Micro - Midterm II - Custom Scholars
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# Micro – Midterm II

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Total Utility:

The total satisfaction you derive from consumption; this could refer to either your total utility of consuming a particular good or your total utility from all consumption
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Marginal Utility

The change in your total utility from a one-unit change in your consumption of a good.
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Law of Diminishing Marginal Utility

The more of a good a person consumers per period, the smaller the increase in total utility from consuming one more unit.
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Consumer Equilibrium

The condition in which an individual consumer’s budget is exhausted and the last dollar spend on each good yields the same marginal utility; therefore, utility is maximized

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Marginal valuation

The dollar value of marginal utility derived from consuming each additional unit of a good.
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Consumer Surplus

The difference between the most a consumer would pay for a given quantity of a good and what the consumer actually pays.
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The Marginal Value of Medical Care

Government-subsidized medical care (Case Study), Medicaid, Free medical care.
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Indifference Curve

Shows all combinations of goods that provide the consumer with the same level of satisfaction or utility.
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Marginal Rate of Substitution (MRS

Indicates the number of “x” that you are willing to give up to get one more unit of “y” – neither gaining nor losing utility in the process

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Law of Diminishing Marginal rate of Substitution

As your consumption of “x” increases, the number of “y” you are willing to give up to get one more until of “x” decreases.

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Indifference Map

A graphical representation of a consumer’s taste.

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Budget Line

Depicts all possible combinations of “x” and “y”, given their prices and your budget.

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Slope of a Budget Line

The Indifference Curve indicates what you are willing to buy. The Budget Line shows what you can buy. We must therefore bring together the indifference curve and the budget line to find out what quantities of each good you are both willing and able to buy.

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Explicit cost

Opportunity cost of resources employed by a firm that takes the form of cash payments.
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Implicit cost:

A firm’s opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment

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Accounting profit

A firm’s total revenue minus its explicit costs.

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Economic profit

A firm’s total revenue minus its explicit and implicit costs.

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Normal profit

The accounting profit earned when all resources earn their opportunity cost.
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Variable resources:

Any resource that can be varied in the short run to increase or decrease production.

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Fixed resource

Any resource that cannot be varied in the short run.

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Short run

A period during which at least one of the firm’s resources is fixed.

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Long run:

A period during which all resources under the firm’s control are variable.

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Total product

The total output produced by a firm.
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Marginal product

The change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant.
question

Increasing marginal returns

The marginal product of a variable resource increases as each additional unit of that resource is employed.
question

Law of diminishing marginal returns

As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative.
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Fixed cost:

Any production cost that is independent of the firm’s rate of output

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Variable cost

Any production cost that changes as the rate of output changes.
question

Production function

The relationship between the amount of resources employed and a firm’s total product.

question

Average variable cost:

Variable divided by output, or AVC = VC/q

question

Average total cost

Total cost divided by output or, ATC = TC/q: the sum of average fixed cost and average variable cost, or ATC = AFC + AVC.

question

Long-run average cost curve

A curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve.
question

Economies of scale

Forces that reduce a firm’s average cost as the scale of operation increases in the long run.

question

Diseconomies of scale

Forces that may eventually increase a firm’s average cost as the scale of operation increases in the long run.

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Constant long-run average cost

A cost that occurs when, over some range of output, long run average cost neither increases nor decreases with changes in firm size.
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Production function

Identifies the maximum quantities of a particular good or service that can be produced per time period with various combinations of resources, for a given level of technology.

question

Isoquant curve

A curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output.
question

Marginal rate of technical substitution (MRTS)

The rate at which labor substitutes for capital without affecting output.
question

Isocost line

Identifies all combinations of capital and labor the firm can hire for a given total cost.
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Expansion path

The line formed by connecting tangency points.
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Market structure

Important features of a market, such as the number of firms, product uniformity across firms, firms’ ease of entry and exit, and forms of competition.

question

Perfect competition

A market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run.
question

Commodity

A standardized product, a product that does not differ across producers, such as bushels of wheat or an ounce of gold.
question

Price taker

A firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm.
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Marginal Revenue

The change in total revenue from selling an additional unit; in perfect competition, marginal revenue is also the market price.
question

Golden rule of profit maximization

To maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures.
question

Average Revenue

Total revenue divided by output, or AR=TR/q; in all market structures, average revenue equals the market price.
question

Short-run firm supply curve

A curve that shows the quantity a firm supplies at each price in the short run; in perfect competition, that portion of a firm’s marginal cost curve that intersects and rises above the low point on its average variable cost curve

question

Short-run industry supply curve

A curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, the horizontal sum of each firm’s short-run supply curve.

question

Long-run industry supply curve

A curve that shows the relationship between price and quantity supplied by the industry once firms adjust fully to any change in market demand.
question

Constant-cost industry

An industry that can expand or contract without affecting the long run per-unit of production; the long-run industry supply curve is horizontal.
question

Increasing-cost industry

An industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward.
question

Producer efficiency

The condition that exists when market output is produced using the least-cost combination of inputs; minimum average cost in the long run.
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Allocative efficiency

The condition that exists when firms produce the output most preferred by consumers; marginal benefit equals marginal cost.
question

Producer surplus

A bonus for producers in the short run; the amount by which total revenue from production exceeds variable costs.
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Social welfare

The overall well-being of people in the economy; maximized when the marginal cost of production equals the marginal benefit to consumers.
question

Monopoly

A sole supplier of a product with no close substitutes.
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Barrier to entry

Any impediment that prevents new firms from entering an industry and competing gone an equal basis with existing firms.
question

Patent

A legal barrier to entry that grants its holder the exclusive right to sell a product for 20 years from the date the patent application is filed.
question

Natural monopoly

one firm can supply market demand at a lower average cost per unit that could two or more.
question

Innovation

The process of turning an invention into a marketable product.
question

Price maker

A firm that must find the profit maximizing price when the demand curve for its output slopes downward. Firms with Market Power.
question

Net loss to society when a firm uses its market power to restrict output and increase price.
question

Rent seeking

Activities undertaken by individuals or firms to influence public policy in a way that will increase their incomes.
question

Price discrimination

Increasing profit by charging different groups of consumers’ different prices when the price differences are not justified by differences in costs.

question

Perfectly discrimination monopolist

A monopolist who charges a different price for each unit sold; also called the monopolist’s dream.

question

Monopolistic competition

A market structure with many firms selling products that are substitutes but different enough that each firm’s demand curve slopes downward; firm entry is relatively easy.

question

Oligopoly

A market structure characterized by a few firms whose behavior is interdependent.
question

Undifferentiated Oligopoly

An oligopoly that sells a commodity or a product that does not differ across suppliers, such as an ingot of steel or a barrel of oil.
question

Differentiated Oligopoly

An oligopoly that sells products that differ across suppliers, such as automobiles or breakfast cereal.
question

Collusion

An agreement among firms to increase economic profit by dividing the market or fixing the prices.
question

Cartel

A group of firms that agree to coordinate the production and pricing decisions to act like a monopolist.
question

A firm whose price is adopted by other firms in the industry.
question

The Marginal Value of Medical Care

Government-subsidized medical care (Case Study), Medicaid, Free medical care.
question

Total cost

The sum of fixed cost and variable cost, or TC = FC + VC.

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question

Total Utility:

The total satisfaction you derive from consumption; this could refer to either your total utility of consuming a particular good or your total utility from all consumption
question

Marginal Utility

The change in your total utility from a one-unit change in your consumption of a good.
question

Law of Diminishing Marginal Utility

The more of a good a person consumers per period, the smaller the increase in total utility from consuming one more unit.
question

Consumer Equilibrium

The condition in which an individual consumer’s budget is exhausted and the last dollar spend on each good yields the same marginal utility; therefore, utility is maximized

question

Marginal valuation

The dollar value of marginal utility derived from consuming each additional unit of a good.
question

Consumer Surplus

The difference between the most a consumer would pay for a given quantity of a good and what the consumer actually pays.
question

The Marginal Value of Medical Care

Government-subsidized medical care (Case Study), Medicaid, Free medical care.
question

Indifference Curve

Shows all combinations of goods that provide the consumer with the same level of satisfaction or utility.
question

Marginal Rate of Substitution (MRS

Indicates the number of “x” that you are willing to give up to get one more unit of “y” – neither gaining nor losing utility in the process

question

Law of Diminishing Marginal rate of Substitution

As your consumption of “x” increases, the number of “y” you are willing to give up to get one more until of “x” decreases.

question

Indifference Map

A graphical representation of a consumer’s taste.

question

Budget Line

Depicts all possible combinations of “x” and “y”, given their prices and your budget.

question

Slope of a Budget Line

The Indifference Curve indicates what you are willing to buy. The Budget Line shows what you can buy. We must therefore bring together the indifference curve and the budget line to find out what quantities of each good you are both willing and able to buy.

question

Explicit cost

Opportunity cost of resources employed by a firm that takes the form of cash payments.
question

Implicit cost:

A firm’s opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment

question

Accounting profit

A firm’s total revenue minus its explicit costs.

question

Economic profit

A firm’s total revenue minus its explicit and implicit costs.

question

Normal profit

The accounting profit earned when all resources earn their opportunity cost.
question

Variable resources:

Any resource that can be varied in the short run to increase or decrease production.

question

Fixed resource

Any resource that cannot be varied in the short run.

question

Short run

A period during which at least one of the firm’s resources is fixed.

question

Long run:

A period during which all resources under the firm’s control are variable.

question

Total product

The total output produced by a firm.
question

Marginal product

The change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant.
question

Increasing marginal returns

The marginal product of a variable resource increases as each additional unit of that resource is employed.
question

Law of diminishing marginal returns

As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative.
question

Fixed cost:

Any production cost that is independent of the firm’s rate of output

question

Variable cost

Any production cost that changes as the rate of output changes.
question

Production function

The relationship between the amount of resources employed and a firm’s total product.

question

Average variable cost:

Variable divided by output, or AVC = VC/q

question

Average total cost

Total cost divided by output or, ATC = TC/q: the sum of average fixed cost and average variable cost, or ATC = AFC + AVC.

question

Long-run average cost curve

A curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve.
question

Economies of scale

Forces that reduce a firm’s average cost as the scale of operation increases in the long run.

question

Diseconomies of scale

Forces that may eventually increase a firm’s average cost as the scale of operation increases in the long run.

question

Constant long-run average cost

A cost that occurs when, over some range of output, long run average cost neither increases nor decreases with changes in firm size.
question

Production function

Identifies the maximum quantities of a particular good or service that can be produced per time period with various combinations of resources, for a given level of technology.

question

Isoquant curve

A curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output.
question

Marginal rate of technical substitution (MRTS)

The rate at which labor substitutes for capital without affecting output.
question

Isocost line

Identifies all combinations of capital and labor the firm can hire for a given total cost.
question

Expansion path

The line formed by connecting tangency points.
question

Market structure

Important features of a market, such as the number of firms, product uniformity across firms, firms’ ease of entry and exit, and forms of competition.

question

Perfect competition

A market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run.
question

Commodity

A standardized product, a product that does not differ across producers, such as bushels of wheat or an ounce of gold.
question

Price taker

A firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm.
question

Marginal Revenue

The change in total revenue from selling an additional unit; in perfect competition, marginal revenue is also the market price.
question

Golden rule of profit maximization

To maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures.
question

Average Revenue

Total revenue divided by output, or AR=TR/q; in all market structures, average revenue equals the market price.
question

Short-run firm supply curve

A curve that shows the quantity a firm supplies at each price in the short run; in perfect competition, that portion of a firm’s marginal cost curve that intersects and rises above the low point on its average variable cost curve

question

Short-run industry supply curve

A curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, the horizontal sum of each firm’s short-run supply curve.

question

Long-run industry supply curve

A curve that shows the relationship between price and quantity supplied by the industry once firms adjust fully to any change in market demand.
question

Constant-cost industry

An industry that can expand or contract without affecting the long run per-unit of production; the long-run industry supply curve is horizontal.
question

Increasing-cost industry

An industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward.
question

Producer efficiency

The condition that exists when market output is produced using the least-cost combination of inputs; minimum average cost in the long run.
question

Allocative efficiency

The condition that exists when firms produce the output most preferred by consumers; marginal benefit equals marginal cost.
question

Producer surplus

A bonus for producers in the short run; the amount by which total revenue from production exceeds variable costs.
question

Social welfare

The overall well-being of people in the economy; maximized when the marginal cost of production equals the marginal benefit to consumers.
question

Monopoly

A sole supplier of a product with no close substitutes.
question

Barrier to entry

Any impediment that prevents new firms from entering an industry and competing gone an equal basis with existing firms.
question

Patent

A legal barrier to entry that grants its holder the exclusive right to sell a product for 20 years from the date the patent application is filed.
question

Natural monopoly

one firm can supply market demand at a lower average cost per unit that could two or more.
question

Innovation

The process of turning an invention into a marketable product.
question

Price maker

A firm that must find the profit maximizing price when the demand curve for its output slopes downward. Firms with Market Power.
question

Net loss to society when a firm uses its market power to restrict output and increase price.
question

Rent seeking

Activities undertaken by individuals or firms to influence public policy in a way that will increase their incomes.
question

Price discrimination

Increasing profit by charging different groups of consumers’ different prices when the price differences are not justified by differences in costs.

question

Perfectly discrimination monopolist

A monopolist who charges a different price for each unit sold; also called the monopolist’s dream.

question

Monopolistic competition

A market structure with many firms selling products that are substitutes but different enough that each firm’s demand curve slopes downward; firm entry is relatively easy.

question

Oligopoly

A market structure characterized by a few firms whose behavior is interdependent.
question

Undifferentiated Oligopoly

An oligopoly that sells a commodity or a product that does not differ across suppliers, such as an ingot of steel or a barrel of oil.
question

Differentiated Oligopoly

An oligopoly that sells products that differ across suppliers, such as automobiles or breakfast cereal.
question

Collusion

An agreement among firms to increase economic profit by dividing the market or fixing the prices.
question

Cartel

A group of firms that agree to coordinate the production and pricing decisions to act like a monopolist.
question

A firm whose price is adopted by other firms in the industry.
question

The Marginal Value of Medical Care

Government-subsidized medical care (Case Study), Medicaid, Free medical care.
question

Total cost

The sum of fixed cost and variable cost, or TC = FC + VC.

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