18 Questions
What is the Equi-marginal principle?
Consumers maximize their utility where their marginal valuation for each product consumed is the same
What does the Law of diminishing marginal utility state?
As the quantity consumed of a product by an individual increases, marginal utility decreases
What characterizes Indifference curves?
They are downward sloping curves
What is Marginal Utility?
The satisfaction gained from one more unit of a product consumed over a particular period of time
When does the Law of diminishing marginal utility come into play?
When consumers consume more units of a product
'Substitution/Income effect' refers to:
Change in quantity demanded due to change in relative price/real income
What is the formula for total revenue (TR)?
Price x quantity
In the LRAC envelope curve, what does a downward sloping curve indicate?
Increasing economies of scale
What is the formula for average revenue (AR)?
Total revenue / output
When TR is maximum, what is the value of Marginal Revenue (MR)?
0
What represents a situation of decreasing returns to scale?
Factor input increases at a proportionally faster rate than output
Where do external economies of scale apply?
Cost saving accruals to all firms in an industry as the scale increases
What concept is illustrated by the movement from point E1 to E2 on the indifference curve?
Substitution effect
Which effect causes the shift from point E2 to E3 on the indifference curve?
Income effect
What type of goods have a price and demand relationship that is directly related?
Giffen goods
Which cost remains constant as output changes in the short run?
Average fixed cost
What does the production function show?
Maximum possible output for given inputs
Which concept represents the change in cost per additional unit of quantity produced?
Marginal cost
Study Notes
Indifference Curves
- Higher curves represent higher consumption levels
- All curves are downward sloping
- Indifference curves cannot cross
- Indifference curves are convex to the origin
Utility
- Utility is the satisfaction gained from consuming a product
- Total utility is the satisfaction gained from consuming all units of a product over a particular period
- Marginal utility is the satisfaction gained from one more unit of a product consumed
- Consumers purchase products when price (P) is less than or equal to marginal utility (MU)
- Law of diminishing marginal utility states that as quantity consumed increases, marginal utility decreases
- Equi-marginal principle: consumers maximize utility when marginal valuation for each product is the same
The Price System & Microeconomy
- Substitution/income effect: change in quantity demanded due to change in relative price/real income
- Budget line shifts when there is a change in prices of one or both products with nominal income remaining the same
Revenue and Cost
- Total revenue (TR) = price x quantity
- Average revenue (AR) = total revenue / output
- Costs in the long run:
- When TR is maximum, marginal revenue (MR) is 0
- Average fixed cost = total fixed cost / output
- Average variable cost = total variable cost / output
- Average total cost = total cost / output
- Marginal cost = change in cost / change in quantity
Economies and Diseconomies of Scale
- Increasing returns to scale: output increases at a proportionately faster rate than the increase in factor outputs
- Decreasing returns to scale: factor input increases at a proportionally faster rate than the increase in output
- Economies of scale: benefits gained from falling long-run average costs as the scale of output increases
- External economies of scale: cost savings accrue to all firms in an industry as the scale increases
- Diseconomies of scale: long-run average cost increases as the scale of output increases
- Types of economies of scale:
- Technical
- Transport
- Financial
- Concentration
- Managerial
- Knowledge
- Marketing
- Ancillary industries
- Purchasing
- Specialised labour
- Risk-bearing
- Reputation
- Least cost combination: (MPP factor A) / (P factor A) = (MPP factor B) / (P factor B)
Change in Nominal Income
- Substitution effect: change in quantity demanded due to change in relative price
- Income effect: change in quantity demanded due to change in nominal income
- Price effect = Substitution effect + Income effect
Giffen/Veblen Goods
- Goods whose price and demand are directly related as they are necessary/luxurious
- Examples of price change effects on different types of goods
Learn about Equi-marginal principle stating that utility is maximized when the ratio of the marginal utility to price is equal for all products. Understand utility as satisfaction from consumption, total utility and marginal utility in microeconomics.
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