Utility
the satisfaction a consumer obtains from the consumption of a good or service
3 Facts of Utility
1) Utility is measured in utils
2) we cannot compare the utils assigned to a good by multiple people
3)we CAN compare the utils assigned to multiple goods by one person
Total Utility
the total satisfaction a person derives from consuming some specific quantity
TU(Toatl Utility) increases as...
Qd increases
What is the formula for TU
(Sigma)Mu-Summation Marginal Utility
Marginal Utility
the additional utility a consumer derives from an additional unit of a good
as MU falls....
willingness to pay falls as well
How do we find MU?
MU= the change in total utility
Law of diminishing MU
as Qd rises-> Mu falls
define budget line/constraint
line that shows the different consumption bundles a consumer can purchase with a specific money income
define consumption bundle
the combination of goods and services consumed by an individual
the price of a consumption bundle cannot...
exceed the consumers total income
what is the formula for income?
(Qx
Px)(Qy
Py)
if the consumer is at the budget line, the only way to consume more of one good is to...
give up some of the other
What are the factors that change the budget line?
1)income
2)Price of Y
3) Price of X
what is the formula for Marginal Utility per dollar?
MU/P
TU is maximized when?
1)all income is spent
2)MUx/Px=MUy/Py
what is an optimal consumption bundle?
the bundle that maximizes total utility
What is the utility maximization rule?
for utility maximization, the consumer must get the same amount of utility from the last dollar spent on each good
Define possible optimal bundles
use the income formula on possible optimal bundle to determine if all money spent?
when graphing optimal consumption, what happens of price changes?
1) rewrite the entire table
2)use graph
define indifference curve
a line that shows the consumption bundles that yield the same amount of total utility
what are the properties of (most) indifference curves?
1) IC's are downward sloping
2) IC's farther from the origin represents a greater level of TU
3) IC's never cross
4) IC's are based inward
why are indifference curves bowed inward?
because the slope is constantly changing
What is the formula for slope of an Indifference Curve?
slope= (delta)Qy/(delta)Qx
along an IC= (delta)TUx+(delta)TUy=0
this can be written as:
MUx
(delta)Qx+MUy
(delta)Qy
OR
MUx
(delta)Qx=-MU
(Delta)Qy
define Marginal Rate of Substitution
the ratio of the marginal utility of one good to the marginal utility of another
What is the formula for Marginal rate of substitution?
MRS=MUx/MUy
Define RELATIVE PRICE
the ratio of the price of one good to the price of another
what is the formula for Relative Price?
RP=Px/Py
How do you find the slope of the budget line?
slope of the budget line=-Px/Py
How can we find the Optimal Bundle?
we can do it by setting
MRS=RP or MUx/MUy
What are the three types of special indifference curves?
Perfect Substitutes
Perfect Complements
define Perfect Substitutes
goods for which the marginal rate of substitution is constant, no matter how much of each good is consumed
define Perfect Complements
goods that a consumer will consume in the same ratio regardless of their relative price
Profit is represented how?
by (Pi)
(Pi)= Total Revenue-Total cost
TR=PxQ
What ways can Total Cost be difined?
1)Accounting(Pi)= TR- Explicit Cost
2)Economic (Pi)= TR- Economic Cost(includes Implicit and Explicit costs)
What makes up Economic cost?
Explicit and implicit cost
Define Short Run (in Time in Production)
an amount of time insufficient to allow PLANT CAPACITY to vary, Also, firms may shutdown production, but they cannot exit the market
Define Plant Capacity (in Time in Production)
the size of the building and amount of capital equipment
Define Long Run (in Time In Production)
all costs are variable: entry and exit are possible
define Variable Costs
costs that change as output changes: goes to zero during shutdown
Describe what makes up Short Run Fixed Costs
1) cannot be varied in the SR
2) do not change as output changes
3)still exist when output falls to zero
4)Usually associated with capital
Define Marginal Cost
the additional cost associated with a 1 unit increase
On a graph, where do ATC and AVC cross MC?
at their miniumum
What is the Law of Diminishing (Marginal) Returns
as successive units of a variable resource are added to a fixed resource, The Marginal Product of the variable resource eventually decreases
why LDMR?
find out!
define Marginal Product of Labor
the additional output produced by one more unit of a variable input