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  • Law of diminishing marginal utility

    As the consumption of a product increases, the marginal utility derived from consuming more of it will eventually decline.

    Marginal Utility

    The additional satisfaction derived from consuming an additional unit of good.

    Marginal Benefit

    The maximum price a consumer will be willing to pay for one more. This falls as consumption increases.

    Substitution Effect

    The extra amount of a good consumed because it is cheaper in relation to the alternatives.

    Income effect

    The extra amount of a good consumed because of the consumer's expanded real income.

    Price Elasticity of Demand

    How responsive consumers are to a change in price.

    What effects elasticity of demand?

    The quality of substitutes available. If people have good substitutes, they'll just switch.

    Income elasticity

    How responsive consumers are with a change in income.

    Normal Good

    A good where more of it is bought as the income raises.

    Inferior Good

    A good where less of it is bought as income falls.

    Price Elasticity of Supply

    Same as price elasticity of demand.

    Residual claimants

    People who benefit form the excess of revenues over costs

    Shirking

    Working less than expected to make work easier.

    Principal-agent Problem

    When a buyer doesn't know the full extent of the trouble of a seller goes through to provide a service.

    Proprietorship

    A business owned by a single person.

    Partnership

    When two people own a business.

    Corporation

    A firm owned by shareholders who gain and are liable based on their investment in the firm.

    Explicit Costs

    Payments by a firm to purchase the services of a productive resource

    Implicit Costs

    Opportunity costs associated with a firm's use of resources that it owns. (Does not count $)

    Total Costs

    The costs, both explicit and implicit of all the resources used by the firm.

    Opportunity cost of equity capital

    The rate of return investors must get in order to supply financial capital to the firm.

    Normal Profit

    Breaking even.

    Short Run in production

    A time period so short that a firm is unable to vary some of its factors of production.

    Long run in production

    A time period long enough to allow the firm to vary all of its factors of production.

    Total fixed costs

    The sum of the costs that do not vary with output.

    Average fixed costs

    Declines as output increases.

    Marginal costs

    The change in total cost required to produce and additional unit of output.

    Law of Diminishing Returns

    Things are less valuable the more they are done or consumed.

    Marginal Product

    A marginal increase in the total product resulting from an increase in the employment of a variable input.

    Economies of Scale

    Big plants can make things easily.

    Constant returns to sale

    Units of costs that are constant as the scale of the firm is altered.

    Sunk Costs

    Costs that have already been incurred as a result of past decisions.

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