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# ECON 303 exam 1

question
price takers.
Where consumers face prices determined by market forces, in competitive markets
question
The market basket that maximizes utility must satisfy two conditions:

1. must be located on budget line

2. must give consumer the most preferred combo of goods and services

question
Transitivity
Transitivity means that if a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C. • Transitivity is necessary for consistency and rational choice.
question
More is better than less:

Preferences are never fully satiated.Goods are assumed to be desirable—i.e., to be good. Consequently, consumers always prefer more of any good to less. In addition, consumers are never satisfied or satiated; more is always better, even if it’s just a tiny bit better.

question
Completeness:
Preferences are assumed to be complete. In other words, consumers can compare and rank all possible baskets. Thus, for any two market baskets A and B, a consumer will prefer A to B, will prefer B to A, or will be indifferent between the two. Indifference means that a person will be equally satisfied with either basket.
question
indifference curve
A curve representing all combinations of market baskets that provide a consumer with the same level of utility.
question
Indifference Map
An indifference map is a set of indifference curves that describes and ranks a person's preferences between market baskets.
question
Utility
a numerical score representing the satisfaction that a consumer gets from a given market basket.
question
utility function
a formula that assigns a level of utility to individual market baskets.
question
marginal rate of substitution (MRS)
MRS is the maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good, while holding their level of utility constant.
question
Indifference curves are convex when...
there is a diminishing marginal rate of substitution.
question
Normal good
An increase in income leads to an increase in demand• Shifts the demand curve to the right
question
Inferior good
An increase in income leads to a decrease in demand• Shifts the demand curve to the left
question
Price-consumption curve
Curve tracing the utility-maximizing combinations of two goods as the price of one good changes.
question
The individual demand curve has two important properties:

1.The level of utility that can be attained changes as we move along the curve.

2. At every point on the demand curve, the consumer is maximizing utility by satisfying the condition• Slope of IC = Slope of BL

question
income effect

the change in a consumer’s consumption choices that results from a change in the consumer’s income (or purchasing power), holding relative prices constant

question
Engel curves
relate the quantity of a good consumed to income.
question
Substitution effect:

the change in quantity demanded when the good’s price increases, holding consumer utility constant.• Consumers buy less of the good that has become relatively more expensive and more of the good that is relatively cheaper.• This tradeoff occurs along the indifference curve

question
total effect
a change in price is given by the sum of the substitution effect and the income effect:
question
Elasticity
A measure of how sensitive one variable is to changes in another
question

3 measures of demand elasticity

1. Price elasticity of demand

2. Cross-price elasticity of demand

3. Income elasticity of demand

question
Price elasticity of demand

How much the quantity demanded of a good responds to a change in the price of that good•

Loosely speaking, it measures the price-sensitivity of buyers’ demand

Mathematically: the percentage change in quantity demanded due to a percentage change in price:

question
Determinants of the Price Elasticity of Demand

Number and closeness of substitutes•

Budget share spent on the good•

Time horizon available to adjust to price changes• Luxuries are more elastic than necessities

question
Total consumer surplus
The area below the demand curve and above the price
question
efficient production
it cannot produce its current level of output with fewer inputs, given its existing technological knowledge and capabilities.
question
Labor

inputs include workers, their skills, as well as the entrepreneurial efforts of the firm’s managers.

question

materials

include steel, plastics, electricity, water, and any other goods that the firm buys and transforms into final products.
question
capital
includes land, buildings, machinery and other equipment, as well as inventories.• Something used to produce other things
question
production function

various ways a firm can transform inputs into the max amount of output

tells us the greatest level of output for any given level of inputs.•

A firm can more easily adjust its inputs in the long run than in the short run.

question
Isoquant
a curve showing all possible efficient combinations of inputs that are capable of producing a certain quantity of output
question
Properties of Isoquants

1. The farther an isoquant is from the origin, the greater the level of output.

2. Isoquants do not cross.

3. Isoquants slope downward.

question
Marginal rate of technical substitution (MRTS)
the extra units of one input needed to replace one unit of another input that enables a firm to keep the amount of output it produces constant.
question
Returns to scale
Rate at which output increases as inputs are increased proportionately
question
increasing returns to scale
Situation in which output more than doubles when all inputs are doubled.
question
constant returns to scale
Situation in which output doubles when all inputs are doubled.
question
decreasing returns to scale
Situation in which output less than doubles when all inputs are doubled
question
The long-run expansion path

a curve that shows the firm’s cost-minimizing combination of inputs for every level of output.

The expansion path is the set of all cost-minimizing bundle, given a particular set of input prices.

question
Accounting cost

are costs that involve a direct monetary outlay.•

Also referred to as explicit costs.•

e.g., raw material purchases, payroll, utility bills, debt payments, depreciation charges on capital, any balance sheet items, etc.

question
Opportunity cost

re costs associated with opportunities forgone when a firm’s resources are not put to their best alternative use.• Includes implicit costs that do not involve a direct outlay of cash.•

e.g., foregone rents from the property in use, foregone salary from different job choice, foregone interest from the cash in use, etc.•

Opportunity cost include all decision relevant costs, including explicit costs

question
Economic cost
are the true cost of utilizing resources in production that are relevant in decision making.
question
Sunk cost

costs that have already been incurred and cannot be recovered.•

Unavoidable cost

question
Non-sunk cost

costs that are incurred only if a particular decision is made.•

Avoidable cost

question
Economies of scale

Long-run average total cost falls as the quantity of output increases•

Increasing specialization among workers•

More common when Q is low

question
Constant economies of scale
Long-run average total cost stays the same as the quantity of output changes
question
Diseconomies of scale

Long-run average total cost rises as the quantity of output increases•

Increasing coordination problems in large organizations. •

E.g., management becomes stretched, can’t control costs. • More common when Q is high

question
product homogenity
When the products of all the firms in a market are perfectly substitutable with one another—that is, when they are homogeneous—no firm can raise the price of its product above the price of other firms without losing most or all its business.
question
free entry and exit
Condition under which there are no special costs that make it difficult for a firm to enter (or exit) an industry.•With free entry and exit, suppliers can easily enter or exit a market in the long-run depending on the profit outlook.
1 of 47
question
price takers.
Where consumers face prices determined by market forces, in competitive markets
question
The market basket that maximizes utility must satisfy two conditions:

1. must be located on budget line

2. must give consumer the most preferred combo of goods and services

question
Transitivity
Transitivity means that if a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C. • Transitivity is necessary for consistency and rational choice.
question
More is better than less:

Preferences are never fully satiated.Goods are assumed to be desirable—i.e., to be good. Consequently, consumers always prefer more of any good to less. In addition, consumers are never satisfied or satiated; more is always better, even if it’s just a tiny bit better.

question
Completeness:
Preferences are assumed to be complete. In other words, consumers can compare and rank all possible baskets. Thus, for any two market baskets A and B, a consumer will prefer A to B, will prefer B to A, or will be indifferent between the two. Indifference means that a person will be equally satisfied with either basket.
question
indifference curve
A curve representing all combinations of market baskets that provide a consumer with the same level of utility.
question
Indifference Map
An indifference map is a set of indifference curves that describes and ranks a person's preferences between market baskets.
question
Utility
a numerical score representing the satisfaction that a consumer gets from a given market basket.
question
utility function
a formula that assigns a level of utility to individual market baskets.
question
marginal rate of substitution (MRS)
MRS is the maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good, while holding their level of utility constant.
question
Indifference curves are convex when...
there is a diminishing marginal rate of substitution.
question
Normal good
An increase in income leads to an increase in demand• Shifts the demand curve to the right
question
Inferior good
An increase in income leads to a decrease in demand• Shifts the demand curve to the left
question
Price-consumption curve
Curve tracing the utility-maximizing combinations of two goods as the price of one good changes.
question
The individual demand curve has two important properties:

1.The level of utility that can be attained changes as we move along the curve.

2. At every point on the demand curve, the consumer is maximizing utility by satisfying the condition• Slope of IC = Slope of BL

question
income effect

the change in a consumer’s consumption choices that results from a change in the consumer’s income (or purchasing power), holding relative prices constant

question
Engel curves
relate the quantity of a good consumed to income.
question
Substitution effect:

the change in quantity demanded when the good’s price increases, holding consumer utility constant.• Consumers buy less of the good that has become relatively more expensive and more of the good that is relatively cheaper.• This tradeoff occurs along the indifference curve

question
total effect
a change in price is given by the sum of the substitution effect and the income effect:
question
Elasticity
A measure of how sensitive one variable is to changes in another
question

3 measures of demand elasticity

1. Price elasticity of demand

2. Cross-price elasticity of demand

3. Income elasticity of demand

question
Price elasticity of demand

How much the quantity demanded of a good responds to a change in the price of that good•

Loosely speaking, it measures the price-sensitivity of buyers’ demand

Mathematically: the percentage change in quantity demanded due to a percentage change in price:

question
Determinants of the Price Elasticity of Demand

Number and closeness of substitutes•

Budget share spent on the good•

Time horizon available to adjust to price changes• Luxuries are more elastic than necessities

question
Total consumer surplus
The area below the demand curve and above the price
question
efficient production
it cannot produce its current level of output with fewer inputs, given its existing technological knowledge and capabilities.
question
Labor

inputs include workers, their skills, as well as the entrepreneurial efforts of the firm’s managers.

question

materials

include steel, plastics, electricity, water, and any other goods that the firm buys and transforms into final products.
question
capital
includes land, buildings, machinery and other equipment, as well as inventories.• Something used to produce other things
question
production function

various ways a firm can transform inputs into the max amount of output

tells us the greatest level of output for any given level of inputs.•

A firm can more easily adjust its inputs in the long run than in the short run.

question
Isoquant
a curve showing all possible efficient combinations of inputs that are capable of producing a certain quantity of output
question
Properties of Isoquants

1. The farther an isoquant is from the origin, the greater the level of output.

2. Isoquants do not cross.

3. Isoquants slope downward.

question
Marginal rate of technical substitution (MRTS)
the extra units of one input needed to replace one unit of another input that enables a firm to keep the amount of output it produces constant.
question
Returns to scale
Rate at which output increases as inputs are increased proportionately
question
increasing returns to scale
Situation in which output more than doubles when all inputs are doubled.
question
constant returns to scale
Situation in which output doubles when all inputs are doubled.
question
decreasing returns to scale
Situation in which output less than doubles when all inputs are doubled
question
The long-run expansion path

a curve that shows the firm’s cost-minimizing combination of inputs for every level of output.

The expansion path is the set of all cost-minimizing bundle, given a particular set of input prices.

question
Accounting cost

are costs that involve a direct monetary outlay.•

Also referred to as explicit costs.•

e.g., raw material purchases, payroll, utility bills, debt payments, depreciation charges on capital, any balance sheet items, etc.

question
Opportunity cost

re costs associated with opportunities forgone when a firm’s resources are not put to their best alternative use.• Includes implicit costs that do not involve a direct outlay of cash.•

e.g., foregone rents from the property in use, foregone salary from different job choice, foregone interest from the cash in use, etc.•

Opportunity cost include all decision relevant costs, including explicit costs

question
Economic cost
are the true cost of utilizing resources in production that are relevant in decision making.
question
Sunk cost

costs that have already been incurred and cannot be recovered.•

Unavoidable cost

question
Non-sunk cost

costs that are incurred only if a particular decision is made.•

Avoidable cost

question
Economies of scale

Long-run average total cost falls as the quantity of output increases•

Increasing specialization among workers•

More common when Q is low

question
Constant economies of scale
Long-run average total cost stays the same as the quantity of output changes
question
Diseconomies of scale

Long-run average total cost rises as the quantity of output increases•

Increasing coordination problems in large organizations. •

E.g., management becomes stretched, can’t control costs. • More common when Q is high

question
product homogenity
When the products of all the firms in a market are perfectly substitutable with one another—that is, when they are homogeneous—no firm can raise the price of its product above the price of other firms without losing most or all its business.
question
free entry and exit
Condition under which there are no special costs that make it difficult for a firm to enter (or exit) an industry.•With free entry and exit, suppliers can easily enter or exit a market in the long-run depending on the profit outlook.

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