Microeconomic Theory - Custom Scholars
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# Microeconomic Theory

question
Supply curve
relationship between the quantity of a good that producers are willing to sell and the price of that good
question
Demand curve
the relationship between the quantity of a good that consumers are willing to buy and the price of that good
question
price elasticity of demand
measures the percentage change in the quantity demanded of a good that results from one percent change in price
question
income elasticity of demand
measures how much quantity demanded changes with a change in income
question
cross-price elasticity of demand
measures the percentage change in quantity demanded of one good that results from a one precent change in the price of another good
question
price elasticity of supply
measures the percentage change in quantity supplied resulting form a 1 percent change in price
question
point elasticity of demand
price elasticity of demand curve at a particular point on the demand curve
question
arc elasticity of demand
price elasticity of demand calculated over a range of prices
question
collection of one or more commodities
question
indifference curve
represents all combinations of market baskets that the person is indifferent to
question
indifference map
set of indifference curves, describes preferences for all combinations of goods and services
question
marginal rate of substitution (MRS)
quantifies the amount of one good a consumer will give up to obtain more of another good; measured by the slope of the indifference curve
question
utility function
formula that assigns a level of utility to individual market baskets
question
budget line
indicates all combinations of two commodities for which total money spent equals total income
question
marginal utility
measures the additional satisfaction obtained from consuming one additional unit of a good
question
diminishing marginal utility
as more of a good is consumed, the additional utility the consumer gains will be smaller and smaller
question
price-consumption curve
curve tracing the utility-maximizing combinations of two goods as the price of one changes
question
individual demand curve
curve relating the quantity of a good that a single consumer will buy to its price
question
income-consumption curve
curve tracing the utility-maximizing combinations of two goods as a consumer's income changes
question
substitutes
two goods are substitutes if an increase in price of one leads to an increase in the quantity demanded of the other
question
complements
two goods are complements if an increase in the price of one good leads to a decrease in the quantity demanded of the other
question
substitution effect
change in consumption of a good associated with a change in its price, with the level of utility held constant
question
income effect
change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant
question
giffen good
good whose demand curve slopes upward because the (negative) income effect is larger than the substitution effect
question
market demand curve
curve relating the quantity of a good that all consumers in a market will buy to its price
question
inelastic demand
the quantity demanded is relatively unresponsive to changes in price; total expenditure of the product increases when price increases
question
elastic demand
total expenditure on the produce decreases as the price goes up
question
speculative demand
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
difference between what a consumer is willing to pay for a good and the amount actually paid
question
expected value
the weighted average of the payoffs or values resulting from all possible outcomes
question
variability
the extent to which possible outcomes of an uncertain event may differ
question
deviations in payoffs
difference between expected payoff and actual payoff
question
standard deviation
the square root of the average of the squares of the deviations of payoffs associated with each outcome from their expected value
question
expected utility
sum of the utilities associated with all possible incomes weighted by the probability that each income will occur
question
risk averse
person who prefers a certain given income to a risky income with the same expected value; diminishing marginal utility of income
question
risk neutral
no preference between a certain income and an uncertain income with the same expected value; constant marginal utility of income
question
risk loving
consumer would prefer a risky income to a certain income
question
maximum amount of money that a risk-averse person would pay to avoid taking a risk
question
theory of the firm
explanation of how a firm makes cost-minimizing production decisions and how its cost varies with its output
question
factors of production
inputs into the production process (labor, capital, materials)
question
production function
function showing the highest output that a firm can produce for every specific combination of inputs
question
short run
period of time in which quantities of one or more production factors cannot be changed
question
fixed input
production factor that cannot be varied
question
long run
amount of time needed to make all production inputs variable
question
average product
output per unit of a particular input
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marginal product
additional output produced as an input is increased by one unit
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law of diminishing marginal returns
principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease
question
labor productivity
average product of labor for an entire industry or for the economy as a whole
question
stock of capital
total amount of capital available for use in production
question
technological change
development of new technologies allowing factors of production to be used more effectively
question
isoquants
curve showing all possible combinations of inputs that yield the same output
question
isoquant map
graph combining a number of isoquants, used to describe a production function
question
marginal rate of technical substitution (MRTS)
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
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
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
accounting cost
actual expenses plus depreciation charges for capital equipment
question
economic cost
cost to a firm of utilizing economic resources in production
question
opportunity cost
cost associated with opportunities forgone when a firm's resources are not put to their best alternative use
question
sunk cost
expenditure that has been made and cannot be recovered
question
total cost (TC or C)
total economic cost of production, consisting of fixed and variable cost
question
fixed cost (FC)
cost that does not vary with the level of output and that can be eliminated only by shutting down
question
variable cost (VC)
cost that varies as output varies
question
amortization
policy of treating a one-time cost expenditure as an annual cost spread out over some number of years
question
marginal cost (MC)
increase in cost resulting from the production of one extra unit of output
question
average total cost (ATC)
firm's total cost divided by its level of output
question
average fixed cost (AFC)
fixed cost divided by the level of output
question
average variable cost (AVC)
variable cost divided by the level of output
question
user cost of capital
annual cost of owning and using a capital asset, equal to economic depreciation plus forgone interest
question
rental rate
cost per year of renting one unit of capital
question
isocost line
graph showing all possible combinations of labor and capital that can be purchased for a given total cost
question
expansion path
curve passing through points of tangency between a firm's isocost lines and its isoquants
question
long run average cost curve (LAC)
curve relating average cost of production to output when all inputs, including capital, are variable
question
short run average cost curve (SAC)
curve relating average cost of production to output when level of capital is fixed
question
long run marginal cost curve (LMC)
curve showing the change in long run total cost as output is increased incrementally by 1 unit
question
economies of scale
situation in which output can be doubled for less than a doubling of cost
question
diseconomies of scale
situation in which a doubling of output requires more than a doubling of cost
question
production transformation curve
curve showing the various combinations of two different outputs (products) that can be produced with a given set of inputs
question
economies of scope
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
question
diseconomies of scope
situation in which joint output of a single firm is less than could be achieved by separate firms when each produces a single product
question
degree of economies of scope
percentage of cost savings resulting when two or more products are produced jointly rather than individually
question
price taker
firm that has no influence over market price and thus takes price as given
question
free entry (or exit)
condition under which there are no special costs that make it difficult for a firm to enter (or exit) an industry
question
cooperative
association of businesses or people jointly owned and operated by members for mutual benefit
question
condominium
housing unit that is individually owned by provides access to common facilities that are paid for and controlled jointly by an association of owners
question
profit
difference between total revenue and total cost
question
marginal revenue
change in revenue resulting from a one unit increase in output
question
producer surplus
sum over all units produced by a firm of differences between the market price of a good and the marginal cost of production
question
welfare effects
gains and losses to consumers and producers
question
net loss of total (consumer + producer) surplus
question
economic efficiency
maximization of aggregate consumer and producer surplus
question
market failure
situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers
question
import quota
limit on the quantity of a good that can be imported
question
tariff
tax on an imported good
question
specific tax
tax of a certain amount of money per unit sold
1 of 97
question
Supply curve
relationship between the quantity of a good that producers are willing to sell and the price of that good
question
Demand curve
the relationship between the quantity of a good that consumers are willing to buy and the price of that good
question
price elasticity of demand
measures the percentage change in the quantity demanded of a good that results from one percent change in price
question
income elasticity of demand
measures how much quantity demanded changes with a change in income
question
cross-price elasticity of demand
measures the percentage change in quantity demanded of one good that results from a one precent change in the price of another good
question
price elasticity of supply
measures the percentage change in quantity supplied resulting form a 1 percent change in price
question
point elasticity of demand
price elasticity of demand curve at a particular point on the demand curve
question
arc elasticity of demand
price elasticity of demand calculated over a range of prices
question
collection of one or more commodities
question
indifference curve
represents all combinations of market baskets that the person is indifferent to
question
indifference map
set of indifference curves, describes preferences for all combinations of goods and services
question
marginal rate of substitution (MRS)
quantifies the amount of one good a consumer will give up to obtain more of another good; measured by the slope of the indifference curve
question
utility function
formula that assigns a level of utility to individual market baskets
question
budget line
indicates all combinations of two commodities for which total money spent equals total income
question
marginal utility
measures the additional satisfaction obtained from consuming one additional unit of a good
question
diminishing marginal utility
as more of a good is consumed, the additional utility the consumer gains will be smaller and smaller
question
price-consumption curve
curve tracing the utility-maximizing combinations of two goods as the price of one changes
question
individual demand curve
curve relating the quantity of a good that a single consumer will buy to its price
question
income-consumption curve
curve tracing the utility-maximizing combinations of two goods as a consumer's income changes
question
substitutes
two goods are substitutes if an increase in price of one leads to an increase in the quantity demanded of the other
question
complements
two goods are complements if an increase in the price of one good leads to a decrease in the quantity demanded of the other
question
substitution effect
change in consumption of a good associated with a change in its price, with the level of utility held constant
question
income effect
change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant
question
giffen good
good whose demand curve slopes upward because the (negative) income effect is larger than the substitution effect
question
market demand curve
curve relating the quantity of a good that all consumers in a market will buy to its price
question
inelastic demand
the quantity demanded is relatively unresponsive to changes in price; total expenditure of the product increases when price increases
question
elastic demand
total expenditure on the produce decreases as the price goes up
question
speculative demand
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
difference between what a consumer is willing to pay for a good and the amount actually paid
question
expected value
the weighted average of the payoffs or values resulting from all possible outcomes
question
variability
the extent to which possible outcomes of an uncertain event may differ
question
deviations in payoffs
difference between expected payoff and actual payoff
question
standard deviation
the square root of the average of the squares of the deviations of payoffs associated with each outcome from their expected value
question
expected utility
sum of the utilities associated with all possible incomes weighted by the probability that each income will occur
question
risk averse
person who prefers a certain given income to a risky income with the same expected value; diminishing marginal utility of income
question
risk neutral
no preference between a certain income and an uncertain income with the same expected value; constant marginal utility of income
question
risk loving
consumer would prefer a risky income to a certain income
question
maximum amount of money that a risk-averse person would pay to avoid taking a risk
question
theory of the firm
explanation of how a firm makes cost-minimizing production decisions and how its cost varies with its output
question
factors of production
inputs into the production process (labor, capital, materials)
question
production function
function showing the highest output that a firm can produce for every specific combination of inputs
question
short run
period of time in which quantities of one or more production factors cannot be changed
question
fixed input
production factor that cannot be varied
question
long run
amount of time needed to make all production inputs variable
question
average product
output per unit of a particular input
question
marginal product
additional output produced as an input is increased by one unit
question
law of diminishing marginal returns
principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease
question
labor productivity
average product of labor for an entire industry or for the economy as a whole
question
stock of capital
total amount of capital available for use in production
question
technological change
development of new technologies allowing factors of production to be used more effectively
question
isoquants
curve showing all possible combinations of inputs that yield the same output
question
isoquant map
graph combining a number of isoquants, used to describe a production function
question
marginal rate of technical substitution (MRTS)
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
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
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
accounting cost
actual expenses plus depreciation charges for capital equipment
question
economic cost
cost to a firm of utilizing economic resources in production
question
opportunity cost
cost associated with opportunities forgone when a firm's resources are not put to their best alternative use
question
sunk cost
expenditure that has been made and cannot be recovered
question
total cost (TC or C)
total economic cost of production, consisting of fixed and variable cost
question
fixed cost (FC)
cost that does not vary with the level of output and that can be eliminated only by shutting down
question
variable cost (VC)
cost that varies as output varies
question
amortization
policy of treating a one-time cost expenditure as an annual cost spread out over some number of years
question
marginal cost (MC)
increase in cost resulting from the production of one extra unit of output
question
average total cost (ATC)
firm's total cost divided by its level of output
question
average fixed cost (AFC)
fixed cost divided by the level of output
question
average variable cost (AVC)
variable cost divided by the level of output
question
user cost of capital
annual cost of owning and using a capital asset, equal to economic depreciation plus forgone interest
question
rental rate
cost per year of renting one unit of capital
question
isocost line
graph showing all possible combinations of labor and capital that can be purchased for a given total cost
question
expansion path
curve passing through points of tangency between a firm's isocost lines and its isoquants
question
long run average cost curve (LAC)
curve relating average cost of production to output when all inputs, including capital, are variable
question
short run average cost curve (SAC)
curve relating average cost of production to output when level of capital is fixed
question
long run marginal cost curve (LMC)
curve showing the change in long run total cost as output is increased incrementally by 1 unit
question
economies of scale
situation in which output can be doubled for less than a doubling of cost
question
diseconomies of scale
situation in which a doubling of output requires more than a doubling of cost
question
production transformation curve
curve showing the various combinations of two different outputs (products) that can be produced with a given set of inputs
question
economies of scope
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
question
diseconomies of scope
situation in which joint output of a single firm is less than could be achieved by separate firms when each produces a single product
question
degree of economies of scope
percentage of cost savings resulting when two or more products are produced jointly rather than individually
question
price taker
firm that has no influence over market price and thus takes price as given
question
free entry (or exit)
condition under which there are no special costs that make it difficult for a firm to enter (or exit) an industry
question
cooperative
association of businesses or people jointly owned and operated by members for mutual benefit
question
condominium
housing unit that is individually owned by provides access to common facilities that are paid for and controlled jointly by an association of owners
question
profit
difference between total revenue and total cost
question
marginal revenue
change in revenue resulting from a one unit increase in output
question
producer surplus
sum over all units produced by a firm of differences between the market price of a good and the marginal cost of production
question
welfare effects
gains and losses to consumers and producers
question
net loss of total (consumer + producer) surplus
question
economic efficiency
maximization of aggregate consumer and producer surplus
question
market failure
situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers
question
import quota
limit on the quantity of a good that can be imported
question
tariff
tax on an imported good
question
specific tax
tax of a certain amount of money per unit sold

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