Econ 101 Umich Exam 1

Economics

the study of the allocation of limited resources across unlimited wants

cost-benefit analysis

the method of trying to make the best possible choice

Markets

a forum for exchanges

utility maximization

people making themselves as well off as possible

profit maximization

firms making their owners as well off as possible

Models

simplifications to understand complex situations and draw conclusions of cause and effect

Cetris Paribus

the assumption that nothing else is changing "all else equal"

circular flow model

A model that shows the flow of goods and services and the interaction among households, businesses, and banks

agents in circular flow model

households and firms

markets in circular flow model

goods & services and factors of production

positive statements

claims that attempt to describe the world as it is

normative statements

claims that attempt to prescribe how the world should be

opportunity cost

The value of the next best alternative that must be forgone as a result of a decision

economic costs

The total opportunity costs of what's given up to make some choice

accounting costs

actual monetary costs required when you make a choice

accounting profits

the difference between explicit benefits and explicit costs, almost always miss most of the costs of a choice

economic profits

benefits minus economic (opportunity) costs

either-or choice

picking one option out of many i.e. the extensive margin

how much decision

given your either-or choice, do you do "a lot" of that thing, or "a little" i.e. the intensive margin

a rational person

will always make the choice that maximizes their net benefits

net benefits

the value of benefits (economic profits) minus the value of economic costs

either-or decision principle

always make the choice that has positive economic profit - every choice but the best has negative economic profit

marginal

involves small changes

marginal costs and benefits

the cost or benefit associated by doing a little more of some activity

at the margin

consider variable costs and benefits, ignore fixed ones

marginal benefit curve

shows the relationship between the marginal benefit of a good and the quantity of that good consumed- slopes downward

marginal cost curve

shows how the cost of producing one more unit depends on the quantity that has already been produced- slopes upward

optimal quantity

the quantity that generates the highest possible total profit- where MB=MC

profit

net marginal benefit = MB-MC

utility

Ability or capacity of a good or service to be useful and give satisfaction to someone.

marginal utility

the change in total utility as consumption rises

MU= (change in total utility)/(change in quantity)

more is better

all else being the same, more of a commodity is better than less of it

diminishing marginal utility

decrease in satisfaction or usefulness from having one more unit of the same product

budget constraint

what a household can afford

"you can't spend more than you have"

consumption bundle

spend all or some of your money

PxQx + PyQy = I or PxQx + PyQy < I

budget line

a line that shows various combinations of two products a consumer can purchase spending all their income

rule of optimal consumption

MUx/Px = MUy/Py

utility function

the relationship between consumption and total utility

indifference curve

all points with equal utility value

intersects budget line in one spot

the individual demand curve

the relationship between a good's price and one person's optimal consumption, holding their income constant