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AP econ ch6 and 7


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Total Utility
the total satisfaction a consumer receives from the consumption of a good or service
Diminishing marginal Utility
at aome point in the consumption parrern of a good, each additional unit consumed yiealds less additional satisfaction (utility)
INcome effect
as the price of a particular good decreases, a consumer can afford more of it and other goods
Substitution Effect
as the price of a particular good decreases, a consumer may buy more of this food relative to the price of substitute good
Consumer surplus
the difference between the utitlity gained and the price paid by the consumer. THe utility gained would measure the value of the product to the consumer. The price paid by the consumer would be the market price.
either the buyer or the seller does not "capture" all of the benefits of a transaction
Social costs
those costs which are incurred by the public, ie, polluted waterways; these are costs not captured by the market
Social benefits
those benefits wich are realized by the public or outside the buyer/seller exchange
Pure private good
a good that has exclusion and distributive characteristics
Technoloical efficiency
the identification of those inputs that have the greatest effet on output per $ of input expenditure
Allocative efficiency
the channeling of resoures to their most productive and desired uses
Pareto efficiency
the optimal point (efficient point) for society when any further improvement for some comes at the expense of others
Pure public goods
goods which have non-exclusion and non-distributive characteristics
Quasi-Public Goods
goods which have some limited private good characteristics such as contestable public goods and price-excludable public goods
Marginal social cost
MSC = Private marginal cost + Negative Externality
= MCp + Tax where tax equals the value of the neative externality
F: Marginal Social Benefits
Private Marginal Benefits + positive externality
Law of Diminishing Marginal Productivity
the range of output over which smaller and ssmaller additional units of output are produced as successive equal increments of a varaible input are added to fixed quantities of other inputs in the short run
Economies of scale
savings per unit costs of production as output increases
Short run
period of time over which supply cannot fully adjust to changes in demand
Long Run
period of time over which supply can fully adjust to changes in demand
Opportunity costs 2
the cost incurred whn resources are engaged in one activity are not as productive as they would have been in a forgone activity
F: Total Costs =
F: Average Total Costs =
F: Marginal Costs
the change in the TC with one additional unit of output
Perfect competition
this structure is characterized by a larager number of sellers with a homogeneous product, infinitely elastic demand, and no barriers to entry or exit (a price-taker)
one firm constitutes the market or industry where there are no close substitutes available for consumers. A monopolist is a price maker.
Monopolisitic competition
this structure is characterized by many medium-sized firms who need to be innovative and differentiate their products in price and non-price ways
this market structure is characterized by relatively few sellers who at interdependently an/or collusively to be price-makers and to control markets
Economic Efficiency
the allocation of resources to most productive nad sesire users
Profit maximizing (loss minimizing) criterion> Golden RULE!
the level of output at which marginal revenue (MR) equals marginal cost (MC)
Shut down Criteria
in the shor run, the firm should shut down when price does not cover average variable cost (AVC)
Firms shust down in the short run
P = MR
Perfectly competitive firm's demand function
PRofit Max. criterion
P = MC
socially optimal price (under perfect competion in the long run); efficiency
P (for perfect competition)
minimum average cost in the loong run for a perfectly competitvive firm
Herfindahl index
the sum of the squares of market shares of firms in a partiular market or industry. this is used to measure the level of concentrated power of firms in an industry
Dead-weight loss
the loss to society in the form of a reduction of consumer surplus from a competitve norm beyond any surplus reduction from a monopoly profit
this practice charges different customers with different prices for the same product
Natural monopolies
these are monopolies for which competition would prevent the benefits of economies of scale
F: Lerner index
= (P-MC)/p
Regulated monopolies pricing at a fair rate of return
P = AC at intersection of demad curve and average cost curve
Regulated monopolies pricing at socially optimal price:
Price = MC (at the intersection of demand curve and margibal cost curve)

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