Chapter 5 Notes- Demand: The benefit side of the market -Law of demand: people do less of what they want

to do as the cost of doing it rises -utility- is the concept to represent the satisfaction people derive from their consumption activities -utility maximization- people try to allocate their incomes so as to maximize their satisfaction -Marginal Utility = change in utility/ change in consumption -denotes the amount by which total utility changes when consumption changes by one unit -law of diminishing marginal utility- tendency for marginal utility to decline as consumption increases beyond some point -rational spending rule- spending should be allocated across goods so that marginal utility per dollar is the same for each good -consumer surplus- economic surplus received by buyers -real price- the dollar price of a good relative to the average dollar price of all other goods -nominal price- the absolute price of a good in dollar terms

Chapter 6 Notes- Perfectly competitive supply: The cost side of the market -profit- the total revenue a firm receives from the sale of its product minus all costs (explicit and implicit) incurred in producing it -Profit = Total Revenue- Total Cost -Profit = Total Revenue- Variable Cost- Fixed Cost -profit-maximizing firm – a firm whose primary goal is to maximize the amount of profit it earns -perfectly competitive markets- markets in which individual firms have no influence over the market prices of the products they sell -perfectly competitive firms- can be described as price takers because their inability to influence market price -4 characteristics of markets that are perfectly competitive: -all firms sell the same standardized product -the market has many buyers and sellers, each of which buys or sells only a small fraction of the total quantity exchanged. -productive resources are mobile -buyers and sellers are well informed -imperfectly competitive firms- a firm that has at least some control over the market price of its product -factor of production- an input used in the production of a good or service -a firm’s factor of production are employees and the machine(s) -short run- a period of time sufficiently short that at least some of the firm’s factors of production are fixed -long run- a period of time of sufficient length that all the firm’s factors of production are variable -law of diminishing returns-a property of the relationship between the amount of a good or service produced and the amount of a variable factor required to produce it; it says that when some factors of production are fixed, increased production of the good eventually requires ever-larger increases in the variable factor. -fixed factor of production- an input whose quantity cannot be altered in the short run -machines -variable factor of production- an input whose quantity can be altered in the short run -labor -variable cost- the sum of all payments made to the firm’s variable factors of production -total cost- the sum of all payments made to the firm’s fixed and variable factors of production -marginal cost- as output changes from one level to another, the change in total cost divided by the corresponding change in output -short-run shutdown condition- Profit is less than the minimum value of AVC -P<minimum value of AVC -average total cost(ATC) – ATC= Total Cost(TC) / total output (Q) -average variable cost(AVC) – AVC= variable cost (VC)/ total output(Q) -maximum profit condition- price=marginal cost

Chapter 7 Notes-Efficiency and Exchange -efficient(or Pareto efficient) – a situation is efficient if no change is possible that will help some people without harming others -deadweight loss- the reduction in total economic surplus that results from the adoption of a policy

Chapter 8 Notes-The quest for profit and the invisible hand -three types of profit -accounting profit= total revenue- explicit costs -economic profit = total revenue – explicit costs – implicit costs -normal profit = accounting profit-economic profit= implicit costs = -the opportunity cost of the resources supplied by a firm’s owners -explicit costs- the actual payments the firm makes to its factors of production and other suppliers -implicit costs- the opportunity costs of all the resources supplied by the firm’s owners the invisible hand theory -Adam Smith’s theory that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources -2 functions of price -rationing function of price- to distribute scarce goods among potential claimants, ensuring that those who get them are the ones who value them most -allocative function of price- to direct productive resources to different sectors of the economy -barrier to entry- any force that prevents firms from entering a new market -economic rent- that part of the payment for a factor of production that exceeds the owner’s reservation price -present value of a perpetual annual payment -for an annual interest rate r, the present value (PV) of a perpetual annual payment (M) is the amount that would have to be deposited today at that interest rate to generate annual interest earnings of M: PV = M/r -time value of money – the fact that a given dollar amount today is equivalent to a larger dollar amount in the future because the money can be invested in an interest-bearing account in the meantime -efficient markets hypothesis- the theory that the current price of stock in a corporation reflects all relevant information about its current and future earnings prospects

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