Micro Midterm Study Guide

question

consumer theory

answer

describes how consumers, based on their preferences, maximize their well-being by trading off the purchase of more of some goods for the purchase of less of others.

question

theory of the firm

answer

theory based on the assumption that a firm tries to maximize their profits

question

positive analysis

answer

statements that describe relationships of cause and effect

question

normative analysis

answer

questions and statements of what ought to be

question

market definition

answer

Determination of the buyers, sellers, and range of products that should be included in a particular market.

question

Arbitrage

answer

practice of buying at a low price at one location and selling at a higher price in another

question

extent of a market

answer

boundaries of a market, both geographically and in terms of range of products produced and sold within it.

question

change in supply/demand

answer

Shift in the S/D curve

question

change in quantity supplied/demanded

answer

Represents a movement along the demand or the supply curve

question

substitutes

answer

two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other

question

complements

answer

two goods for which an increase in the price of one leads to a decrease in the quantity demand of the other

question

inferior good

answer

a good for which demand reacts inversely with income

question

normal good

answer

a good for which demand moves positively with income

question

market baskets

answer

a list with specific quantities of one or more goods

question

completeness

answer

preferences are assumed to be complete. In other words, consumers can compare and rank all possible baskets.

question

transitivity

answer

we presume that preferences are transitive in that if a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C.

question

indifference curves

answer

Curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction.

question

marginal rate of substitution

answer

Maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good.

question

diminishing marginal rate of substitution

answer

4th assumption in consumer preference. The assumption that indifference curves are usually convex (bowed inward).

question

perfect substitutes

answer

Two goods for which the marginal rate of substitution of one for the other is a constant.

question

perfect complements

answer

Two goods for which the MRS is zero or infinite; the indifference curves are shaped as right angles.

question

utility

answer

Numerical score representing the satisfaction that a consumer gets from a given market basket.

question

utility function

answer

Formula that assigns a level of utility to individual market baskets.

question

ordinal utility function

answer

Utility function that generates a ranking of market baskets in order of most to least preferred.

question

cardinal utility function

answer

Utility function describing by how much one market basket is preferred to another.

question

budget line

answer

All combinations of goods for which the total amount of money spent is equal to income.

question

marginal benefit

answer

the additional benefit to a consumer from consuming one more unit of a good or service

question

corner solution

answer

Situation in which the marginal rate of substitution of one good for another in a chosen market basket is not equal to the slope of the budget line. When one good is purchased in entirety

question

marginal utility

answer

Additional satisfaction obtained from consuming one additional unit of a good.

question

diminishing marginal utility

answer

Principle that as more of a good is consumed, the consumption of additional amounts will yield smaller additions to utility.

question

equal marginal principle

answer

Principle that utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods.

question

price elasticity of demand

answer

Percentage change in quantity demanded of a good resulting from a 1-percent increase in its price.

question

infinitely elastic demand

answer

Principle that consumers will buy as much of a good as they can get at a single price, but for any higher price the quantity demanded drops to zero, while for any lower price the quantity demanded increases without limit.

question

completely inelastic demand

answer

Principle that consumers will buy a fixed quantity of a good regardless of its price.

question

income elasticity of demand

answer

Percentage change in the quantity demanded resulting from a 1-percent increase in income.

question

cross price elasticity of demand

answer

Percentage change in the quantity demanded of one good resulting from a 1-percent increase in the price of another.

question

elasticity of supply

answer

Percentage change in quantity supplied resulting from a 1-percent increase in price.

question

point elasticities of demand

answer

Price elasticity at a particular point on the demand curve.

question

arc elasticity of demand

answer

Price elasticity calculated over a range of prices.
Midpoint method

question

cyclical industries

answer

Industries in which sales tend to magnify cyclical changes in gross domestic product and national income.

question

price consumption curve

answer

Curve tracing the utility-maximizing combinations of two goods as the price of one changes.

question

individual demand curve

answer

Curve relating the quantity of a good that a single consumer will buy to its price

question

income consumption curve

answer

curve tracing the utility-maximizing combinations of two goods as a consumer's income changes

question

Engel Curve

answer

curve relating the quantity of a good consumed to income

question

substitutional effect

answer

Change in consumption of a good associated with a change in its price (change in price ratio), with the level of utility held constant.

question

income effect

answer

Change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant.

question

total effect

answer

substitution effect + income effect

question

Giffen good

answer

Good whose demand curve slopes upward because the (negative) income effect is larger than the substitution effect. This good will have an upward sloping demand curve.

question

market demand curve

answer

Curve relating the quantity of a good that all consumers in a market will buy to its price

question

isoelastic demand curve

answer

Demand curve with a constant price elasticity.

question

speculative demand

answer

Demand driven not by the direct benefits one obtains from owning or consuming a good but instead by an expectation that the price of the good will increase.

question

consumer surplus

answer

Difference between what a consumer is willing to pay for a good and the amount actually paid.

question

production function

answer

Function showing the highest output that a firm can produce for every specified combination of inputs.

question

average product of labor

answer

average output per unit of labor

question

marginal product of labor

answer

Additional output produced as an input is increased by one unit.

question

Isoquant

answer

Curve showing all possible combinations of inputs that yield the same output.

question

marginal rate of technical substitution

answer

Amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant.

question

Fixed-Proportions Production Function

answer

Production function with L-shaped isoquants, so that only one combination of labor and capital can be used to produce each level of output.

question

returns to scale

answer

Rate at which output increases as inputs are increased proportionately.

question

increasing returns to scale

answer

Situation in which output more than doubles when all inputs are doubled.
This may likely be due to enabling specialization and make use of more organization among FOP

question

constant returns to scale

answer

Situation in which output doubles when all inputs are doubled.

question

decreasing returns to scale

answer

Situation in which output less than doubles when all inputs are doubled

question

accounting cost

answer

actual expenses plus depreciation charges for capital equipment

question

economic cost

answer

Cost to a firm of utilizing economic resources in production.

question

Amortization

answer

Policy of treating a one-time expenditure as an annual cost spread out over some number of years.

question

marginal cost

answer

Increase in cost resulting from the production of one extra unit of output.

question

average total cost

answer

Firm's total cost divided by its level of output.

question

average fixed cost

answer

fixed cost divided by the level of output

question

average variable cost

answer

variable cost divided by the level of output

question

user cost of capital

answer

Annual cost of owning and using a capital asset, equal to economic depreciation plus forgone interest.

question

rental rate

answer

the cost per year of renting one unit of capital

question

isocost line

answer

Graph showing all possible combinations of labor and capital that can be purchased for a given total cost.

question

Expansion Path

answer

Curve passing through points of tangency between a firm's isocost lines and its isoquants. (a curve showing the associated cost of varying levels of output)

question

long run average cost curve

answer

Curve relating average cost of production to output when all inputs, including capital, are variable.

question

long run marginal cost curve

answer

Curve showing the change in long-run total cost as output is increased incrementally by 1 unit.

question

short run average cost curve

answer

curve relating average cost of production to output when level of capital is fixed

question

economies of scale

answer

Situation in which output can be doubled for less than a doubling of cost.

question

diseconomies of scale

answer

Situation in which a doubling of output requires more than a doubling of cost.

question

cost-output elasticity

answer

the percentage change in the cost of production resulting from a 1 percent increase in output

question

production transformation curve

answer

Curve showing the various combinations of two different outputs (products) that can be produced with a given set of inputs.

question

economies of scope

answer

Situation in which joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product with equivalent production inputs allocated between them.
When the production transformation curve is bowed out

question

diseconomies of scope

answer

Situation in which joint output of a single firm is less than could be achieved by separate firms when each produces a single product. Concave production transformation curve.

question

degrees of economies of scope (SC)

answer

Percentage of cost savings resulting when two or more products are produced jointly rather than individually

question

monopolistic competition

answer

a competitive market with differentiated products that allows prices to vary from each other

question

cooperative

answer

association of businesses or people jointly owned and operated by members for mutual benefit

question

short-run market supply curve

answer

shows the amount of output that the industry will produce in the short run for every possible price.

question

price elasticity of market supply

answer

measures the sensitivity of industry output to market price.

question

short run producer surplus

answer

Sum over all units produced by a firm of differences between the market price of a good and the marginal cost of production.

question

zero economic profit

answer

...

question

economic rent

answer

Amount that firms are willing to pay for an input less the minimum amount necessary to obtain it. The rent the property could currently command on the open market.

question

constant cost industry

answer

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

question

increasing cost industries

answer

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

decreasing cost industries

answer

An industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs.

1 of 93

question

consumer theory

answer

describes how consumers, based on their preferences, maximize their well-being by trading off the purchase of more of some goods for the purchase of less of others.

question

theory of the firm

answer

theory based on the assumption that a firm tries to maximize their profits

question

positive analysis

answer

statements that describe relationships of cause and effect

question

normative analysis

answer

questions and statements of what ought to be

question

market definition

answer

Determination of the buyers, sellers, and range of products that should be included in a particular market.

question

Arbitrage

answer

practice of buying at a low price at one location and selling at a higher price in another

question

extent of a market

answer

boundaries of a market, both geographically and in terms of range of products produced and sold within it.

question

change in supply/demand

answer

Shift in the S/D curve

question

change in quantity supplied/demanded

answer

Represents a movement along the demand or the supply curve

question

substitutes

answer

two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other

question

complements

answer

two goods for which an increase in the price of one leads to a decrease in the quantity demand of the other

question

inferior good

answer

a good for which demand reacts inversely with income

question

normal good

answer

a good for which demand moves positively with income

question

market baskets

answer

a list with specific quantities of one or more goods

question

completeness

answer

preferences are assumed to be complete. In other words, consumers can compare and rank all possible baskets.

question

transitivity

answer

we presume that preferences are transitive in that if a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C.

question

indifference curves

answer

Curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction.

question

marginal rate of substitution

answer

Maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good.

question

diminishing marginal rate of substitution

answer

4th assumption in consumer preference. The assumption that indifference curves are usually convex (bowed inward).

question

perfect substitutes

answer

Two goods for which the marginal rate of substitution of one for the other is a constant.

question

perfect complements

answer

Two goods for which the MRS is zero or infinite; the indifference curves are shaped as right angles.

question

utility

answer

Numerical score representing the satisfaction that a consumer gets from a given market basket.

question

utility function

answer

Formula that assigns a level of utility to individual market baskets.

question

ordinal utility function

answer

Utility function that generates a ranking of market baskets in order of most to least preferred.

question

cardinal utility function

answer

Utility function describing by how much one market basket is preferred to another.

question

budget line

answer

All combinations of goods for which the total amount of money spent is equal to income.

question

marginal benefit

answer

the additional benefit to a consumer from consuming one more unit of a good or service

question

corner solution

answer

Situation in which the marginal rate of substitution of one good for another in a chosen market basket is not equal to the slope of the budget line. When one good is purchased in entirety

question

marginal utility

answer

Additional satisfaction obtained from consuming one additional unit of a good.

question

diminishing marginal utility

answer

Principle that as more of a good is consumed, the consumption of additional amounts will yield smaller additions to utility.

question

equal marginal principle

answer

Principle that utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods.

question

price elasticity of demand

answer

Percentage change in quantity demanded of a good resulting from a 1-percent increase in its price.

question

infinitely elastic demand

answer

question

completely inelastic demand

answer

Principle that consumers will buy a fixed quantity of a good regardless of its price.

question

income elasticity of demand

answer

Percentage change in the quantity demanded resulting from a 1-percent increase in income.

question

cross price elasticity of demand

answer

Percentage change in the quantity demanded of one good resulting from a 1-percent increase in the price of another.

question

elasticity of supply

answer

Percentage change in quantity supplied resulting from a 1-percent increase in price.

question

point elasticities of demand

answer

Price elasticity at a particular point on the demand curve.

question

arc elasticity of demand

answer

Price elasticity calculated over a range of prices.
Midpoint method

question

cyclical industries

answer

Industries in which sales tend to magnify cyclical changes in gross domestic product and national income.

question

price consumption curve

answer

Curve tracing the utility-maximizing combinations of two goods as the price of one changes.

question

individual demand curve

answer

Curve relating the quantity of a good that a single consumer will buy to its price

question

income consumption curve

answer

curve tracing the utility-maximizing combinations of two goods as a consumer's income changes

question

Engel Curve

answer

curve relating the quantity of a good consumed to income

question

substitutional effect

answer

Change in consumption of a good associated with a change in its price (change in price ratio), with the level of utility held constant.

question

income effect

answer

Change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant.

question

total effect

answer

substitution effect + income effect

question

Giffen good

answer

Good whose demand curve slopes upward because the (negative) income effect is larger than the substitution effect. This good will have an upward sloping demand curve.

question

market demand curve

answer

Curve relating the quantity of a good that all consumers in a market will buy to its price

question

isoelastic demand curve

answer

Demand curve with a constant price elasticity.

question

speculative demand

answer

Demand driven not by the direct benefits one obtains from owning or consuming a good but instead by an expectation that the price of the good will increase.

question

consumer surplus

answer

Difference between what a consumer is willing to pay for a good and the amount actually paid.

question

production function

answer

Function showing the highest output that a firm can produce for every specified combination of inputs.

question

average product of labor

answer

average output per unit of labor

question

marginal product of labor

answer

Additional output produced as an input is increased by one unit.

question

Isoquant

answer

Curve showing all possible combinations of inputs that yield the same output.

question

marginal rate of technical substitution

answer

Amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant.

question

Fixed-Proportions Production Function

answer

Production function with L-shaped isoquants, so that only one combination of labor and capital can be used to produce each level of output.

question

returns to scale

answer

Rate at which output increases as inputs are increased proportionately.

question

increasing returns to scale

answer

Situation in which output more than doubles when all inputs are doubled.
This may likely be due to enabling specialization and make use of more organization among FOP

question

constant returns to scale

answer

Situation in which output doubles when all inputs are doubled.

question

decreasing returns to scale

answer

Situation in which output less than doubles when all inputs are doubled

question

accounting cost

answer

actual expenses plus depreciation charges for capital equipment

question

economic cost

answer

Cost to a firm of utilizing economic resources in production.

question

Amortization

answer

Policy of treating a one-time expenditure as an annual cost spread out over some number of years.

question

marginal cost

answer

Increase in cost resulting from the production of one extra unit of output.

question

average total cost

answer

Firm's total cost divided by its level of output.

question

average fixed cost

answer

fixed cost divided by the level of output

question

average variable cost

answer

variable cost divided by the level of output

question

user cost of capital

answer

Annual cost of owning and using a capital asset, equal to economic depreciation plus forgone interest.

question

rental rate

answer

the cost per year of renting one unit of capital

question

isocost line

answer

Graph showing all possible combinations of labor and capital that can be purchased for a given total cost.

question

Expansion Path

answer

Curve passing through points of tangency between a firm's isocost lines and its isoquants. (a curve showing the associated cost of varying levels of output)

question

long run average cost curve

answer

Curve relating average cost of production to output when all inputs, including capital, are variable.

question

long run marginal cost curve

answer

Curve showing the change in long-run total cost as output is increased incrementally by 1 unit.

question

short run average cost curve

answer

curve relating average cost of production to output when level of capital is fixed

question

economies of scale

answer

Situation in which output can be doubled for less than a doubling of cost.

question

diseconomies of scale

answer

Situation in which a doubling of output requires more than a doubling of cost.

question

cost-output elasticity

answer

the percentage change in the cost of production resulting from a 1 percent increase in output

question

production transformation curve

answer

Curve showing the various combinations of two different outputs (products) that can be produced with a given set of inputs.

question

economies of scope

answer

question

diseconomies of scope

answer

Situation in which joint output of a single firm is less than could be achieved by separate firms when each produces a single product. Concave production transformation curve.

question

degrees of economies of scope (SC)

answer

Percentage of cost savings resulting when two or more products are produced jointly rather than individually

question

monopolistic competition

answer

a competitive market with differentiated products that allows prices to vary from each other

question

cooperative

answer

association of businesses or people jointly owned and operated by members for mutual benefit

question

short-run market supply curve

answer

shows the amount of output that the industry will produce in the short run for every possible price.

question

price elasticity of market supply

answer

measures the sensitivity of industry output to market price.

question

short run producer surplus

answer

Sum over all units produced by a firm of differences between the market price of a good and the marginal cost of production.

question

zero economic profit

answer

...

question

economic rent

answer

Amount that firms are willing to pay for an input less the minimum amount necessary to obtain it. The rent the property could currently command on the open market.

question

constant cost industry

answer

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

question

increasing cost industries

answer

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

decreasing cost industries

answer

An industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs.

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