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Microeconomics > Chapters 8-14 > Flashcards

Chapters 8-14 Flashcards

0
Q

Total Utility

A

the total benefit a person gets from the consumption of goods. More consumption gives more utility

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1
Q

Marginal Utility

A

the change in total utility that results from a unit-increase in the quantity of the good consumed. As the quantity of a good increases, the marginal utility from it decreases. This decrease in marginal utility as the quantity of the good consumed increases is the principle of diminishing marginal utility.

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2
Q

Consumer equilibrium

A

the situation in which a person has allocated all of their available income in the way that maximizes total utility.

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3
Q

Marginal utility per dollar

A

the marginal utility from a good that results from spending one more dollar on it. It equals the marginal utility from a good divided by its price

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4
Q

Utility-maximizing rule

A

a consumer’s total utility is maximized by following the rule of spending all available income and equalize the marginal utility per dollar for all goods

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5
Q

Demand curve slopes downward when…

A

the price of a good falls, the quantity demanded of that good increases

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6
Q

Behavioral economics

A

studies the ways in which limits on the human brain’s ability to compute and implement rational decisions, influence economic behavior

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7
Q

Bounded rationally

A

is rationality that is bounded by the computing power of the human brain

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8
Q

Bounded will-power

A

is the less than perfect willpower that prevents us from making a decision that we know, at the time of implementing the decision, we will later regret

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9
Q

Bound self-interest

A

is the limited self-interest that sometimes results in suppressing our own interests to help others

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10
Q

Endowment effect

A

is the tendency for people to value something more highly simply because they own it

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11
Q

Neuroeconomics

A

is the study of the activity of the human brain when a person makes an economic decision

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12
Q

Budget line

A

describes the limits to the household’s consumption choices. It is a constraint on consumption choices. A person can afford any point that is on or inside the budget line, but cannot afford any point that is outside the budget line.

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13
Q

Budget equation

A

expenditure = income

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14
Q

Real income

A

the income expressed as a quantity of goods the household can afford to buy.

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15
Q

Relative price

A

is the price of one good divided by the price of another good. It is the magnitude of the slope of the budget line. It shows how many of a certain object must be foregone to see an additional unit of another object.

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16
Q

Change in the price of a good on the x-axis changes…

A

the slope of the budget line

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17
Q

Change in money income brings a…

A

parallel shift of the budget line. The slope of the budget line doesn’t change because the relative price doesn’t change.

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18
Q

Indifference curve

A

is a line that shows combinations of goods among which a consumer is indifferent. At specific points a person can choose 2 movies for example and drink 6 cases of soda a month.

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19
Q

Marginal rate of substitution (MRS)

A

measures the rate at which a person is willing to give up good y to get an additional unit of good x, while at the same time remaining indifferent (remaining on the same indifferent curve)

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20
Q

Magnitude of the slope of the indifference curve

A

measures the marginal rate of substitution

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21
Q

If the indifference curve is relatively steep…

A

the MRS is high (the person is willing to give up a large quantity of y to get a bit more of x)

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22
Q

If the indifference curve is relatively flat…

A

the MRS is low (the person is willing to give up a small a quantity of y to get more of x)

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23
Q

A diminishing marginal rate of substitution

A

is the key assumption of consumer theory. It is a general tendency for a person to be willing to give up less of good y to get one more unit of good x, while at the same time remaining indifferent as the quantity of good x increases.

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24
Q

The shape of the indifference curves reveals the…

A

degree of substitutability between two goods

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25
Q

The consumer’s best affordable choice is…

A

on the budget line, on the highest attainable indifference curve, has a marginal rate of substitution between the two goods equal to the relative price of the two goods

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26
Q

The price effect

A

is the effect of a change in the price of a good on the quantity of the good consumed

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27
Q

The income effect

A

is the effect of a change in income on the quantity of a good consumed

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28
Q

For a normal good, a fall in price always increases…

A

the quantity consumed

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29
Q

The substitution effect

A

is the effect of a change in price on the quantity bought when the consumer remains on the same indifference curve. It is the first reason why the demand curve skiers downward

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30
Q

For a normal good, the income effect…

A

reinforces the substitution effect and is the second reason why the demand curve slopes downward

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31
Q

For an inferior good, when income increases…

A

the quality bought decreases. The income effect is negative and works against the substitution effect. As long as the substitution effect dominates, the demand curve still sloped downward.

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32
Q

To isolate the income effect

A

we reverse the hypothetical pay cut and restore the consumer’s income to its original level

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33
Q

To isolate the substitution effect

A

we give the consumer a hypothetical pay cut

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34
Q

If the negative income effect is stronger than the substitution effect

A

a lower price for inferior goods brings a decrease in the quantity demanded and the demand curve slopes upward. This case does not appear to occur in the real world.

35
Q

The best affordable choices determine…

A

spending patterns. Changes in prices and incomes change the best affordable point and change consumption patterns.

36
Q

A firm

A

an institution that hires factors of production and organizes them to produce and sell goods and services. A firm’s goal is to maximize profit. If a firm fails to maximize profit, the firm is either eliminated or taken over by another firm that seeks to maximize profit

37
Q

Profit…

A

equal total revenue minus total cost

38
Q

Economic profit is equal…

A

to total revenue minus total cost, with total cost measured as the opportunity cost of production

39
Q

A firm’s main objective…

A

profit maximation

40
Q

Short run

A

is a time frame in which the quantity of one or more resources used in production is fixed. For most firms, the capital, called the firm’s plant, is fixed in the short run. Other resources like labor, raw materials, and energy can be changed in the short run. Short-run decisions are easily reversed.

41
Q

Long run

A

is a time frame in which the quantities of all resources, including the plant size, can be varied. Long run decisions are not easily reversed.

42
Q

Sunk cost

A

is a cost incurred by the firm and cannot be changed. If a firm’s plant has no resale value, the amount paid for it is a sunk cost. Sunk costs are irrelevant to a firm’s current decisions.

43
Q

To increase output in the short run….

A

a firm must increase the amount of labor employed. Three concepts describe the relationship between output and the quantity of labor employed: total product, marginal product, average product.

44
Q

Total product

A

is the total output produced in a given period

45
Q

Marginal product

A

of labor is the change in total product that results from a one-unit increase in the quantity of labor employed, with all other inputs remaining the same

46
Q

Average product of labor

A

is equal to total product divided by the quantity of labor employed

47
Q

As the quantity of labor employed increases…

A

total product increases, marginal product increases initially, but eventually decreases, average product decreases

48
Q

Total product curve

A

separates attainable output level from unattainable output levels in the short run

49
Q

Diminishing marginal returns

A

arises because each additional worker has less access to capital and less in which to work. They are so pervasive that they are elevated to the status of a “law”

50
Q

Law of diminishing returns

A

states that as a firm uses more of a variable input with a given quantity of fixed inputs, the marginal product of the variable input eventually diminishes

51
Q

When marginal product is below average product…

A

average product decreases

52
Q

When marginal product equals average product…

A

average product is at is maximum

53
Q

To produce more output in the short run…

A

the firm must employ more labor, meaning it must increase its costs

54
Q

Total cost

A

is the cost of all resources used

55
Q

Total fixed cost

A

is the cost of the firm’s fixed inputs. Fixed costs do not change with output

56
Q

Total variable cost

A

is the cost of the firm’s variable inputs. Variable costs do change with output

57
Q

Total cost equals

A

total fixed cost plus total variable cost

58
Q

Marginal cost

A

is the increase in total cost that results from a one-unit increase in total product

59
Q

With increasing marginal returns…

A

marginal cost falls as output increases

60
Q

With diminishing marginal returns…

A

marginal cost rises as output increases

61
Q

Average fixed cost

A

is total fixed cost per unit of output

62
Q

Average variable cost

A

is total variable cost per unit of output

63
Q

Average total cost

A

is total cost per unit of output

64
Q

The AVC curve is U shaped because

A

MP exceeds AP, which brings rising AP and falling AVC. EVentually, MP falls below AP, which brings falling AP and rising AVC

65
Q

The ATC curve is U shaped because

A

ATC falls at low output levels because AFC is falling quickly

66
Q

The ATC curve is the vertical sum of…

A

the AFC curve and the AVC curve. AFC curve slopes downward as output increases

67
Q

MC is at its maximum at the same output level at which MP is at its

A

maximum

68
Q

When MP is rising

A

MC is falling

69
Q

AVC is at its minimum at the same output level at which AP is at its

A

maximum

70
Q

When AP is rising

A

AVC is falling

71
Q

An increase in productivity shifts the product curves

A

upward and the cost curves downward

72
Q

If a technological advance results in the firm using more capital and less labor

A

fixed costs increase and variable costs decrease. Average total cost increases at low output levels and decreases at high output levels

73
Q

An increase in the price of a factor of production

A

increases costs and shifts the cost curves

74
Q

An increase in fixed cost shifts the total cost and average total cost curves

A

upward but does not shift the marginal cost curve

75
Q

An increase in a variable cost shifts the total cost, average total cost, and marginal cost curves

A

upward

76
Q

The firm’s production function

A

is the relationship between the maximum output attainable and the quantities of both capital and labor

77
Q

The marginal product of capital

A

is the increase in output resulting from a one-unit increase in the amount of capital employed, holding constant the amount of labor employed

78
Q

The long run average cost curve is made up from the

A

lowest ATC for each output level

79
Q

The long run average cost curve

A

is the relationship between the lowest attainable average total cost and output when both the plant and labor are varied.

80
Q

Economies of scale

A

are features of a firm’s technology that lead to falling long run average cost as output increases

81
Q

Diseconomies of scale

A

are features of a firm’s technology that lead to rising long-run average cost as output increases

82
Q

Constant returns of scale

A

are features of a firm’s technology that lead to constant long run average cost as output increases

83
Q

Minimum efficient scale

A

is the smallest quantity of output at which the long run average cost reaches its lowest level

84
Q

If the long run average cost curve is U shaped

A

the minimum point identifies the minimum efficient scale output level

Microeconomics (1 decks)

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