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Econ Exam 2 part 2
| Term | Definition |
|---|---|
| Supply and Demand | Forces that determine prices and quantities in a market. |
| Demand reflects | marginal benefit (maximum willingness to pay) |
| supply reflects | marginal cost (minimum willingness to sell). |
| Marginal Benefit (MB) | The extra benefit gained from consuming one more unit of a good; represented by the demand curve. |
| Marginal Cost (MC) | The extra cost of producing one more unit of a good; represented by the supply curve. |
| Optimal Quantity (Q*) | The quantity where MB = MC, or equivalently MWTP = mwts. |
| Total Benefit (TB) | The sum of all marginal benefits from each unit consumed. |
| Total Cost (TC) | The sum of all marginal costs from each unit produced. |
| Production Process | The method by which inputs (factors of production) are converted into outputs (goods/services). |
| Factors of Production | Inputs used to produce goods: labor, capital, land, raw materials, entrepreneurial ability. |
| Fixed Costs | Costs that do not change with output (e.g., rent, machinery). |
| Variable Costs | Costs that change with output (e.g., labor, materials). |
| Short Run (SR) | A period where at least one input is fixed. |
| Long Run (LR) | A period where all inputs are variable; firms can enter or exit freely. |
| Total Product (TP) | Total output produced by all inputs. |
| Marginal Product of Labor (MPL) | The additional output from employing one more unit of labor. |
| Typical TP Curve | Initially increasing at an increasing rate, then at a decreasing rate, and eventually decreasing due to diminishing marginal returns. |
| Diminishing Marginal Returns | As more variable inputs are added, the additional output from each new input eventually decreases. |
| Marginal Cost (MC) Curve | Derived from the slope of the Total Cost (TC) curve; MC = ΔTC / ΔQ. |
| Average Total Cost (ATC) | ATC = TC / Q; typically U-shaped due to spreading fixed costs and rising variable costs. |
| Average Variable Cost (AVC) | AVC = TVC / Q; lies below ATC and is also U-shaped. |
| Profit (π) | The difference between total revenue and total cost; π = TR - TC. |
| Revenue (TR) | Total money received from selling goods; TR = P × Q. |
| Implicit Costs | Opportunity costs of using owned resources (non-cash). |
| Explicit Costs | Out-of-pocket expenses (cash payments). |
| Accounting Profit | TR - Explicit Costs. |
| Economic Profit | TR - (Explicit + Implicit Costs). |
| Price Taker | A firm with no market power; must accept the market price. |
| Marginal Revenue (MR) | Change in total revenue from selling one more unit; MR = ΔTR / ΔQ. |
| Profit-Maximizing Rule (Perfect Competition) | Produce where P = MR = MC. |
| Profit-Maximizing Rule (Monopoly) | Produce where MR = MC, then charge the price found on the demand curve at that quantity. |
| Total Profit Graphically | The area of a rectangle: (P - ATC) × Q. |
| Sunk Costs | Costs that cannot be recovered once incurred; irrelevant to future decisions. |
| Short-Run Supply Curve | The portion of a firm's MC curve above AVC. |
| Long-Run Supply Curve | The portion of the MC curve above ATC. |
| Market Supply | The horizontal sum of all firms' supply curves. |
| Market Demand | The horizontal sum of all individual demand curves. |
| Law of Supply | As price rises, quantity supplied rises (and vice versa). |
| Law of Demand | As price rises, quantity demanded falls (and vice versa). |
| Law of Supply and Demand | The market price adjusts to bring quantity supplied and quantity demanded into balance. |
| Total Utility (TU) | The total satisfaction from consuming goods. |
| Marginal Utility (MU) | The change in satisfaction from consuming one more unit. |
| Diminishing Marginal Utility | As more of a good is consumed, the additional satisfaction from each unit decreases. |
| Income Effect | When price changes, purchasing power changes, affecting quantity demanded. |
| Substitution Effect | When price changes, consumers substitute relatively cheaper goods. |
| Equilibrium (E) | The point where QD = QS; determines P* (equilibrium price) and Q* (equilibrium quantity). |
| Shortage | When QD > QS; causes prices to bid up. |
| Surplus | When QS > QD; causes prices to bid down. |
| Shifts in Demand | Caused by changes in number of buyers, income, tastes, prices of related goods, expectations, taxes/subsidies. |
| Shifts in Supply | Caused by changes in number of sellers, input costs, technology, expectations, regulations, taxes/subsidies. |
| Normal Goods | Demand increases as income increases. |
| Inferior Goods | Demand decreases as income increases. |
| Substitute Goods | Goods used in place of each other. |
| Complementary Goods | Goods used together. |
| Elasticity | The responsiveness of quantity to price changes. Steeper curve = more inelastic; flatter = more elastic. |
| Consumer Surplus (CS) | The difference between MWTP and the price paid; area under the demand curve and above price. |
| Producer Surplus (PS) | The difference between price received and mwts; area above the supply curve and below price. |
| Total Surplus (TS) | The sum of CS + PS = MWTP - mwts; measures total market efficiency. |
| Welfare Analysis | Evaluates how market structures and policies affect total surplus and equity. |
| Efficiency vs. Equity | Efficiency = maximizing total surplus; Equity = fairness in distribution. |
| Perfect Competition (p.c.) | Many buyers and sellers, identical products, free entry/exit, price takers, no informational advantages. |
| Monopoly | One seller with unique product and high barriers to entry; price maker. |
| Imperfect Market | Any market that fails to meet perfect competition assumptions. |
| Market Failure | When total surplus is not maximized (e.g., due to market power or externalities). |
| Normal Profit | Zero economic profit in the long run; earning just enough to cover opportunity costs. |
| Abnormal Profit | Positive economic profit in the short run. |
| Monopolist's MR Relationship | MR curve has the same intercept as demand but twice the slope; MR ≤ P. |
| Monopoly vs. Perfect Competition | Monopoly has higher P, lower Q, and lower total surplus (less efficient). |
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