economise 1100. test 2
Terms
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- models that assume that consumers and producers behave rationally to achieve their objectives
- economic models
- the coal of consumers is to
- maximize utility
- the goal of producers is to
- maximize profit
- satisfaction
- utility
- requires a precise measurement of consumer satisfaction that is not available
- cardinal approach
- requires only that consumers can rank their preferences by indicating whether they prefer and apple to an orange, prefer an orange to an apple, or are indifferent between the two choices, as an example
- the ordinal approach
- says that as consumption of one good increases relative to other goods, the additional satisfaction gained from consuming yet another unit of that good eventually declines
- law of diminishing marginal utility
- is calculated as the change in total utility divided by the change in quantity consumed (change in TU/ change in Q)
- marginal utility
- in choosing between two goods, a consumer will also take into account the...
- respective prices
- a measure of the value of each additional unit to the consumer in terms of how much money each additional unit is worth to the consumer, or the maximum amount the consumer would pay for each additional unit
- marginal benefit
- is defined as the maximum amount the consumer is willing to pay for a product minus the amount the consumer actually has to pay (the market price)
- consumer surplus
- the additional cost of producing one more unit of output is the...
- marginal cost
- marginal cost increases as output increases in the short run because of the...
- law of diminishing returns
- must be paid whether the seller produces output or not
- fixed costs
- the supply curve can be used to predict how many units of output a seller is willing and able to produce at each price, where price is determined by market forces in a
- perfectly competitive market
- defined as the actual amount a producer receives for a product minus the minimum amount the producer is willing to accept in exchange for the product
- producer surplus
- when a market is in equilibrium, the sum of consumer and producer surplus is maximized. it is
- efficient
- the reduction in total surplus that occurs when output is not at the intersection of competitive market supply and demand curves is referred to as
- deadweight loss
- the difference between the maximum total consumer and producer surplus and the total consumer and producer surplus that results from a given situation
- deadweight loss
- shows all the bundles of two goods, x and y, that yield a fixed amount of utility for the consumer.
- indifference curves
- tells how many units of good y the consumer would be willing to give up in exchange for one additional unit of good x while keeping total utility unchanged
- marginal rate of substituation
- the forces of supply and demand determine equilibrium price and quantity in a
- free market
- a maximum legal price for an output, and is sometimes referred to as a price cap
- price ceiling
- incidence (burden) of a tax refers to which party has the legal obligation to pay the tax
- statutory
- incidence (burden) typically differs from the statutory incidence
- economic
- a fixed amound collected on each unit of a product sold
- per-unit tax
- taxes collected by the government
- tax revenue
- if the average tax rate falls as income rises it is
- regressive
- spillover benefits where market demand curves do not account for all benefits and goods tend to be underproduced and over priced
- positive externalities
- spillover gosts where market supply curves do not account for all casts and goods tend to be overproduced and under-priced
- negative externalities
- free markets do not supply
- public goods
- one party in the transaction knows more than the other
- asymmetric information
- buyers and sellers make choices regarding the use of scarce resources based on the information available to them
- imperfect information
- when a firm can raise the price of its product without losing all sales of that product
- imperfectly competitive
- government provides for education, public health, police and fire protection, roads and highways, and a host of other services because these services create external benefits.
- correcting externalities
- when the consumption of a good or service creates benefits that spill over to third parties a ---- exists
- positive externality
- when the production of a good or service creates costs that spill over to third parties
- negative externality
- when a negative externality exists ---- exceeds the marginal private cost that firms must pay
- marginal social cost
- emphasizes the need for clearly defined property rights
- coase theorem
- nonrival and nonexcludable
- public goods
- rival but nonexcludable
- common resources
- an organization that transforms inputs into outputs for the purpose of sale
- firm
- a single owner of all assets and profits of the firm and unlimited liability for all debts of the firm
- proprietorship
- has two or more owners, all sharing in the profits and debts of the firm
- partnership
- a legal entity separate rom its owners
- corporation
- ranges from perfect competition to pure monopoly
- market structure
- obstacles that make it unprofitable or impossibly for new firms to enter an industry or market
- barriers to entry
- market structures that lie inbetween perfect competition and monopoly
- monopolistic competition and oligopoly
- the price of the good multiplied by the quantity sold
- total revenue
- total cost in the profit equation represents
- total economic cost
- costs that require direct monetary payments to the factors of production are called
- explicit costs
- the opportunity costs to the firm for the use of factors of production for which it does not make a direct monetary payment
- implicit costs
- consists of explicit and implicit costs
- total revenue minus total explicit costs
- accounting profit
- total revenue minus total explicit and implicit costs
- economic profit
- when total revenue is equal to all costs of production