Microeconomics 1123 Exam 2

consumer surplus

the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays. Area below the demand curve and above the equilibrium price

welfare economics

a branch of economics that focuses on measuring the welfare of market participants and how changes in the market change their well-being

producer surplus

the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives. Area below the equilibrium price and above the supply curve.

economic surplus

the sum of consumer surplus and producer surplus

deadweight loss

the value of the economic surplus that is forgone when a market is not allowed to adjust to its competitive equilibrium

productive efficiency

Producing output at the lowest possible average total cost of production; using the fewest resources possible to produce a good or service.

allocative efficiency

producing the goods and services that are most wanted by consumers in such a way that their marginal benefit equals their marginal cost (MB=MC)

Utility

the satisfaction or happiness received from the consumption of goods or services

total utility

The total satisfaction or happiness received from the consumption of a good, service, or combination of goods and services.

marginal utility

the additional satisfaction or happiness received from the consumption of an additional unit of a good or service (MU= change in total utility/change in quantity)

util

a subjective measure of the utility associated with consuming a good or service.

law of diminishing marginal utility

A principle in economics that states that the marginal utility associated with consumption of a good or service becomes smaller with each extra unit that is consumed in a given time period.

Utility Maximization

The process of obtaining the greatest level of overall satisfaction or happiness from consuming goods and services, subject to consumers' preferences, incomes, and prices.

equal marginal principle

the idea that consumers maximize their utility when they allocate their limited incomes so that the marginal utility per dollar spent on each of their final choices in a bundle is equal

budget line

a line showing the possible combinations of two goods that a consumer can purchase

indifference curve

a curve that shows the combinations of two products that generate the same amount of total utility or satisfaction

economic cost

the cost associated with the use of resources; the sum of implicit and explicit costs

explicit costs

Monetary payments made by individuals, firms, and governments for the use of land, labor, capital, and entrepreneurial ability owned by others. Also known as accounting costs.

implicit costs

the opportunity costs of using owned resources; costs for which no monetary payment is explicitly made

accounting profit

total revenue minus total explicit cost

economic profit

total revenue minus economic cost (implicit and explicit costs)

total revenue

Price x Quantity

short run

the time period in which at least one input is fixed but other inputs can be changed

total product

the total amount of output produced with a given amount of resources

marginal product

the additional output produced as a result of utilizing one more unit of a variable resource

average product

the average amount of output produced per unit of a resource employed; total product divided by the number of units of a resource employed

increasing marginal returns

a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is greater than that of the previous variable resource

diminishing marginal returns

a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource

fixed costs

costs that do not change with the amount of output produced

variable costs

costs that change with the amount of output produced, increasing as production increases and decreasing as production decreases

total cost

fixed costs plus variable costs

average fixed cost

total fixed cost divided by the amount of output produced; fixed cost per unit

average variable cost

the total variable cost divided by the total output; variable cost per unit

average total cost

total cost divided by the amount of output produced; total cost per unit

marginal cost

the additional cost associated with one more unit of an activity. For production, it is the change in total cost due to the production of one more unit of output

short run average total cost curve

a curve showing the average total cost for different levels of output when at least one input of production is fixed, typically plant capacity

long-run average total cost curve

a curve showing the lowest average total cost possible for any given level of output when all inputs of production are variable

long run

the time period in which all inputs can be changed

economies of scale

a condition in which the long-run average total cost of production decreases as production increases

diseconomies of scale

a condition in which the long-run average total cost of production increases as production increases

constant returns to scale

a condition in which the long-run average total cost of production remains constant as production increases

minimum efficient scale

The lowest level of output at which the long run average total cost is minimized