Economics - Key Concepts in Consumer and Production Theory

Flashcards representing key concepts, definitions, and principles in economics related to consumer behavior and production theory.

Marginal Utility

Satisfaction gained after each purchase.

Utility Maximizing Rule

Consumers reallocate their consumption until the marginal utility of the last dollar spent on each good is equal.

Law of Diminishing Marginal Utility

Each additional unit consumed adds less to total utility than the previous unit.

Indifference Curve

A curve representing points yielding the same utility level; higher curves are preferred.

Marginal Rate of Substitution

The slope of the indifference curve.

Budget Line

Shows combinations of goods a consumer can buy with their income, shifting with changes in prices.

Substitution Effect

Change in consumption that results from a change in relative prices.

Income Effect

Change in consumption resulting from a change in consumer's real income.

Expected Income

What the consumer can be expected to earn or spend.

Risk Aversion

Preference for a certain outcome over a gamble.

Production Function

Schedule showing the maximum output produced with various amounts of a variable input.

Marginal Product

Slope of the production function, indicating output change per unit of input change.

Average Product

Measure of labor productivity calculated as output per input unit.

Isoquant

Different combinations of inputs producing the same output.

Isocost Line

Combinations of all inputs resulting in the same total cost.

Cost Minimization Rule

A firm chooses a combination of inputs to produce output at the lowest cost.

Short-Run Costs

Fixed and variable inputs where firm adjusts input proportions.

Profit Maximization

Occurs when price is exogenous with a horizontal demand curve (P = D = MR).

Long-Run Costs

All costs are variable; firms choose the scale of operation.

Increasing Returns to Scale

Output increases by more than the increase in inputs.

Decreasing Returns to Scale

Output increases by less than the increase in inputs.

Elasticity of Demand

Measure of responsiveness of quantity demanded to a change in price.

Utility

Satisfaction or pleasure derived from consuming a good or service.