Term
| The Law of Diminishing Utility |
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Definition
| after some point in consumption of a good, each extra unit of the good provides less and less satisfaction until we reach the point where the last unit consumed yields zero marginal utility |
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Term
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Definition
1. Utility is not the same thing as usefulness
2. Utility is subjective
3. Utility is difficult to measure |
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Term
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Definition
total satisfaction derived from consumption
TU = E x Marginal Utility |
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Term
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Definition
the satisfaction gained from the consumption of one extra unit of the good
the change in total utility divided by change in quantity
lambda |
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Term
| At what point on a graph does the law of diminishing utility sets in? |
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Definition
| When the slope is equal to zero |
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Term
| How does the law of diminishing marginal utility affect the demand curve? |
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Definition
| the demand curve slopes down because the buyer is less willing to pay the same amount for another unit if there is less satisfaction |
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Term
| What are the assumptions of the theory of consumer behavior? |
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Definition
1. Consumers exhibit rational behavior in their choices
2. Each consumers has a personal set of preferences |
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Term
| What are the choices that a consumer can make when faced with a decision on what product to buy? |
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Definition
1. X is preferred to Y
2. Y is preferred to X
3. Indifferent |
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Term
| The Utility Maximizing Rule |
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Definition
| when the consumer has two goods to choose from, they will consume the goods up to the point where the marginal utility per dollar spent on product X equals the marginal utility per dollar spent on product Y |
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Term
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Definition
| a consumer is in equilibrium when the marginal utility per dollar for all goods are equal |
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Term
| What are the two types of economic costs? |
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Definition
1. Implicit Costs: implied costs - opportunity costs
2. Explicit Costs: real costs - accounting costs |
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Term
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Definition
| Implicit Costs and Explicit Costs |
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Term
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Definition
| cost of production in economic costs |
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Term
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Definition
| includes only explicit costs |
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Term
| What is the difference between short and long run costs? |
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Definition
| All costs in the long run are variable while at least one cost is fixed in the short run |
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Term
| Minimum efficient scale of operation |
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Definition
| the point where economics of scale are exhausted |
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Term
| Why can't the long run have diminishing returns to factors? |
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Definition
| there are no fixed costs so they have returns to scale |
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Term
| What are characteristics of pure competition? |
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Definition
very large number of firms
no control over price
very easy to enter the market
no non price competition |
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Term
| What are characteristics of monopolistic competition? |
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Definition
many firms
differentiated products
some control over price but narrow limits
relatively easy entry
non price competition; emphasis on advertising, etc. |
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Term
| What are characteristics of oligopoly? |
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Definition
few firms
standardized or differentiated product
control over price is limited by mutual interdependence
significant obstacles in entry
great deal of non price competition |
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Term
| What are characteristics of pure monopoly? |
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Definition
one firm
unique products
considerable control over price
blocked entry
non price competition |
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Term
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Definition
| everyone who is willing and able to pay for the product can get it - no shortage |
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