econ mid term 2

utility

the pleasure or satisfaction people get from doing ot consuming something

total utility

refers to the total satisfaction one gets from consuming a product

marginal utility

refers to the satisfaction one gets from consuming one additional unit of a product above and beyond what one consumed up to that point

principle of diminishing marginal utility 

after some point the marginal utility received from each additional unit of a good decreases with each additional unit consumed , other things equal

principle of rational choice

spend your money on those goods that give you the most marginal utility per dollar

utility maximizing rule 

when ratios of the marginal utility to price of two goods are equal

income effect

the reduction in quantity demanded because the increase in price makes us poorer 

substitution effect

the reduction in quantity demanded because of the relative price has risen 

assumptions

1. Decisions are costless

2. tastes are given

3. individual maximize utility

firm

an economic institution that transforms factors of production into goods and services 

role of firm

1. organized factors of production

2. produces goods 

3. sells produced goods and services (individuals, businesses, or government )

implicit revenues

revenues that you dont receive but that increase your net wealth

total cost

explicit payments to the factors of production plus the opportunity cost of the factors provided by the owners of the firm

total revenue

amount a firm receives for selling its product or service plus any increase in the value of the assets owned by firm 

long run decision

a firm choose among all possible production techniques

short run decision

firm is constrained in regard to what production decisions it can make

production table

table showing the output resulting from various combinations of factors of production or inputs

marginal product

the additional output that will be forthcoming from an additional workers other inputs constant 

average product

output per worker

average output / quantity of input

production function

is the relationship between the inputs and outs

law of diminishing marginal productivity

as more and more of a variable inputs is added to an existing fixed input , eventually the additional output one gets from that additional input is going to fall 

fixed costs

costs that are spent and cannot be changed in the period of time under consideration

variable costs

costs that change as output changes

marginal cost

is the increase/decrease in total cost from increasing/decreasing the level of output by 1 unit 

technical efficiency 

production process uses as few inputs as possible to produce a given level of output

economically efficient

the method that produces a given level of output at the lowest possible cost

economies of scale

when long run average total costs decrease as output increases

indivisible setup cost

the cost of an indivisible input for which a certain minimum amount of production must be undertaken before the input becomes economically feasible tp use 

minimum efficient level of production

amount of production that spreads out setup costs sufficiently for a firm to undertake production profitably

diseconomies of scale

when long range average total costs increase as output increase

monitoring costs

the cost incurred by the organizer of production in seeing to its that the employees do what they are supposed to do

constant returns to scale

where long run average total costs do not change with an increase in output

economies of scope 

when costs of producing products are interdependent so that its less costly for a firm to produce one good when its already prodcuing another

minimum efficient level of production

is the amount of production that spreads out setup costs sufficiently for a firm to undertake production profitably 

diseconomies of scale

when long run average total costs increases as output increases 

• higher production leads to higher price to produce per unit 

• not related to diminishing marginal productivity 

monitoring costs 

costs incurred by the organizer of production in seeing to it that the employees are supposed to di 

constant returns to scale

where long run average total costs do not change with an increase in output

perfectly competitive market

a market in which economic forces operate unimpeded 

price taker

a firm or individual who takes the price determined by market and demand as give

Barriers to entry

are social, political or economic impediments that prevent firms from entering a market

marginal revenue 

the change in total revenue assoicated with a change in quantiy 

marginial cost

the change in total cost associated with change in quantity

profit max

MR=MC

increase production

MR > MC

decrease production

MR< MC

market supply curve

horizontal sum of all the firms marginal costs curves taking account of any changes in input prices that might occur

long run market supply

schedule of quantities supplied when firms are no longer entering or exiting the market

increasing cost industry

factor prices rise as more firms enter the market and existing firms expand production

decreasing cost industry 

factor price falls as industry output expands 

natural monopoly

industry in which a single firm can produce at a lower cost than can two or more firms

first mover advantage

benefit gained from being the first to gain a significant share of a market

network externality

when greater use of a product increases the benefit of that product to everyone without them paying for it