ECON 303 exam 1

1. must be located on budget line

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

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.

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

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

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

1. Price elasticity of demand

2. Cross-price elasticity of demand

3. Income 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:

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

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

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.

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

2. Isoquants do not cross.

3. Isoquants slope downward.

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.

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.

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

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

Unavoidable cost

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

Avoidable cost

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

Increasing specialization among workers•

More common when Q is low

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