Economics 130

Shutdown Point

The lowest point on the average variable cost curve. When price falls below the minimum point on AVC, total revenue is insufficient to cover variable costs and the firm will shit down and bear losses equal to fixed costs.

Movement along S Curve

The change in quantity supplied, resulting from a change of price.

Shift of S curve

The change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good.

Shift of a demand curve

The change that takes place n a demand curve corresponding to a new RELATIONSHIP between quantity demanded of a good and the price of that good.

Financial capital Market

The complex set of institutions in which suppliers of capital (households that save) and the demand for capital (firms wanting to invest) interact.

Excess demand or 'shortage'

The condition exists when quantity exceeds quantity supplied at the current price

Efficiency

The condition in which the economy is producing what people want at least possible cost

general equilibrium

The condition that exists when all markets in an economy are in simultaneous equilibrium

equilibrium

The condition that exists when quantity supplied and quantity demanded are equal. At equilibrium there is no tendency for price to change.

Excess supply

The condition that exists when quantity supplied exceeds quantity demanded at the current price -prices falls -quantity supplied falls -quantity demanded increases

Tomatoes and Spinach are substitutes an increases in price for spinach would cause

The demand for tomatoes to increase, shifting the demand curve to the right

marginal cost

The increase in total cost that results from producing one more unit of output.

budget constraint

The limits imposed on household choices by income, wealth, and product prices.

Law of diminishing MU

The more of anyone good consumed in a given period, the less satisfaction (utility) generated by consuming each additional unit of the same good.

Long Run

The period of time for which there are no fixed factors of production: firms can increase or decrease the scale of operation and new firms can enter and existing firms can exit.

Short Run

The period of time for which two conditions hold: The firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry.

demand-determined price.

The price of a good that is in fixed supply; it is determined exclusively by what households and firms are willing to pay for the good.

The quantity of each input to demand

The price of inputs.

The quantity of output to supple

The price of output

Spreading overhead

The process of diving total fixed costs by more units of output. Average fixed cost declines as quantity of output rises.

Partial Equilibrium analysis

The process of examining the equilibrium conditions in individual markets and for household and firms separately

optimal Method of production

The production method that minimises cost.

Production technology

The quantitative relationship between inputs and outputs.

pure rent

The return to any factor of production that is in fixed supply.

Real income

The set of opportunities to purchase real goods and services available to a household as determined by prices and income.

Average Product

The average amount produced by each unit of a variable factor of production.

Movement along Demand curve

The change in quantity demanded brought about by change in price

marginal revenue product (MRP)

The additional revenue a firms earns by employing 1 additional unit of input, ceteris paribus.

slope of a budget constraint

-Px/Py

excess D in unregulated M =

-Tendency for price to rise as demanders compete against each other for limited supply. -Quantity demanded falls -Quantity supplied rises -new equilibrium

Marginal revenue product and factor demand for a firm using one variable input (labor)

A competitive firm using only one variable factor of production will use that factor as long as its marginal revenue product exceeds its units cost. A perfectly competitive firm will hire labor as long as MRPL is greater than the going wage, W.

Pareto efficiency or Pareto optimality

A condition in which no change is possible that will make some members of society better off without making some other members of society worse off

Eternality

A cost or benefit imposed or bestowed on an individual or a group that is outside or external to the transaction. (air or water pollution) an ugly building destroying a view.

variable Cost

A cost that depends on the level of production chosen.

labor supply curve

A curve that shows the quantity of labor supplied at different wage rates. Its shape depends on how households react to changes in the wage rate.

Cameras and films are compliment goods, an increase in price of films would cause

A decrease in demand for cameras, shifting the demand curve to the left

Income effect of decrease price

A decrease in price of a good, ceteris paribus will lead the household to be better off because they will have more money to spend.

Tomatoes and spinach are substitutes a decrease in the price of spinach would cause

A decrease in the demand of tomatoes, shifting the demand curve to the left.

Supply Curve

A graph illustrating how much of a product a firm will sell at different prices

Total variable cost curve

A graph that shows the relationship between total variable cost and the level of a firms output.

Substitution effect of a wage increase.

A higher wage rate would mean that leisure is more expensive. This would mean lower quantity demanded for leisure and a higher quantity supplied of labor

Production/Total production function.

A numerical or mathematical expression of a relationship between inputs and outputs. It shows units of total product as a function of units of inputs

Diamond/water paradox

A paradox stating that (1) the things with the greatest value in use frequently have little or no value in exchange frequently have little or no value in exchange and (2) the things with the greatest value in exchange frequently have little or no value in use.

Substitution effect

A price decrease would mean less expensive relative to substitutes, therefor households are likely to buy more of the good.

Normal Rate of Return

A rate of return on capital that is just sufficient to keep owners and investors satisfied. For relatively risk free firms, it should be nearly the same as the interest rate on risk free government boards.

ATC=

AFC + AVC

Constant returns to scale

An increase in a firms scale of production has no effect on costs per unit produced

Decreasing returns to scale or diseconomies of scale

An increase in a firms scale of production leads to higher costs per unit produced.

Increasing returns to scale or economies of scale.

An increase in a firms scale of production leads to lower costs per unit produced.

Income effect of a wage increase

An increase in income will lead to a higher demand for leisure and a lower labor supply.

Perfect competition

An industry structure in which there are many firms, each small relative to the industry, producing identical products and in which no firm is large enough to have any control over prices. In perfectly competitive industries, new competitors can freely enter and exit the market.

Fixed cost

Any cost that does not depend on the firms level of output. These costs are incurred even if the firm is producing nothing. There are no fixed costs n the long run.

House hold supply choices are affected by

Avaliability of jobs Market wage rates Skills they possess

The rent on land is demand determined

Because land in general (and each parcel in particular) is in fixed supply, its price is demand determined. Graphically, a fixed supply is represented by a vertical, perfectly inelastic supply curve. Rent depends exclusively on demand-what people are willing to pay

MU

The additional satisfaction gained by the consumption or use of one more unit of a good or service.

Quantity Supplied

The amount of a particular product that a from would be willing and able to offer for sale at a particular price during a given time period.

Cameras and films are compliment goods, a decrease in the price of films would cause

Demand for cameras to increase, shifting the demand curve to the right.

Public Good or Social Good

Goods and services that bestow collective benefits of society. Generally, no one can be excluded from enjoying their benefits. The classic example is national defines.

Productivity of an input

The amount of output produced per unit of that input

TR

The amount received from the scale of the product (QxP)

Rate of return

The annual flow of net income generated by an investment expressed as a percentage of total investment.

Utility maximising rule

MUx/Px=MU/Py for all goods.

Market Failure

Occurs when resources are misallocated, or allocated inefficiently . The result is waste or lost value.

Profit maximising level of output for Perfectly CF

P= MC

TC =

TFC + TVC

Profit

TR-TC

How much to produce at that output

Techniques of production available.

Labour-intensive technology

Technology that relies heavily on capita; instead of human behaviour.

Capital intensive technology

Technology that relies heavily on capital instead of human behaviour

A firm must Know three things

The Market price of output The techniques of production that are available The prices of inputs

Imperfect Information

The absence of full knowledge concerning a product characteristics, available prices, and so on.

marginal product of Labor (MPL)

The additional output produced by 1 additional unit of labor.

Marginal product

The additional output that can be produced by adding one more unit of a specific input, ceteris paribus

Breaking Even

The situation in which a firm is earning exactly a normal rate of return.

market demand

The sum of all quantities of a good or service demanded per period by all the households buying in the market for that good or service.

Market Supply

The sum of all that is supplied each period by all producers of a single product.

Short run industry supply curve

The sum of the marginal cost curves (above AVC) of all the firms in an industry.

factor substitution Effect

The tendency of firms to substitute away from a factor whose price has risen and toward a factor whose price has fallen.

Total Cost (T economical C )

The total (1) out-of-pocket costs and (2) opportunity cost of all factors of production.

TFC=

The total of all costs that do not change with output even if output is zero

TVC

The total of all costs that vary in the short run.

Average total cost

Total Cost divided by the number of units of output

AFC=

Total fixed cost divided by the number of units of output; a per-unit measure of fixed costs.

homogenous products

Undifferentiated products; products that are identical to, or indistinguishable from, one another.

Output effect of a factor price increase (decrease)

When a firm decreases (increases) its output in response to a factor price increase (decrease), this decreases (increases) its demand for all factors.

Law of diminishing returns

When additional units of variable input are added to fixed inputs, after a certain point, the marginal product of the variable input declines.

Short run costs

When marginal cost is below average cost, average cost is declining. When marginal cost is above average cost, average cost is increasing. Rising marginal cost intersects average variable cost at the minimum of the Average variable Cost

Effect of a decrease in price on a budget constraint

When the price of a good decreases, the budget constraint swivels to the right, increasing the opportunities available and expanding choice.

Labour Supply Decision

Whether to work How much to work What kind of job to work at

The Trade off facing Firms

firms weigh the cost of labor as reflected in wage rates against the value of labor's marginal product. Assume that labor is the only variable factor of production. Then, if society values a good more than it costs firms to hire the workers to produce that good, the good will be produced

marginal revenue

is = to price, the additional revenue gained from increase in output of one unit

The Trade off facing households

the decision to enter the work-force involves a trade off between wages (and the goods and services that wages will buy) on the one hand and leisure and value of non market production on the other hand.

Derived demand

the demand for resources (inputs) that is dependent on the demand for the outputs those resources can be used to produce.

Choice set, opportunity set

the set of options that is defined and limited by a budget constraint.

Profit maximising level of output

where price intercepts the MC curve. P=MR=MC MR=MC