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ECON201 FINAL STUDY GUIDE chapters 6 7 8 9 13 14 15 16 CH 6 NOTES Every Household must make 3 basic decisions 1 How much of each product or output to demand 2 How much labor to supply 3 How much to spend today and how much to save for the future The change in consumption of X due to improvement in well being is called income effect of a price change The Labor supply decision 1 whether to work 2 how much to work 3 what kind of a job to work at Finding budget constraint take total income divided by price Price quantity slope is negative demand curve Positive slope supply curve Indifference curves downward concave up curves MAXIMIZE PROFIT P MR MC DEFINITIONS Budget constraint The limits imposed on household choices by income wealth and product prices Choice set or opportunity set The set of options that is defined and limited by a budget constraint Real income The set of opportunities to purchase real goods and services available to a household as determined by prices and money income utility The satisfaction a product yields marginal utility The additional satisfaction gained by the consumption or use of one more unit of a good or service Total utility the total amount of satisfaction obtained from consumption of a good or service law of diminishing marginal utility the more of any one good consumed in a given period the less satisfaction utility generated by consuming each additional marginal unit of the same good Utility maximizing rule Equating the ratio of the marginal utility of a good to it price for all goods Diamond water Paradox A paradox stating that 1 the things with the greatest value in use frequently have little or no value in exchange and 2 the things with the greatest value in exchange frequently have little or no value in use Labor supply curve A curve that shows the quantity of labor supplied at different wage rates Its shape depends on how households react to changes in the wage rate Financial capital market The complex set of institutions in which suppliers of capital households that save and the demand for capital firms wanting to invest interact Inferior Goods goods for which demand tends to fall when income rises Normal Goods Goods for which demand goes up when income is higher and for which demand goes down when income is lower Ceteris paribus the probable response of a household to a decline of some heavily used product Makes household unequivocally better off Income effect the change in consumption of X due to improvement in well being Substitution Effect A fall in the price of product X might cause a household to shift its purchasing pattern away from substitutes toward X EQUATIONS Budget Constraint Equations P x X P y Y I and Y I P y Px price of X X quantity cosumed I income Utility maximizing rule M U x P x the last unit of x consumed M U y P y for all goods Mux marginal utility derived from CH 7 NOTES DEFINITIONS In the language of economics a firm needs to know three things 1 the market price of output 2 The techniques of production that are available 3 the price of inputs Production The process by which input are combined transformed and turned into outputs Firm An organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand Profit economic profit the difference between total revenue and total costs Total Revenue the amount received from the sale of the product q x P Total cost total economic cost the total 1 out of pocket costs and 2 opportunity cost of all factors of production 3 normal rate of return on capital Out of pocket costs explicit costs or accounting costs Costs an accountant would calculate Economic costs or implicit costs opportunity costs of every input Normal Rate of Return A rate of return on capital that is just sufficient to keep owners and investors satisfied For relatively risk free firms it should be nearly the same as the interest rate on risk free government bonds demand ATC Short Run the period of time for which two conditions hold the firm is operating under a fixed scale fixed factor of production and firms can neither enter nor exit an industry Long run The period of time for which there are no fixed factors of production Firms con increase or decrease the scale of operation and new firms can enter and existing firms can exit the industry Optimal method of production The production method that minimizes cost Production technology the quantity relationship between inputs and outputs Labor intensive technology Technology that relies heavily on human labor instead of capital Capital intensive technology Technology that relies heavily on capital instead of human labor Added capital increases the productivity of labor Production function or total production function a numerical or mathematical expression of a relationship between inputs and outputs It shows units of total production as a function of units of inputs Marginal product The additional output that can be produced by adding on more unit of a specific input ceteris paribus Law of diminishing returns When additional units of a variable input are added to fixed inputs after a certain point the marginal product of the variable input declines Average product The average amount produced by each unit of a variable factor of production Profit total revenue total cost capital stock average product of labor total product total units of labor cost minimizing equilibrium condition When ATC function is at its minimum MC ATC firms earning profits will produce to the right to the minimum on the average total cost function The point at which MR MC is where the firm will always produce at its profit maximizing level of production A short run supply curve is the marginal cost curve of the competitive market When demand is linear Monopolist s TR schedule is curve from origin w decreasing Fixed costs any cost that does not depend on the firms level of output These costs are incurred even if the firm is producing nothing There are no fixed costs in the long run Variable costs a cost that depends on the level of production chosen Total cost TC total fixed costs plus total variable costs EQUATIONS M P L P L M P K P K CH 8 NOTES slope DEFINITIONS Total fixed costs TFC or overhead the total of all costs that do not change with output even if output is zero Average fixed costs AFC total fixed costs divided by the number of units of output a per unit measure of fixed costs Spreading overhead The process of dividing


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