econ test 2

marginal utility

is the additional utility a person receives from consuming an additional unit of a particular good.

total utility

is the total satisfaction a person receives from consuming a particular quantity of a good.

Total Revenue

price of a good times the quantity of the good sold. PxQ. if ed is less than 1, inelastic, price is directly tied to total revenue. if unit elastic, there is no change in revenue

Determinants of demand

- number of substitutes- higher the number of substitues for a good, the higher the price elasticity of demand. fewer substitutes lower price of elasticity. - necessities vs luxuries- generally the more that a good is considered a luxury rather than a necessity the higher the price elasticity of demand. - percentage of ones budget spent on the good- the greater the percentage of ones budget that goes to purchase a good, the higher the price elasticity of demand. the smaller the percentage, the lower the price elasticity of demand. - time= the more time that passes since the rice change the higher the price elasticity of demand for the good. the less time that passes the lower the price elasticity of demand for the good.

Consumer Equilibrium

Analysis is based on the assumption that individuals seek to maximize utility. Occurs when the consumer has spent all income and the marginal utilities per dollar spent on each good purchased are equal.

sunk cost

a cost incurred in the past that cannot be changed by current decisions and cannot be recovered. economists advise individuals to ignore sunk costs.

Explicit Cost-

a cost incurred when an actual payment is made

implicit cost

a cost that represents the value of resources used in production for which no actual monetary payment is made (opportunity cost)

Price elasticity of demand- consumers

a measure of the responsiveness of quantity demanded to changes in price., q2-q1/(q1+q2/2) / p2-p1/(p1+p2/2)

long run

a period of time in which all inputs in the production process can be varied (no inputs are fixed)

Short run

a period of time in which some at least one inputs in the production process are fixed

Variable Input

an input whos quantity can be changed as output changes.

Fixed Input

an input whos quantity cannot be changed as output changes

Fixed costs

costs that do not vary with output- the costs associated with fixed inputs.

variable cost

costs that vary with output. the costs associated with variable inputs.

Economies of scale

exist when inputs are increased by some percentage and output increases by a greater percentage causing unit costs to fall.

diseconomies of scale

exist when inputs are increased by some percentage and output increases by a smaller percentage causing unit costs to rise.

constant returns to scale

exist when inputs are increased by some percentage and output increases by an equal percentage, causing unit costs to remain constant.

Price elasticity

general concept of elasticity provides a technique for estimating the response of one variable to changes in another. it has numerous applications in economics.

end result

greater than 1= elastic, less than 1, inelastic, = to 1 is unit elastic.

utility

is a measure of the satisfaction happiness or benefit that results from consumption of a good.

Production

is a transformation of resources or inputs into goods and services.

util

is an artificial construct used to measure utility.

Monitor

person (manager) in a business firm who coordinates team production and reduces shirking.

Residual claimants

person who share the profits of a business firm.

Shirking

the behavior of a worker who is putting forth less than the agreed to effort

Marginal cost

the change in total cost that results from a change in output= mc=change TC/change Q

accounting profit

the difference between total revenue and explicit costs.

Economic Profit

the difference between total revenue and total costs including both explicit and implicit costs.

minimum efficient scale

the lowest output level at which average total costs are minimized.

Total cost

the sum of fixed costs and variable cots. TC=TFC+TVC

diamond water paradox

those things that have the greatest value in use greatest value in use often have little value in exchange and those things that have little value in use often have the greatest value in exchange.

Profit

total revenue (PxQ)- total cost (explicit costs and implicit costs)

Normal Profit

zero economic profit, a firm that earns normal profit is earning revenue equal to its total costs, explicit plus implicit costs), this is the level of profit necessary to keep resources employed in that particular firm.