When markets do not work Price ceiling - A regulation that makes it illegal to charge a price higher than a specified level. When a price ceiling is applied to rents in housing markets, it is called a rent ceiling. Black market - An illegal trading arrangement in which buyers and sellers do business at a price higher than legally imposed price ceiling. Minimum wage law - A regulation that makes hiring labor below a specified wage illegal. Externalities – Social costs, but no private costs. Consumption & Utility A household’s consumption choices are determined by Budget constraint Preferences Utility - The benefit or satisfaction that a person gets from the consumption of a good or service. Total utility - The total benefit or satisfaction that a person gets from the consumption of goods and services. Marginal utility - The change in total utility resulting from a one- unit increase in the quantity of a good consumed. Consumer equilibrium - A situation in which a consumer has allocated his or her income in the way that, given the prices of goods and services, maximizes his or her total utility. Understanding Costs Short run - Period of time in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied. Long run - Period of time in which the quantities of all inputs can be varied. Inputs whose quantity can be varied in the short run are called variable inputs. Inputs whose quantity cannot be varied in the short run are called fixed inputs. Firm’s total cost - The sum of the costs of all the inputs it uses in production. Fixed cost -The cost of a fixed input. Variable cost - The cost of a variable input. Total fixed cost - The total cost of fixed inputs. Total variable cost - The cost of the variable inputs. Marginal cost - The increase in total cost for increasing output by one unit. Average fixed cost (AFC) - Total fixed cost per unit of output. Average variable cost (AVC) - Total variable cost per unit of output. Average total cost (ATC) - Total cost per unit of output. Long-run average cost curve - Traces the relationship between the lowest attainable average total cost and output when both capital and labor inputs can be varied. Economies of scale - As output increases, long-run average cost decreases. Diseconomies of scale - As output increases, long run average cost increases. Perfect Competition There are many firms, each selling an identical product. There are many buyers. There are no restrictions on entry into the industry. Firms in the industry have no advantage over potential new entrants. Firms and buyers are completely informed about the prices of the product of each firm in the industry. Firms in perfect competition are said to be price takers. A price taker is a firm that cannot influence the price of a good or service.
Posted on: Thu, 27 Feb 2014 14:17:33 +0000
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