Economics Notes For
Exam
2nd
Concept of Utility
Needs
- be satisfied for an individual to
live.
Utility
- power of goods and services
to satisfy wants.
- Refers to the pleasure of
satisfaction.
Wants
- be satisfied in order to live
comfortably.
Formulas in Utility
Marginal Utility
- additional satisfaction/utility
gets from consuming an
additional unit of good.
Utils
- unit of measure to quantify
utility or satisfactions
Law of Diminishing Marginal
Utility
- if more and more commodity
is concerned, the additional
utility from every unit consumed
tend to become less and less.
Relationship between TU and
MU
Phase 1
- MU(Diminishing)
- TU(Increasing)
- Implication (Satisfied)
Jeremy Bentham
- Coined the term ‘utility’
Phase 2
- MU (Zero)
- TU (Maximum)
- Implication (Satiated)
John Stuart Mill
He
extended
and
popularized
Bentham’s
theoretical work.
Phase 3
- MU (Negative)
- TU (Diminishing)
- Implication (Dissatisfied)
William Stanley Jevons
- developed the rule of
consumer equilibrium.
- Helped transform consumer
demand
theory
(also
microeconomics in general)
into a rigorous mathematical
science.
Formula for Marginal Utility.
Budget Line
- a line that shows the
alternative combinations of any
two goods that a consumer can
afford at given prices for the
goods and a given level of
income.
Indifference Curve
- a curve on a graph linking
those
combinations
of
quantities that the consumer
regards as of equal value.
Budget Constraint
- limit to expenditure imposed
by a cash-limited budget.
Weak Substitute
- provides lower level
satisfaction
as
that
substituted goods.
of
of
Consumer Sovereignty
- an economic philosophy that
suggests consumer demand
drives
business
in
free
enterprise systems.
Consumer Surplus
- the extra satisfaction received
from purchasing a good.
Production Theory and Cost
Analysis
MRS (Marginal Rate of
Substitution)
- measures the maximum
amount of one good given up in
order to consume more units of
the other good.
Product
- refers to the output of goods
and services produced by
businesses within a market.
Substitution
- consumers often use these to
satisfy their wants.
Planning
- includes choosing a location
for the business and scheduling
production.
Production Process:
Formula for MRS
Quality Control
- involves over seeing the
grade or freshness of goods,
their strength or workability, etc.
Inventory Control
- all service businesses need
inventories for materials.
2 Types of substitution
Close Substitute
- provides equal level
satisfaction
as
that
substituted goods.
of
of
Purchasing
- company needs raw materials
to produce goods and services.
Short Run Production
- There is at least one fixed
factor input.
Average Product:
Long Run Production
- all of the factors can change
Production Stages:
2 Kinds of Inputs
Stage 1
- It has a positive slope.
Fixed Inputs
- inputs do not change as
output increases.
Variable Inputs
- inputs changes as output
increases.
Marginal
Product
and
Average Product Formulas:
Marginal Product:
Example:
Stage 2
- It has a decreasing positive
slope.
Stage 3
- total product has a negative
slope.
Summary of Returns to Scale:
Stage 1
- TP(Increasing)
-MP(Diminishing)
-AP(Decreasing)
Stage 2
-TP(Maximum/constant)
-MP(Zero)
-AP(Decreasing)
Stage 3
-TP(Diminishing)
-MP(Negative)
-AP(Decreasing)
In Marginal Product, to get
the amount 7, you deduct 3
from 10 in Total Product. The
same process also applies to
all amount.
Law of Diminishing Return
- it occurs when the marginal
product of labor starts to fall.
Cost of Production
- expenses faced
business.
by
a
Fixed Cost
- expenses that do not
change in proportion to the
activity of a business.
Variable
- change in direct proportion
to the activity of a business
such as sales or production
volume.
Break-even point
- a situation where firm’s gain
from its economic activity
equals the cost it incurred.
Formulas