constant

Average Product of Labor

the average output produced per unit of labor input

Law of Diminishing Marginal Returns

if a firm keeps increasing an input, holding all other inputs and technology constant, the corresponding increases in output will become smaller eventually

Isoquant

a curve that shows the efficient combinations of labor and capital that can produce the same level of output

Marginal Rate of Technical Substitution (MRTS)

the extra units of one input needed to replace one unit of another input that enables a firm to keep the amount of output it produces constant

Constant Returns to Scale (CRS)

property of a production function whereby when all inputs are increased by a certain percentage, output increases by that same percentage

Increasing Returns to Scale (IRS)

property of a production function whereby output rises more than in proportion to an equal increase in all inputs

Decreasing Returns to Scale (DRS)

property of a production function whereby output increases less than in proportion to an equal percentage increase in all inputs

Technical Progress

an advance in knowledge that allows more output to be produced with the same level of inputs

Accounting Costs

direct costs of operating a business

Economis Cost

accounting cost + opportunity cost

Economic Profit

revenue - economic cost

Sunk Cost

a past expenditure that cannot be recovered

Fixed Cost (FC)

a production expense that does not vary with output

Variable Cost (VC)

a production expense that changes with the quantity of output produced

Marginal Cost (MC)

the extra cost from producing one more unit of output

Expansion Path

the cheapest bundle at each output level

Cost Minimization Rules

1. Lowest-isocost rule

2. Tangency rule

3. Last-dollar rule

Economies of Scale

the average cost of production falls as output increases