MICRO EXAM

Utility-maximizing rule

1. Consumers are assumed to be rational, trying to get the most value for their money. 2. ... The Utility Maximization rule states: consumers decide to allocate their money incomes so that the last dollar spent on each product purchased yields the same amount of extra marginal utility.

Economic (pure) profit

The term "pure profit" is generally used to mean something very similar to economic profit. Economic profit takes into account both explicit cost and implicit cost. ... When talking about profits most of the time what is being referred to is accounting profit or basically the revenues less explicit costs.

Fixed Cost

business costs, such as rent, that are constant whatever the quantity of goods or services produced.

Average Variable Cost

is a firm's variable costs (labor, electricity, etc.) divided by the quantity of output produced. Variable costs are those costs which vary with output.

Law of Diminishing Marginal Utility

is a law of economics stating that as a person increases consumption of a product while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product.

Variable Resource

A fixed resource remains unchanged as output increases, and a variable resource changes in tandem with output. All resources are utilized as inputs in the production process.

Rational

A rational behavior decision-making process is based on making choices that result in the most optimal level of benefit or utility for the individual. Most conventional economic theories are created and used under the assumption all individuals taking part in an action/activity are behaving rationally.

Explicit Cost

An explicit cost is a direct payment made to others in the course of running a business, such as wage, rent and materials, as opposed to implicit costs, which are those where no actual payment is made.

Diseconomies of scale

Diseconomies of scale is an economic concept referring to a situation in which economies of scale no longer functions for a firm. With this principle, rather than experiencing continued decreasing costs and increasing output, a firm sees an increase in marginal costs when output is increased.

Average Total cost

In economics, average cost and/or unit cost is equal to total cost divided by the number of goods produced (the output quantity, Q). It is also equal to the sum of average variable costs (total variable costs divided by Q) plus average fixed costs (total fixed costs divided by Q).

Normal Profit

Normal profit is an economic condition occurring when the difference between a firm's total revenue and total cost is equal to zero. Simply put, normal profit is the minimum level of profit needed for a company to remain competitive in the market.

Income effect

The income effect in economics can be defined as the change in consumption resulting from a change in real income. This income change can come from one of two sources: from external sources, or from income being freed up (or soaked up) by a decrease (or increase) in the price of a good that money is being spent on.

Total Cost

Total cost refers to the total expense incurred in reaching a particular level of output; if such total cost is divided by the quantity produced, average or unit cost is obtained. A portion of the total cost known as fixed cost—e.g., the costs of a building lease or of

Total Product

Total product is the overall quantity of output that a firm produces, usually specified in relation to a variable input. Total product is the starting point for the analysis of short-run production. It indicates how much output a firm can produce according to the law of diminishing marginal returns.

Variable cost

a cost that varies with the level of output.

Economies of scale

a proportionate saving in costs gained by an increased level of production.

Average Fixed Cost

average cost and/or unit cost is equal to total cost divided by the number of goods produced (the output quantity, Q). It is also equal to the sum of average variable costs (total variable costs divided by Q) plus average fixed costs (total fixed costs divided by Q).

Short Run

expresses the concept that an economy behaves differently depending on the length of time it has to react to certain stimuli. The short run does not refer to a specific duration of time but rather is unique to the firm, industry or economic variable being studied.

Marginal Product

marginal product or marginal physical product of an input (factor of production) is the change in output resulting from employing one more unit of a particular input (for instance, the change in output when a firm's labor is increased from five to six units), ...

Marginal Utility

the benefit gained from consuming one additional unit of a good or service.

Marginal Cost

the cost added by producing one additional unit of a product or service.

Opportunity Cost

the loss of potential gain from other alternatives when one alternative is chosen.

Utility

the state of being useful, profitable, or beneficial.

Long Run

A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all costs, whereas in the short run firms are only able to influence prices through adjustments made to production levels.

Economic cost

Economic cost is the combination of gains and losses of any goods that have a value attached to them by any one individual. Economic cost is used mainly by economists as means to compare the prudence of one course of action with that of another.

Implicit Cost

In economics, an implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use a factor of production for which it already owns and thus does not pay rent. It is the opposite of an explicit cost, which is borne directly.

Average Product

is one of two measures derived from total product. The other is marginal product. Average product is the per unit production of a firm.

Law of Diminishing Returns

used to refer to a point at which the level of profits or benefits gained is less than the amount of money or energy invested.