Competency 3 Flashcards
(48 cards)
What is a Budget Constraint?
A line that shows combinations of goods/services that we can afford given prices & income.
What causes the budget constraint/line to shift?
Income ↑ = line shifts outward (right)
Income ↓ = line shifts in ward (left)
Price of Goods↑ = pivots inward (you can buy of that good)
Price of Goods ↓ = pivots outward (you can buy less of that good)
What are Indifference Curves (IC)?
All combinations of goods that equal happiness/satisfaction on any point on the curve.
What is Consumer Preference?
Consumers make choices based on utility (happiness) of consuming a good/service
With Consumer Preference what are the 4 characteristics of Indifference Curves (IC) & what’s the Optimal Choice?
- Downward Sloping
- Higher is Better (as we move NE, we have more goods)
- Never Cross
- Bowed Inward
Optimal Choice = the point (IC) that touches the Budget Line = maximize happiness
What is Cost of Production?
All expenses firms incur to produce goods/services
How do firms maximize profit?
By reducing costs.
Profits = Total Revenue (TR) - Total Costs (TC)
How to distinguish cost?
Explicit Costs - out-of-pocket cost (insurance, wages, cost of inputs, electricity, etc.
Implicit Costs - what you give up to run a business, opportunity cost i.e., owner’s salary, forgone interest
What is Accounting Profit?
Total Revenue – Explicit Costs
What is Economic Profit?
Total Revenue – Explicit – Implicit Costs
Which profit is always lower: accounting or economics?
Economic profit is always lower because it subtracts out implicit costs.
What is Zero Economic Profit?
The Total Revenue (TR) is enough to cover the explicit cost of production (out of pocket costs), & cover implicit or opportunity costs.
What is utility?
Measure “happiness” from consuming a good.
What is total utility?
The total happiness/satisfaction from consuming goods.
How do consumers make choices?
Choose the bundle that maximizes utility within the budget.
What defines the Short Run?
At least one input is fixed; fixed cost doesn’t change w/ production.
Ex. of Fixed Cost: Rent
What defines the Long Run?
All inputs are variable, no fixed cost; variable cost change w/ production.
What is Marginal Product of Labor?
One 1 more extra unit.
What is Marginal Product (MP)?
The additional output from one more input.
i.e., A coffee shop hires extra baristas:
• Before hiring, they make 100 cups of coffee per day.
• After hiring one more barista, they make 120 cups per day.
• The marginal product of the new barista is:
MP= 120 - 100 = 20 cups per barista
The extra barista added 20 more
What is Law of Diminshing Marginal Returns?
When adding more variable input (labor) to fixed input (machines) the additional output will decrease
What is utility?
Measures “happiness.”
What is Marginal Cost (MC)?
The additional cost of producing one more unit.
What is total cost made up of?
Fixed Costs + Variable Costs
What are fixed and variable costs?
• Fixed: Do not change with production (e.g., rent).
• Variable: Change with production (e.g., raw materials, wages).
