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Flashcards in Exam 2 Deck (60):
1

Consumer's optimal choice definition

-tangent of the constraint and indifference curve
-find the pt on the budget constraint that is on the highest indifference curve

2

consumer's optimal choice equation

MRSxy=Px/Py
marginal rate of substitution = price ratio

3

price ratio

Px/Py
how many units of 'y' HAVE to give up to get one more unit of 'x'

4

marginal rate of substitution

MUx/MUy
-how many units of 'y' WILLING to give up for one more unit of 'x'

5

if MRS>price ratio, then

level of utility rises

6

an increase in income (for normal goods) causes

-the budget constraint to shift to the right parallel
-new optimal is made

7

income consumption curve

-connection of all the optimal points

8

Engel curve

- quantity v income
-if pos slope- normal good
-if neg slope-inferior good

9

change in price effect on the budget constraint

curve rotates out off the y-intercept

10

total effect

=substitution effect+income effect

11

substitution effect

-as prices rise, buy more of the relatively cheaper goods

12

income effect

-change in consumers' consumption choices that result from a change in purchasing power of income

13

to extract substitution effect

1. take new budget constraint and shift in parallel until it's tangent to the old indifference curve
2. new point is A'
3. the difference in Q between A and A' is the substitution effect

14

to extract the income effect

1. take new budget constraint and shift in parallel until it's tangent to the old indifference curve
2. new point is A'
3. the difference in Q between B and A' is the substitution effect

15

law of demand 2 reasons why

- as price decreases the Qd increases
1. the good gets relatively cheaper than substitutes (buy more)
2. the real income increases

16

the income effect (inferior goods)

will be neg.

17

Giffen good

-violates the law of demand
-has a positive slope demand curve

18

production function

Q=f(K,L)
Q-KaLb

19

variable input

Q can be changed over a relatively short period of time

20

fixed input

Q can't be changed over time

21

long run

period of time that is long enough that all inputs can be variable

22

short run

period of time where at least one input is fixed

23

Increasing the amt of labor...

-can take advantage of specialization and division of labor
-increasing returns

24

diminishing returns

-as keep adding labor the output increases by smaller and smaller amts, eventually going negative
-starts when marginal product goes down

25

average product of labor=

total output/#workers

26

marginal product of labor

increase of output for hiring one more worker

27

MPL>APL then APL

rises
cause producing more than the average

28

MPL

falls
cause producing less than the average

29

isoquants

series of lines that show all combinations of inputs that produce the same level of output

30

marginal rate of technical substitution=

=ΔK/ΔL
ALSO the slope of the isoquant
-the rate at which one input can be substituted for another without altering the total level of output
-WILLING

31

optimal input combination

MPL/MPK=w/r

32

w/r

have to
price ratio

33

opportunity costs

economic costs; what you give up when you make a decision

34

accounting costs

something that involves an outlay of money

35

total economic costs

=opp costs+acct. costs

36

economic profit

TR-economic costs

37

accounting profits

=TR-accting costs

38

sunk costs

costs that once paid cannot be recovered

39

sunk cost fallacy

-the mistake that you make when you let sunk costs affect future decisions
-everyone does it sometimes...rational behavior

40

perfect competition

many firms; identical products; no barriers to entry

41

typical firm in perfect competition

-horizontal demand curve
-price taker
-no impact on the market price
-perfectly elastic demand
-if charged above market price, then sales go to 0 immediately

42

marginal revenue

increase in TR from selling one more unit

43

if MR>MC

produce

44

when MR=MC in perfect competition

stop producing because at profit maximization

45

short run supply curve

the portion of the MC curve that lies above the AVC curve

46

if P>ATC then

firms make a profit

47

short run firm will produce at a loss as long as,

producing reduces the size of the loss

48

long run equilibrium

MC=ATC (low point)

49

when more firms enter the industry:

-supply increases
-no profits-no more entry
-P=ATC
still make accounting profit not economic

50

normal profit

making money but no more than @ next best alternative (no economic profit)

51

firm working at a loss in the long run

can't do it
-exit industry cause of repeated losses

52

as long as P>AVC

the firm should produce in the short run

53

when P

the firm should shut down in the short run

54

minimum of the AVC curve

the shut down point

55

If P

leave the industry in the long run

56

Constant cost industry

-total costs do not change with total industry output
-long run supply curve horizontal
-demand goes up, profit increases, more firms enter the industry, goes back to original price level

57

Increasing cost industry

-total costs increase with increases in industry output
-positive sloping long run supply curve
-demand goes up, price goes up, more firms enter, production costs go up, price level ends up being higher than the originial

58

decreasing cost industry

-total costs decrease with increases in industry output
- neg. sloping long run supply curve
-demand goes up, price goes up, more enter, production costs go down, price levels lower than original

59

Does price change more in the long run or the short run?

-the short run b/c the LRE stays the same and the short run price falls

60

Does industry wide Q change more in the short run or the long run?

-the long run b/c more firms exit the market cause P go down
-demand and supply change making it more significant