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45 Cards in this Set
- Front
- Back
Utility
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a measure of satisfaction (expressed in utils)
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Total Utility
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total satisfaction obtained by consuming all units of a commodity
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Marginal Utility
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satisfaction for every additional unit of a commodity
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Law of Diminishing Marginal Utility
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marginal utility decreases as supply increases
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Budget constraint/line
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the limit on consumption bundles a consumer can afford
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Optimal consumption bundle
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Bundle with maximum utility given budget contraints
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Indifference Curves
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a graph that shows all bundles of good between which the consumer has no preference of one over the other
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Marginal Rate of Substitution
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the rate at which a consumer is willing to give up one good for another while maintaining the same level of utility
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Principle of Diminishing MRS
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the more of good x a person consumes in proportion to good y, the less of y the consumer is willing to substitute for x; MRS decreases as Qx increases (this explains why MRS changes along an IC)
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Perfect Substitutes
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goods for which the marginal rate o substitution is constant no matter how much of each is consumed
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Perfect Compliments
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goods that the consumer consumes at the same rate regardless of price
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Implicit Costs
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Opportunity Costs
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Plant Capacity
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size of a building and amount of capital equipment
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Marginal Product of Labor
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additional output produced by one more unit of variable input
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Economies of Scale/Increasing Returns of Scale
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as q rises, long run average total cost falls
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Diseconomies of Scale/Decreasing Returns of Scale
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as q rises, long run average total cost rises
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Utility and Quantity Demand/Willingness to Pay
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Higher utilities= more demand/more willing to pay
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Factors that change Budget Line
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1. Change in Income
2. Change in Price of a specific good 3. Change in price of all other goods |
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Properties of (most) Indifference Curves
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1. all bundles on a curve give you the same total utility
2. if you raise the curve, you add utility 3. Along an IC, total utility is constant, but the slope changes |
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Special Indifference Curves
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1. Perfect Substitutes: Optimal consumption will be at an endpoint (all of the cheaper good, none of the other)
2. Perfect Compliments: IC is shaped like a right angle, Optimal consumption will be at the point (equal numbers of both good!) |
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economic vs accounting profit
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Economic profit is total revenue minus both implicit and explicit costs
Accounting profit is total revenue minus explicit costs only. |
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Normal Profit
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In a competitive market, and economic profit of $0 is considered a normal profit.
At normal profit your firm is doing just as well as it could in another market and your implicit costs are equal to your accounting profit. |
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Long run vs Short run
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Short run is the amount of time to allow plant capacity to vary. In the short run a firm may shut down but it can't entirely exit the market.
At long run all costs become variable and a firm is able to enter and exit a market. |
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Fixed vs Variable COsts
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Fixed Costs:
-cant be varied in the Short Run -do not change as output changes -still exist when the output is 0 -usually associated with capital -examples: leases, payments (anything contractual) Variable Costs: changes as output changes, go to zero at shut down |
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Law of Diminishing Marginal Returns
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1. as successive units of a variable resource are added to a fixed resource, a marginal product of the variable resource eventually decrease
2. explains why short run cost curves increase as q increases 3. only applies in the short run (there are no fixed resources in the long run) |
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Factors that shift Cost Curves
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1. Input prices (price and cost move together)
2. Regulations/Taxes (taxes and costs move together) 3. Technology (technology and costs move opposite) |
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Marginal Utility Equation
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MU=^TU
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Total Utility Equation
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TU= Sum of all MU
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Opportunity Cost Formulas
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Cost of Nth unit of x= quantity of y at (n-1) - quantity of y at n
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Marginal Utility per dollar Equation
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MUx/Px
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Utility Maximization Rule
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MUx/MUy=Px/Py
or MUx/Px= MUy/Py or MRS= Px/Py |
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MRS (slope of an IC)
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^Qy/^Qx
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Utility Along an IC Equations
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along an IC : ^TUx=^TUy=0
= MUx * ^Qx + MUy*^Qy=0 =MUx*^Qx= - MUy*^Qy ^Qx/^Qy= -MUx/MUy |
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Relative Price
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the ratio of one price to another
RP= Px/Py |
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Relative Price Rule
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To find Optimal Bundle set MRS=RP
or MUx/MUy=Px/Py |
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Profit (general)
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TR-Costs=Profit
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Economic Profit
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TR- Implicit Costs - Explicit Costs= Economic Profit
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Accounting Profit
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TR- Explicit Costs= Accounting Profit
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Total Cost
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TC= Fixed Costs (TFC) + Variable Costs (TVC)
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Average Fixed Cost
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= TFC/Q
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Average Variable Costs
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=TVC/Q
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Average TOtal Cost
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=TC/Q=AFC+ATC
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Marginal Costs
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=^TC/^Q
or Wage/MPL |
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Marginal Product of Labor Equation
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MPL=^Q/^L
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Total Product Equation
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Q= Sum of MPL
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