Econ Midterm #2

Benefit/satisfaction/happiness from consuming goods and services

Total benefit/satisfaction/happiness from consuming goods and services

Utility: utils
Benefit: $

Additional utility from consuming one more unit of a good or service

Marginal utility diminishes as we consume more of a good

Step 1: Calculate M.U. (Change in TU/Change in Q)
Step 2: Calculate M.U./Price
Step 3: Compare M.U.1/Price1 and M.U.2/Price2

M.U.1/P1 = M.U.2/P2

Line that shows combinations of goods among which a consumer is indifferent

More utility

Less utility

Same utility

How much of a good Y someone is WILLING to give up for one additional good X, keeping the same utility.

As someone gets more of item X, he values it less, while item Y's value to him increases --> Willing to give up less and less Y for X

Convex, because marginal rate of substitution is diminishing (Decreased speed of giving up Y)
--> If MRS is constant, IC is a straight line

- Does not matter whether you choose Y or X (i.e. Chevron and Shell gasoline)
- Constant MRS

- Always have the same amount of X and Y (i.e. Right and Left Shoe)

Series of Indifference Curves

A=B (IC1), A=C (IC0), so B > C
--> Does not make sense, since one person could not have different utility for same item or service
--> However, ICs representing preferences of 2 different people can intersect

A line that shows the maximum amount of good that can be bought with a given income at given prices.

How much of a good Y you HAVE TO give up in order to get one more good X.

Affordable but not desirable

Desirable but not affordable

Just affordable and desirable

I = (Py)(Qy) + (Px)(Qx)

Qy = (I/Py) - (Px/Py) x (Qx)

--(Px/Py)

I/Py

Slope = Ratio of Prices

At consumer equilibrium, consumer is/has:
1) At BL
2) At the highest affordable IC
3) BL and IC are tangent (Slope IC = Slope BL, MRS = Px/Py)
4) How much you are willing to give up = How much you have to

- Land --> Rent
- Labor --> Wage
- Capital --> Interest
- Entrepreneurship --> Profit

All natural resources

Physical and mental work hours

Goods used to produce other goods (machinery, oven, computer, loom, factory, building)

Talent to put together factors of production to produce goods and services

Max Profit

TR - TC

P x Q

Costs paid in money (see them in accounting books)

Foregone alternatives

Wages you could earn in second best option

Interest you could earn in second best option, but didn't

Income you could get from renting land or resources, but didn't

Change in value of your capital (decrease)

Profit you could earn in the alternative employment, but didn't

Explicit Costs + Implicit Costs

TR - Economic (Opportunity) Costs
--> How much of a profit you could earn by choosing one option over another

TR - Explicit (Accounting) Costs

Period of time when at least one input is fixed (capital)

All factors are variable

Output

- Additional Q from hiring 1 more worker
- MP = Q1 - Q0/L1 - L0 = Change in Q/Change in L (# workers)
- At the beginning, MP increases (specialization --> increasing returns), then MP decreases because not enough resources for # of workers (diminishing returns --> Fixed Capital (K))

- Amount of output per worker
- AP = TP/L = Q/L

- Cost of firm's fixed inputs that do not change w/ quantity (i.e. certain machinery)

As P decreases, Qd increases

- Costs of the firm's variable inputs
- L x P

TFC + TVC

- Additional cost from producing one more unit of a product
- MC = Change TC/Change Q = Change TVC/Change Q

- Fixed cost per unit of Q
- AFC = TFC/Q

- Variable cost per unit of output
- AVC = TVC/Q

- AFC + AVC = TC/Q

It increases at the beginning because you can specialize in different tasks so you can have increased returns on production. Then, it decreases because you only have a fixed capital so you will start producing less.

It follows the same path as MP curve for the same reason, yet has less severe crest and valley because it's an average (Product/Worker)

- When MP = AP
- Always the maximum point of average product
- MP first pulling AP up, then pulling it down when it decreases

- FC line does not change
- VC and TC curves both increase, plateau, then become steeper
- Costs increase at slower speed (VC) at first because productivity increases. Then TVC goes up at increasing speed because of lower productivity and fixed capital
- Total cost increases the same way as total variable cost (TVC + Constant)

Slowly decreases then sharply increases (less productivity and fixed capital)

Starts decreasing steeply, then plateaus (always down because costs are fixed)

Has only slight dip downwards and mostly stays flat, before increasing (Less productivity and fixed capital: Cheaper to produce as you produce more --> Specialization

ATC decreases sharply, then it too flattens out --> Similar reasons to AVC

-The intersection is always the minimum of AVC
- Where the AVC and MC are the same --> Drives AVC up or down

- MP and MC are reverses of each other
- AP and AVC are also opposite, although AP has a steeper slope

- AFC same
- AVC decreases because of increased productivity
- ATC decreases for same reason
- MC decreases usually because they still have to hit minimum points

- Production decreases
- AFC increases
- AVC stays the same
- ATC increases
- MC stays the same
- Only thing changed is fixed inputs

Relationship between the lowest attainable ATC and output when all inputs are variable

- Range of output when long run ATC is falling
- Reason: Deeper specialization

- Range of output when long run ATC increases
- Reason: Difficulties of managing a large enterprise

- Smallest quantity of output at which long run ATC reaches its minimum
- Minimum output to be efficient

Industry in which:
1) There are many (infinite) sellers/producers and buyers
2) Product is identical
3) No barriers to entry
4) Perfect information
5) Producers are price-takers (cannot change/influence price) --> take it as given
- Examples: Kids' lemonade stands, agriculture, babysitters

1) Stay in business or shut down
2) If it stays, how much to produce

- Market demand (D) --> Downsloping
- Individual firm's demand (d) --> Horizontal line (perfectly elastic)

- Additional revenue from selling one more unit of output
- d = P = MR
= MR = Change TR/Change Q

- Goal of a firm is to maximize its profit

- MR = MC
- If MR > MC, produce (increase output)
- If MR < MC, cut back
- If MR = MC, stop and produce only that much

- Price is how much I get per unit of q
- ATC is how much I spend per unit of q
- If the profit > 0, this alternative is better than any other
- Action: Stay in business

If I shut down, I have to pay a fixed cost of $10. But if I continue producing, I will incur a loss of $6.25 because TR is enough to cover TVC and part of FC --> Stay in Business

The firm should shut down because if we do shut down, we would pay a fixed cost of $10. If we keep operating, our loss is $12. This is due to TR not even being enough to cover TVC.

P = Min. AVC, then we are indifferent because we lose an equal amount either way.

Where the priceline hits the MC curve

Sum of all individual supplies

All inputs are variable, and firm can leave or enter the industry

- Leads to firm entering industry
- S increases --> P decreases --> MR decreases --> q decreases --> Profit decreases until it = 0 --> P = minimum ATC (Long Run Outcome)

- Leads to firms exiting the industry
- S decreases --> P increases --> MR increases --> q increases --> Loss decreases until it (profit) = 0 and P = minimum ATC (Long Run Outcome)

- Efficiency: production efficiency (producing at minimum costs)
- Perfect Competition: Produce at min ATC (productively efficient)
- Allocative Efficiency: MB = MC (D = MB = S = MC)
- Perfect competition is allocatively efficient

- Straight line equaling minimum ATC