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Utility
Satisfaction received from consumption
Diminishing marginal utility
As consumption increase, satisfaction from consumption decreases
Total utility
total satisfaction received from consumption
Marginal utility
utility derived from consuming one more unit of the good and service
equi-marginal principle
Consumers maximized their utility where their valuation for each product is the same
indifference curves
show all combinations of two goods that give consumer equal satisfaction
marginal rate of substitution
the rate at which the consumer is willing to substitute a good for another
budget line
combinations of two goods that can be purchased with given income and given prices
substitution effect
following a price change, a consumer will substitute the cheaper good for one that is relatively more expensive
income effect
following a price change, a consumer has higher real income and will purchase more of this good
Giffen good
type of inferior good where the quantity demanded falls as price falls and quantity demanded increases as price changes
Economic efficiency
scarce resources are used in the most efficient way to produce maximum output
Productive efficiency:
firm is producing at lowest possible cost
Allocative efficiency:
price is equal to marginal cost; firms are making goods/services most demanded by consumers
Marginal cost:
addition to total cost when making 1 extra unit of output
Pareto optimality
impossible to make someone better off w/o making someone else worse off
Dynamic efficiency:
resources are allocated efficiently over time
Externality:
actions of a producer/consumer give rise to side effect on others not directly involved in the action
Third parties:
not directly involved in the decision-makingÂ
Negative externalities:
side effects of an action have a negative impact that creates costs on third parties
Positive externalities:
the side effects of an action that have a positive impact to third parties
Private costs:
costs incurred by a consumer/firm that makes goods/services
Private benefits:
benefits accrue to the consumer/firm that produces a good/service
External costs:
costs incurred and paid by third parties
External benefits:
benefits received by third parties
Social costs:
total costs of an action
Social benefits:
total benefits of an action
Cost benefit analysis
Decision taking into account costs and benefits
Shadow price
There is no established market price available
Marginal product
Change in output of using one more unit of production
Law of diminishing returns
Output from an additional unit of a product leads to a fall in the marginal product
Average product
Total product divided by total number of employees
Fixed cost
Not dependent on output in short run
Variable cost
Dependent on output in short run
Increasing returns to scale
Output increases proportionately faster than increase in factor inputs
Decreasing returns to scale
factor inputs increases proportionately faster than increase in output
Minimum efficient scale
Lowest level of output which costs are minimized
Price taker
Firm not able to influence the market price
Price maker
Firm that can choose what price they can sell the product at
Perfect competition
Ideal market structure with many buyers, identical products, no entry barriers
Monopolistic competition
Many firms, differentiated products and few entry barriers
Oliogopoly
Few firms and high barriers to entry
Pure monopoly
One seller in the market
Natural monopoly
With falling long-run average costs, it makes sense to have one firm to provide the service
Note 
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