ECON 2102 Test 2 (Chapters 5/6)
Total consumer surplus
(1/2) * (items per x-amount) * ($ per y-amount) > its just the area of the triangle formed when you plot the horizontal and diagonal lines on a price/quantity graph
marginal cost per unit is equal to:
(change in total cost) / (change in number of units)
profit is equal to:
(price - ATC) * quantity
The following four conditions are characteristic of markets that are perfectly competitive:
1. All firms sell the same standardized product. 2. The market has many buyers and sellers, each of which buys or sells only a small fiaction of the total quantity exchanged. 3. Productive resources are mobile. 4. Buyers and sellers are well informed.
the demand curve for a good can be interpreted either horizontally or vertically The horizontal interpretation tells us ___ The vertical interpretation tells us ___
> for each price, the total quantity that consumers wish to buy at that price > for each quantity, the most a buyer would be willing to pay for the good at that quantity
Condition #1 for a perfectly competitive market: All firms sell the same standardized product.
Although this condition is almost never literally satisfied, it holds as a rough approximation for many markets. Thus, the markets for concrete building blocks of a given size, or for apples of a given variety, may be described in this way. This condition implies that buyers are willing to switch from one seller to another if by so doing they can obtain a lower price.
example of the income effect on two items
At the original prices ($2 per pint for chocolate, $1 per pint for vanilla), Sarah's $400 annual ice cream budget enabled her to buy at most 200 pints per year of chocolate or 400 pints per year of vanilla. If the price of vanilla rose to $2 per pint, that would reduce not only the maximum amount of vanilla she could afford (from 400 to 200 pints per year), but also the maximum amount of chocolate she could afford in combination with any given amount of vanilla. For example, at the original price of $1 per pint for vanilla, Sarah could afford to buy 150 pints of chocolate while buying 100 pints of vanilla, but when the price of vanilla rises to $2, she can buy only 100 pints of chocolate while buying 100 pints of vanilla
Which of the following is NOT true of a perfectly competitive firm?
It seeks to maximize revenue.
Law of Demand
People do less of what they want to do as the cost of doing It rises.
"Rule number one" helps you find the optimal quantity. Optimal quantity for a firm is the quantity where:
Profit is maximized and Price=Marginal Cost
The Rational Spending Rule
Spending should be allocated across goods so that the marginal utility per dollar is the same for each good
Julie says, "I am willing to pay $10.00 for a pizza." Which of the following is true?
The benefit that Julie will receive from the pizza is $10.
horizontal addition
The process of adding individual demand curves to get the market demand curve > adding quantities, which are measured on the horizontal axes of individual demand curves.
law of diminishing marginal utility
The tendency for marginal utility to decline as consumption increases beyond some point
Condition #4 for a perfectly competitive market: Buyers and sellers are well informed.
This condition implies that buyers and sellers are aware of the relevant opportunities available to them. If that were not so, buyers would be unable to seek out sellers who charge the lowest prices, and sellers would have no means of deploying their resources in the markets in which they would earn the most profit.
Condition #3 for a perfectly competitive market: Productive resources are mobile
This condition implies that if a potential seller identifies a profitable business opportunity in a market, he or she will be able to obtain the labor. capital, and other productive resources necessary to enter that market. By the same token. sellers who are dissatisfied with the opportunities they confront in a given market are free to leave that market and employ their resources elsewhere.
Condition #2 for a perfectly competitive market: The market has many buyers and sellers, each of which buys or sells only a small fraction of the total quantity exchanged.
This condition implies that individual buyers and sellers will be price takers, regarding the market price of the product as a fixed number beyond their control. For example, a single farmer's decision to plant fewer acres of wheat would have no appreciable impact on the market price of wheat, just as an individual consumer's decision to become a vegetarian would have no perceptible effect on the price of beef.
Law of Diminishing Returns
When some factors of production are held fixed, increased production of the good eventually requires ever-larger increases in the variable factor.
imperfectly competitive firm (or price setter)
a firm that has at least some con- trol over the market price of its product
price taker
a firm that has no influence over the price at which it sells its product
profit-maximizing firm
a firm whose primary goal is to maximize the difference between its total revenues and total costs
perfectly competitive market
a market in which no individual supplier has significant influence on the market price of the product
long run
a period of time of sufficient length that all the firm's factors of production are variable
short run
a period of time sufficiently short that at least some of the firm's factors of production are fixed
once we have achieved bare subsistence levels of consumption (the amount of food, shelter, and clothing required to maintain our health) we can ___
abandon all reference to needs and speak only in terms of wants
profitable
achieved if a firm's revenue (P x Q) exceeds its total cost (ATC x Q) for some level of output
Wants (preferences/tastes)
an important determinant of a consumer's reservation price for a good > come from biology, culture and social influence > some wants may be stable but others are highly volatile
factor of production
an input used in the production of a good or service
variable factor of production
an input whose quantity can be altered in the short run
fixed factor of production
an input whose quantity cannot be altered in the short run
for every price—quantity pair along the market supply curve, price will ___
be equal to each seller's marginal cost of production
the additional utility from additional units of consumption ___ as total consumption increases
declines > Ex. whereas one cone per hour is 50 utils better than zero, five cones per hour is just 10 utils better than four
lf total consumer surplus in a market is $2,000 per day, then the total amount, in aggregate, that consumers would be willing to pay to participate in that market is __
equal to $2000 per day.
Willingness to pay is:
equal to the benefit that a consumer receives from a good
If a perfectly competitive firm produces an output level at which price is greater than marginal cost, then the firm should:
expand output to earn greater profits or smaller losses.
Whenever P>MC, the firm should ___
expand output.
A firm's profit-maximizing level of output will not change when the firm's ___ cost changes.
fixed
average fixed cost (AFC)
fixed cost / quantity sold
when plotting the marginal utility graph:
graph each point in between the stated quantity like in class
short-run shutdown condition:
if (price * quantity) < (variable cost) >
Expectations of future price decreases lead current supply to ___
increase because suppliers prefer to sell their product when prices are high
the definition of marginal cost implies that the marginal cost curve must ___
intersect both the average variable cost curve (AVC) and the average total cost curve (ATC) at their respective minimum points. > To see why, consider the logic that explains what happens to the average weight of children in a third-grade class when a new student joins the class. If the new (marginal) student is lighter than the previous average weight for the class, average weight will fall, but if the new student is heavier than the previous average, average weight will rise. By the same token, when marginal cost is below average total cost or average variable cost, the corresponding average cost must be falling, and vice versa. And this ensures that the marginal cost curve must pass through the minimum points of both average cost curves.
Suppose a perfectly competitive firm is producing 1,000 units of output and the marginal cost of the 1,000th unit is $7. If the firm can sell each unit of output for $7 and the firm's revenue is sufficient to cover its variable cost, the firm should
leave production unchanged.
The perfectly competitive firm's supply curve is the portion of its marginal cost curve that ___
lies above its average variable cost curve > At the profit-maximizing quantity, the firm's profit is the product of that quantity and the difference between price and average total cost.
lrina's current marginal utility from consuming tofu is 200 utils per pound, and her marginal utility from consuming chicken is 300 utils per pound. If tofu costs $2 per pound and chicken costs $2.50 per pound, then ____
lrina should buy more chicken and less tofu > Irina gets 100 utils per dollar spent on tofu and 120 utils per dollar spent on chicken. So, she should buy more chicken and less tofu.
price should be equal to ___
marginal cost
profit is highest when ___
marginal cost = price
In general, perfectly competitive firms maximize their profit by producing the level of output at which:
marginal cost equals price.
production occurs when the ___
marginal cost is greater than or equal to the average total cost
when the ATC is below the MC, average cost is declining because:
marginal cost is less than average cost
The market price measures the
marginal cost: the amount the buyer will actually have to pay
In general, if the price of a fixed factor of production increases:
marginal costs are unchanged.
marginal cost is upward sloping because:
marginal productivity of at least one input is declining
You should continue to consume more as long as:
marginal utility isn't negative
total cost =
multiply (price * quantity) on the ATC line at the same x-coordinate as the point you used to find the total revenue
if the MC is below the AVC then:
no units are produced
The supply is upward sloping because:
of diminishing returns to variable factors of production.
Strictly speaking, the rational spending rule applies to goods that are ___
perfectly divisible > Ex. milk or gasoline > Many other goods. such as bus rides and television sets, can be consumed only in whole-number amounts. In such cases, it may not be possible to satisfy the rational spending rule exactly.
in a perfectly competitive market, the demand curve is:
perfectly elastic since if an company raises it's price, then consumers will never buy it, due to the fact that the market is perfectly competitive
total revenue =
price * quantity
a loss occurs when: a profit occurs when:
price < ATC price > ATC
when output and employment can be varied continuously, the maximum-profit condition is that ___
price be equal to marginal cost
The amount by which price exceeds the seller's reservation price is ___
producer surplus
consumer surplus
refers to the surplus received by a single buyer in a transaction > also used to denote the total surplus received by all buyers in a market or collection of markets
utility
represents the satisfaction people derive from their consumption activities
Suppose a firm is collecting $1,700 in total revenues and the total costs of its variable factors of production are $1,900 at its current level of output. One can predict that the firm will:
shut down
there are exceptions to the law of diminishing marginal utility, like:
songs, since the more you listen to the song, the more you may enjoy it
The rational spending rule is easily generalized to apply to ___
spending decisions regarding large numbers of goods
nominal price
the absolute price of a good in dollar terms
optimal combination of goods
the affordable combination that yields the highest total utility
marginal utility
the amount by which total utility changes when consumption changes by one unit
producer/consumer surplus value is equal to:
the area of the producer/consumer surplus
utility maximization
the assumption that people try to allocate their incomes so as to maximize their satisfaction and reach a goal
income effect of a price increase/decrease
the change in the quantity demanded of a good that results because an increase/decrease in the price of a good decreases/increases buyers' purchasing power
producer surplus
the difference between the equilibrium price and the lowest price the supplier would sell the product for (seller reservation price) > triangle left of the intersection point and below the price line
consumer surplus
the difference between the highest price the buyer is willing to pay (buyer's reservation price) and the equilibrium price > triangle left of the intersection point and above the price line
real price
the dollar price of a good relative to the average dollar price of all other goods
the upward slope of the supply curve reflects ___
the fact that costs tend to rise at the margin when producers expand production, partly because each individual exploits her most attractive opportunities first, but also because different potential sellers face different opportunity costs.
marginal cost
the increase in total cost that results from carrying out one additional unit of an activity
a company should continue to sell more of a product at the same price until:
the marginal cost of producing another unit becomes larger than the marginal benefit from producing one
supply curves shift to the right as ___
the number of individual suppliers grows. > Ex. if container recyclers die or retire at a higher rate than new recyclers enter the industry, the supply curve for recycling services will shift to the left. Conversely, if a rise in the unemployment rate leads more people to recycle soft drink containers (by reducing the opportunity cost of time spent recycling), the supply curve of recycling services will shift to the right.
In its most general form, the rational spending rule says that ___
the ratio of marginal utility to price must be the same for each good the consumer buys > If the ratio were higher for one good than for another, the consumer could always increase her total utility by buying more of the first good and less of the second.
fixed cost
the sum of all payments made to the firm's fixed factors of production
variable cost
the sum of all payments made to the firm's variable factors of production
Total consumer surplus in a market is ___
the total amount that consumers would be willing to pay, in aggregate, for the right to participate in that market.
a firm's profit for a single unit is equal to:
the total revenue (price * quantity sold) minus the ATC (total cost / output)
profit
the total revenue a firm receives from the sale of its product minus all costs, explicit and implicit, incurred in producing it
One reason that variable factors of production tend to show diminishing returns in the short run is that:
there is only so much that can be produced using additional variable inputs when some factors of production are fixed.
if the fixed cost is greater than the loss at the profit maximizing value, ___
there would be no shutdown because the loss of producing zero units would be greater than the loss of producing at the profit maximizing value
The challenge confronting the perfectly competitive firm is ___
to choose its output level so that it makes as much profit as it can at that price
on the right side of the profit graph the lines from highest to lowest are:
top) marginal cost middle) average total cost bottom) average variable cost
average total cost (ATC)
total cost / quantity sold > the cost of one unit
Average total cost is total cost divided by ___
total output
profit =
total revenue - total cost
to find market supply at a certain price from multiple suppliers with identical supply curves:
use horizontal summation to add the quantities of each identical supply curve to get a total, aka the market supply
average variable cost (AVC)
variable cost / quantity sold
For the purpose of computing consumer surplus, we rely on the ___ interpretation of the demand curve
vertical > The value on the vertical axis that corresponds to each point along the demand curve corresponds to the marginal buyer's reservation price
simple equation for rational spending for two goods
when MUc / Pc = MUv / Pv then total utility will be maximized > MUc = marginal utility from from attaining more c > Pc = the price of c > MUv = marginal utility from from attaining more v > Pv = the price of v
Whether the demand curve captures all relevant costs and benefits of consumption is a determinant of ___
whether the market is efficient, not whether it's perfectly competitive.
Marginal utility from the last morsel of food you swallow should be ___
zero
