Econ 1001 1st EditionExam # 3 Study Guide March 17 – April 21 Look at the powerpoints on MyGateway for chapter questions and possible short answerprompts.Chapter 8 – consumer choiceUtility – the level of satisfaction or pleasure that people receive from their choicesMarginal utility – the additional utility provided by one additional unit of consumptionDiminishing marginal utility – the common pattern that each marginal unit of a good consumedprovides less of an addition to utility than the previous unitSubstitution effect – when a price changes, consumers have an incentive to consume less of thegood with a relatively lower price, always happens simultaneously with an income effect.Income effect – a change in price affects the buyer power of income, with a higher price meaning that the buying power of income has been reduced, so that there is usually (with normal goods) an incentive to buy less of both goods, and a lower price meaning that the buying power of income has been increased, so that there is usually an incentive to buy more ofboth goods. Always happens simultaneously with substitution effect.Giffen good – the theoretical but unrealistic possibility that a higher price for a good could lead to a higher quantity demanded (or a lower price leads to a lesser quantity demanded).Life-cycle theory of savings – the common pattern that many people save little or borrow heavily early in life, save more in the middle of life, and then draw upon their accumulated savings later in life.Backward-bending Supply curve – the situation when high-wage people can earn so much that they respond to a still-higher wage by working fewer hoursHow do consumers make choices?1. Opportunity – budget constraint (reality)2. Preferences – utility/taste (desires) Goal of everyone is to maximize utility / profitJill’s utility for chicken and steakQuantity steak Marginal utility Total utility1 10 102 8 10+8=183 5 18+5=234 2 23+2=25Quantity Chicken Marginal Utility Total Utility1 8 82 6 8+6=143 4 14+4=184 1 18+1=19- Short run decision rule: P1/P2 = MU1/MU2o This equation is utility maximizing when the price ration and marginal utilities ratio of the two goods are equal to each other.To maximize utility, Jill should choose 2 steaks and 2 chickens because 18+14 = 32 and that is thelargest total utility Jill is able to get out of her available combinations of quantity of chicken and steak.- The good that costs twice as much should ideally give twice as much utility. As you moveup the budget constraint line, the utility of both goods will change. Slope is constant.Chapter 9 – Cost and Industry StructurePROFIT = TOTAL REVENUE – TOTAL COSTPerfect Competition – each firm faces many competitors that sell identical productsMonopoly – a firm that faces no competitorsMonopolistic competition – many firms competing to sell similar but differentiated productsOligopoly - When a few firms have all or nearly all of the sales in an industryFixed Costs (FC) – Expenditures that must be made before production starts and that do not change regardless of the level of productionVariable Costs (VC) – Costs of production that increase with the quantity producedDiminishing Marginal Returns – When the marginal gain in output diminishes as each additional unit of input is addedAverage Cost (AC) – Total Cost divided by the quantity of output; AC = TC / QAverage Variable Cost (AVC) – Variable cost divided by the quantity of output; AVC = VC / QMarginal Cost (MC) – The additional cost of producing one more unitGRAPHS Short-run marginal graphs are less spread out than long-run marginal graphs and have two separate curves for Average Cost and Average Variable Cost; on the long-run graph, these two curves are the same curve. The units on the vertical axis for marginal graphs are $/unit and on totals graphs is just $ Marginal graphs are used by economists more frequently than totals graphs to make decisions because everything is marginalProduction Technologies – Alternative methods of combining inputs to produce outputEconomies of Scale – When the average cost of producing each individual unit declines as total output increasesIncreasing returns to Scale – When a larger-scale firm can produce at a lower cost than a smaller-scale firm. AKA economies of scaleConstant Returns to Scale – When expanding all inputs does not change the average cost of productionDiseconomies of Scale – Another term for decreasing returns to scaleDecreasing returns to scale – A situation in which as the quantity of output rises, the average cost of production rises.Long run – the time horizon long enough for a firm to vary ALL inputs; FreeShort run – A time horizon over which at least one input cannot be varied; stuckChapter 10 – Perfect CompetitionPerfect Competition – each firm faces many competitors that sell identical product No perfectlycompetitive firm alone can affect the market price. * Best for consumers and society overall, and worst for producers.Price Takers – A firm in a perfectly competitive market that must take the prevailing market price as a given because of the pressure of other competitors.Marginal Revenue – the additional revenue gained from selling one more unitShutdown Point – When the revenue a firm receives does not cover its average variable costs, the firm should shut down immediately. Point where the marginal cost curve crosses that average variable cost curve. EX: When Ted Drewe’s shuts down in the winterZero profit point – On a short-run graph it is where Average total cost curve intersects with the Marginal cost curve. On a long-run graph it is at the same intersection except the Average total cost curve and the average variable cost curve are the same thing.Short-run outcomes for perfectly competitive firmsThree Characteristics of Perfect Competition1. Lots of buyers and sellers2. Standardized product3. Ease of entry and exitEntry – The long-run process of firms beginning and expanding production when they see opportunity for profitsExit – The long-run process of firms reducing production and shutting down because they expect losses.Accounting Profit – Total revenue minus the firm’s costs, without taking opportunity cost into accountEconomic Profit – Total revenues minus all of the firm’s costs, including opportunity costsMarginal Physical Product – The quantity of goods produced by an additional input (like an additional