Microeconomics: Utility, Production, Costs, and Market Structure

Vocabulary practice flashcards covering consumer utility theory, short-run and long-run production functions, cost structures, and perfect competition from economics lecture notes.

Utility

The satisfaction that the user experiences in consumption.

Total Utility ($TU$)

The total satisfaction derived from doing or consuming the entirety of a good.

Marginal Utility ($MU$)

The change in total satisfaction that comes from consuming one additional unit of a good above and beyond what has already been consumed, expressed as $MU = \frac{\Delta TU}{\Delta q}$.

Theory of Demand

A theory that defines what a consumer is willing and able to buy in a given time period, resting on the assumption that consumers seek the most desirable mix of goods and services allowed by their limited resources.

Law of Diminishing Marginal Utility

The principle that in the short run, as more units of a good are consumed, after some point the marginal utility ($MU$) received from each additional unit decreases, other things being equal.

Principle of Rational Choice

The principle stating that rational consumers will spend their money on the goods that give them the most marginal utility ($MU$) per dollar.

Utility-Maximizing Rule

The condition achieved when the ratios of marginal utility to price ($MU/P$) across goods are equal, meaning total utility is maximized when the last dollar spent on each good gives equal satisfaction.

Production Function

A specification of the limits of production given technology, describing the maximum output that can be produced with varying amounts of inputs.

Short Run (SR)

A period of time in production in which at least one input is fixed.

Long Run (LR)

A period of time in production in which all inputs are variable.

Marginal Product ($MP$)

The measure of the change in production resulting from an additional unit of variable input, given by $MP = \frac{\Delta TP}{\Delta \text{variable input}}$ or $MP = \frac{\Delta TP}{\Delta q}$.

Law of Diminishing Marginal Returns (LDMR)

The economic law stating that the marginal product ($MP$) of a variable input declines as more and more of it is employed with a given quantity of other, fixed inputs.

Total Product and Marginal Product Relationship

Total Product ($TP$) reaches its maximum point at the exact level of input where Marginal Product equals zero ($MP = 0$); beyond this point, $MP$ becomes negative and $TP$ falls.

Market Structure

The characteristics of the marketplace—such as product differentiation, number and size of sellers, and ease of entry and exit—that shape and influence how firms interact with customers and competitors.

Market Power

The ability of a firm to raise the price of its product without losing all of its sales.

Explicit Costs

Out-of-pocket production expenses paid directly by a firm.

Implicit Costs

The opportunity costs of using resources in a given firm instead of in their next best alternative use.

Accounting Costs

The sum of all explicit costs of production.

Economic Costs

The sum of both implicit costs and explicit costs.

Fixed Costs ($FC$)

Costs of production that do not change with the rate of output, present only in the short run.

Variable Costs ($VC$)

Costs of production that change directly with the level of output.

Total Cost Curves

Figure 7.4 illustrating that Total Fixed Cost ($TFC$) remains constant across output (at $150$), while Total Cost ($TC$) and Total Variable Cost ($TVC$) increase with output and remain vertically separated by $TFC$.

Marginal Cost ($MC$)

The change in total cost resulting from a one-unit change in output, calculated as $MC = \frac{\Delta TC}{\Delta q}$.

Average Fixed Cost ($AFC$)

Fixed cost divided by quantity of output ($AFC = \frac{FC}{q}$), which declines continuously as output rises due to spreading constant overhead over more units.

Average Variable Cost ($AVC$)

Variable cost divided by the quantity of output ($AVC = \frac{VC}{q}$).

Average Total Cost ($ATC$)

Total cost divided by output quantity ($ATC = \frac{TC}{q}$), which is also equal to the sum of average fixed cost and average variable cost ($ATC = AFC + AVC$).

General Behavior of Cost Curves

The geometric behavior of short-run cost curves where $ATC$ and $AVC$ are $U$-shaped, $AFC$ continuously declines, and $MC$ crosses both $AVC$ and $ATC$ at their minimum points.

Perfect Competition (PC)

A market structure characterized by a large number of firms and buyers, standardized products without quality differences, and easy entry and exit into and out of the industry.

Price Takers

Competitive firms that possess zero market power and must take the market price as given, only deciding the quantity they want to produce.

Marginal Revenue ($MR$)

The change in total revenue resulting from a one-unit increase in quantity sold, defined as $MR = \frac{\Delta TR}{\Delta q}$.

Profit-Maximizing Rule

The rule stating that a firm maximizes profit by producing at the rate of output where marginal revenue equals marginal cost ($MR = MC$), which for a perfectly competitive firm simplifies to $P = MC$.

Break-Even Point and Economic Profit Graph

A graphical representation of firm profitability where intersections of $TR$ and $TC$ represent break-even points (normal profit), and the maximum vertical distance between $TR$ and $TC$ yields peak economic profit ($\$970$ at $q = 600$, where $TR = \$1800$ and $TC = \$830$).