Econ 11 - LE 2

• Determinants of Household Demand

  • The price of the product
  • The income available to the household
  • The household’s amount of accumulated wealth
  • The prices of other products available to the household.
  • The household’s tastes and preferences.
  • The household’s expectations about future income wealth and prices.
• Theory of Consumer Choice


  Examines the trade-offs that people face as consumers
• Utility


  The property of a good that enables it to satisfy human wants
• Marginal Utility


  The extra utility received from consuming one additional unit of good per unit of time.
• Util


  The arbitrary unit of measure of utility
• The law of diminishing marginal utility


  Each additional unit of a good eventually gives less and less extra utility
• Cardinal Utility


  An individual can attach specific values or numbers of utils from consuming each quantity of good or basket of goods
• Ordinal Utility


  Ranks the utility received from consuming various amounts of a good or basket of goods
• Utility-Maximizing Rule


  Equating the ratio of the marginal utility of a good to its price for all goods.
• Indifference Curve


  Shows the consumption bundles that give the consumer the same level of satisfaction
• Marginal Rate of Substitution


  The rate at which a consumer is willing to trade one good for another
• The Equation of the Budget Constraint


  $P_{x}X +$$P_{y} =$$I$

  Where:

  • Px is the Price of X
  • X is the quantity of X consumed
  • Py is the Price of Y
  • Y is the The Quantity of Y Consumed
  • I is the Household Income
• Budget Constraints Change When Prices Rise or Fall


  When the price of a good decreases, the budget constraint swivels to the right, increasing the opportunities available and expanding choice
• Budget Constraints Change When Income Rise or Fall


  When there is a rise and fall in income, the budget constrain shifts outward and inward, respectively.
• Marginal Rate of Substitution

  • The rate at which a consumer is willing to trade one good for another.
• Marginal Rate of Substitution

  • The rate at which a consumer is willing to trade one good for another
  • The rate at which a consumer is willing to trade one good for the other depends on the amount of the goods she is already consuming.
  • $MRS=$$\frac{P_{x}}{P_{y}}$
• Four Properties of Indifference Curves

  1. Higher Indifference Curves are Preferred over Lower Ones
  2. Indifference curves are downward-sloping
  3. Indifference curves cannot cross
  4. Indifference curves are bowed inward
• Extreme Cases


  Perfect Substitutes: Straight-Lines

  Perfect Complements: Right-Angles
• Income Effect


  A fall in Px boosts the purchasing power of the consumer's income, allowing him to buy more of good X and good Y.
• Substitution Effect


  A fall in Py makes good X more expensive relative to price Y. Causing the consumer to buy fewer X and more Y.
• Total Revenue


  The amount a firm receives for the sale of its output

  $P \times Q$
• Total Cost


  The market value of the inputs a firm uses in a production
• Profit


  $Total \space Revenue -Total \space Cost$
• Economic Profit


  Total Revenue - Total Cost (Including Explicit and Implicit Costs)
• Explicit Cost


  Input costs that require an outlay of money by the firm
• Implicit Cost


  Input costs that do not require an outlay of money by the firm
• Optimal Method of Production


  The production method that minimizes cost
• Rate of Return


  Annual flow of net income generated by an investment expressed as a percentage of total investment
• Normal Rate of Return


  Rate that is sufficient to keep the owners and investors satisfied
• Positive Level of Profit


  The firm is earning more than sufficient to retain the interest of investors
• Negative Level of Profit


  The firm incurs a loss, earning a rate below that is required to keep investors happy
• Short Run Decision


  The firm is operating under a fixed scale of production and firms can neither enter nor exit an industry
• Long Run Decision


  The period of time for which there are no fixed factors of production: firms can increase or decrease their scale of operation, and new firms can enter and existing firms can exit the industry.
• 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
• Production Function


  The relationship between the quantity of inputs used to make a good and the quantity of output of that good.
• marginal Product


  The increase in output that arises from an additional unit of input.
• Diminishing Marginal Product


  The property whereby the marginal product of an input declines as the quantity of the input increases
• Fixed Costs


  Expenses that must be paid even if the firm produces zero output
• Variable Costs


  Vary as output changes.