Chapter 5
Characteristics of competitive markets
1) many buyers+sellers 2)everyone buys and sells the exact same product 3)free entry to and exit from the market 4)perfect information
what does cost depend on ?
1) price of inputs 2) productivity of inputs
Characteristics of firms in competitive markets
1) when all things are equal the market will reach equilibrium 2) all competitive firms are price takers 3) the firms goal is to maximize profit 4) firms have to decisions, what to produce and how much to produce
Marginal productivity < Average productivity
AP decreases
when Marginal productivity > average productivity
AP increases
marginal productivity=average productivity
AP is maximized
what equation, when satisfied, represents the utility being maximized
MUc/Pc=MUv/pv
what equation is satisfied by the budget constraint
PcC+PvV=M
equation for profit
Profit = revenue - cost
equation for the slope tangent to the indifference curve T
T= change in Vt/ change in Ct
variable cost
a payment made to variable factors of production
long run
a period of of time in which all factors of production are variable
short run
a period of time where at least one factor of production is fixed and cannot be controlled
indifference curve
a set of bundles all of which the consumer likes equally well, hence also equivalent to one another
bundles that lie _______ the indifference curve are preferred to those that lie ________ it
above, on
variable factor of production
an input whose quantity can be altered at any time
consumer choice
decisions that consumers make regarding what they do or don't consume
if the dollar price of books doesn't change, but the average dollar price of all other goods increases the the real price of books will
decrease
when marginal cost>marginal benefit
decrease in activity
bundle of goods
describes a particular combination of the two types of ice cream measured in pints per year
Characteristics of consumer demand
determinants of demand law of demand demand curve
what does a steep demand curve mean ?
diminishing marginal utility
utility
economists use this concept t represent the satisfaction people derive from their consumption activities
if the 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 $2,000 per day
horizontal interpretation
for each price the total quantity that consumers wish to buy at that price
vertical interpretation
for each quantity the most a buyer would be willing to pay for the good at that quantity
productivity relationships
how much we can produce with given input
when marginal cost<marginal benefit
increase in activity occurs (consume for produce more)
fixed factor of production
input whose quantity cannot be altered for a certain period of time
relative price decreases if
its absolute price decreases or the other goods price increases
realative price increases if
its absolute price inc or the other goods price increases
consumer surplus
measure of consumers net benefit from a market transaction
where will the best affordable bundle lie on the budget constraint
on the budget constraint
fixed cost
payment made to a fixed factor of production
law of demand
people do less of what they want to do as the cost of doing it rises
what goods does the rational spending rule apply to ?
perfectly divisible goods
what is the difference between a buyers reservation price and the market price?
reservation price= consumers benefit market price=consumers cost
equation for revenue
revenue= price x quantity
The effect of cutting income in half states that both horizontal and vertical intercepts fall by half, the new budget constraint has the ______ slope as the old but is ___________ to the origin
same, closer
utility=
satisfaction
indifference map
shows indifferences curves that, taken together yield a complete description of a consumers preferences
rational spending rule
spending should be allocated across goods so that the marginal utility per dollar is the same for each good
What does the indifference map tell us?
tells us how various bundles are ranked in order of preference
budget constraint
tells us which bundles are affordable
economists believe
that our preferences for different goods and services can be influenced by our peers
nominal price
the absolute price of a good in dollar terms
marginal rate of substitution
the absolute value of the slope of the tangent to the indifference curve at T
marginal utility
the additional utility gained from consuming an additional unit of a good
optimal combination of goods
the affordable combination that yields the highest total utility
average productivity
the amount produced per unit o0f variable input
utility maximization
the assumption that people try to allocate their incomes so as to maximize their satisfaction
real price
the dollar price of a good relative to the average dollar price of all other goods
income effect
the fact that when the price changes the consumer becomes either poorer or richer
factors of production
the input used in the production of a good or service
factors of production
the inputs and resources used to produce a good/ service
absolute price
the money price you pay to purchase a good
What is a common property of indifference curves
the more a consumer has of one good, the more they must be given of that good before she will be willing to give up a unit of the other good
relative price
the price of one good in terms of price of a second good
what is the slope of a budget constraint given by?
the price of the good graphed on the vertical axis divided by the price of the good graphed on the horizontal axis
horizontal addition
the process of adding individual demand curves to get the market demand curve
law of diminishing marginal utility
the tendency for the additional utility gained from consuming an additional unit of good to diminish as consumption increases beyond some point
total utility
the total amount of satisfaction obtained from consumption of a good or service
total productivity
the total amount produced using a given amount of inputs
what is the consumer limited by in terms of utility
their income
when marginal cost= marginal benefit
there is no change in activity level
what is the consumer goal in terms of utility?
to maximize utility gained from consumption
equation for total cost
total cost= variable cost+fixed cost
true or false in market economies participants are free to choose the tradeoffs they accept + reject
true
diminishing marginal productivity
when at least one factor of production is fixed increasing output requires larger + larger amounts of the variable inputs
income effect
when prices change a consumers purchasing power changes
substitute effect
when the price of a good goes up substitutes for that good become relatively more attractive causing some consumers to abandon that good for substitutes
are bundles that lie on an indifference curve preferred to those that lie below it?
yes
if you get 5 additional units per dollar spent of clothes and 8 additional units per dollar spent of shoes then....
you should reallocate your spending away from clothes and towards shoes
