Economics Key Terms: Utility, Demand, Costs, and Production

Utility

Satisfaction from consuming a good or service

Total Utility (TU)

Total satisfaction from consumption of all units

Marginal Utility (MU)

Change in total utility from one more unit consumed

Law of Diminishing Marginal Utility

Additional satisfaction decreases as more units are consumed

Consumer Surplus

Difference between what you're willing to pay and what you actually pay

Price Discrimination

Selling the same good at different prices to different buyers

Utility Maximization Rule

MU/P ratios equal across goods; maximizes total utility

Price Elasticity of Demand

% change in quantity demanded ÷ % change in price

Elastic Demand

E > 1; consumers very responsive to price

Inelastic Demand

E < 1; consumers not responsive to price

Determinants of Elasticity

Necessities/luxuries, substitutes, relative price, time

Total Revenue

Price × Quantity sold

Cross-Price Elasticity

Measures responsiveness of demand for one good to price of another

Substitute Goods

Goods that replace each other; Eₓᵧ > 0

Complementary Goods

Goods used together; Eₓᵧ < 0

Income Elasticity

% change in quantity demanded ÷ % change in income

Normal Good

Demand increases when income rises

Inferior Good

Demand decreases when income rises

Elasticity of Supply

% change in quantity supplied ÷ % change in price

Production Function

Relationship between inputs (labor, capital) and output

Marginal Physical Product (MPP)

Additional output from one more unit of input

Law of Diminishing Returns

MPP eventually declines as more labor is added

Fixed Cost (FC)

Costs that don't change with output

Variable Cost (VC)

Costs that vary with output

Total Cost (TC)

FC + VC

Average Total Cost (ATC)

TC ÷ Q

Average Fixed Cost (AFC)

FC ÷ Q

Average Variable Cost (AVC)

VC ÷ Q

Marginal Cost (MC)

Change in total cost ÷ change in output

Economic Cost

Explicit + Implicit Costs

Economies of Scale

Larger scale → lower average cost

Diseconomies of Scale

Oversized scale → higher average cost

Productivity

Output per input; higher productivity lowers costs