- Level of happiness one gets from consuming something.
- The satisfaction experienced from comsuming a good.
Define marginal utility.
The change in total utility from one additional unit of good.
Explain law of diminishing marginal utility.
- The more you consume something the less it satisfies.
- As the consumption of a particular good increases, marginal utility decreases.
Explain utility maximizing rule.
- Consumers will allocate their income such as the last dollar spent on each good yeilds the same marginal utility.
- Pick the combination that makes the marginal rate of substitution equal to the price ratio.
What is the formula for utility maximizing rule?
What is a budget line?
- "What you can afford"
- The line connecting all the combinations of two goods that exhaust a consumer's budget.
- *line on graph (graph 1)
What is an indifference curve?
- "How much utility" Curves showing the varations of two goods which yeild the same level of satisfaction.
- A curve showing the different combinations of two goods that generate the same level of utility or satisfaction.
- *curve on graph (graph 2)
What are the properties of an indifference curve?
- 1. Slopes downward
- 2. Bowed inward
- 3. Indifference curve futher out preferred (graph 3)
- 4. Indifference curves do not intersect (graph 4)
What is the formula for the indifference curve?
What is profit?
Total revenue minus total cost
What is accounting profit?
- Total revenue minus explicit cost.
- Total revenue minus accounting cost, the explicit cost of production.
What is economic profit?
- Total revenue minus explicit and implicit cost.
- Total revenue minus economic cost, the oppotunity cost of the inputs used in the production process; equal to explicit cost plus implicit cost.
Accounting profit tends to be...
larger than economic profit.
Define explicit cost.
- "Out of pocket" cost
- A monetary payment.
Define implicit cost.
- Opportunity cost; normal rate of return.
- An oppotunity cost that does not involve a monetary payment.
What is a fixed cost?
- Cost that do not change; stay the same, ex. rent, property tax. If the input is 0 and you have any cost, that is a fixed cost.
- Cost that does not vary with the quantity produced.
What is a variable cost?
- Costs that do vary with the level of output.
- Cost that varies with the quantiy produced.
What is margianl cost?
- The additional cost of producing one more unit of output.
- The additional cost resulting from a small increase in some activity.
How do you calculate Total Cost (TC)?
Total Cost (TC) = Total Fixed Cost (TFC) - Total Variable Cost (TVC)
How do you calculate Average Fixed Cost (AFC)?
Average Fixed Cost (AFC) = Total Fixed Cost (TFC) / Quantity of Output (Q)
How do you calculate Average Variable Cost (AVC)?
Average Variable Cost (AVC) = Total Variable Cost (TVC) / Quantity of Output (Q)
How do you calculate Average Total Cost (ATC)?
- Average Total Cost (ATC) = Total Cost (TC) / Quantity of Output (Q)
- Average Total Cost (ATC) = Average Fixed Cost (AFC) + Average Variable Cost (AVC)
How do you calculate Marginal Cost (MC)?
- Marginal Cost (MC) = Change of Total Cost (TC) / Change in output (Q)
- Marginal Cost (MC) = Change in Total Variable Cost (TVC) / Change in output (Q)
Average Fixed cost...
decreases as the level of output increases.
Explain Diminishing Return.
- As one input increases while the other imputs are held fixed, output increases at a decreasing rate.
- *When cost tends to rise, that when diminishing return is setting in.
The MC line will cross the will cross the ATC and AVC line at...
their minimum point.
What is the short run?
Time period where you have atleast one fixed cost; firms can not exit or enter the industry. (graph 7)
What is the long run?
All costs are variable; firms are free to enter or exit an industry. (graph 8)
Define perfect competition?
- Large number of firms producing a standardized product.
- A market with many sellers and buyers of a homogeneous product and no barriers to entry.
What are the properties of a perfectly competitive market?
- 1. Large number of firms
- 2. Standarized product
- 3. "Price takers"-no control over market price
- 4. No significant barriers to enter or exit the market
What does marginal revenue (MR) equal?
What is marginal revenue(MR)?
- The additional revenue from selling one more unit.
- The change in total revenue from selling one more unit of output.
What is the formula for marginal revenue?
MR = change in TR / change in Q
How do you know profit has maximized its level of output?
Explain "Shut Down Price".
- Minimum point on the Average Variable Cost curve.
- The price at which the firm is indifferent between operations and shutting down; equal to the minimum average variable cost.
What is the supply curve?
The MC above the AVC.