on 22-Sep-2015 (Tue)

A utility function is of the form utility = U(Q_A, Q_B, ... ,Q_N), where the variables are quantities consumed of goods A through N. We assume that no quantities are negative (some may be zero), and that holding all other quantities constant while increasing one always results in greater utility. This is referred to as the condition of non-satiation.

Indifference curves plot the combinations of two goods that provide equal utility to a consumer.

Indifference curves for two goods slope downward: A bundle of goods with less of Good X must have more of GoodY for the two to have equal utility and lie on the same indifference curve.

Indifference curves are convex towards the origin: Convexity results when the magnitude of the slope decreases as we move toward more of Good X and less of GoodY.

The slope of an indifference curve at any point is referred to as the marginal rate of substitution (MRS), the rate at which the consumer will willingly exchange units of Good X for units of Good Y.

The characteristic convexity of indifference curves towards the origin reflects a diminishing marginal rate of substitution.

we represent a consumer 's equilibrium bundle of goods, the most preferred affordable combination of Good X and GoodY, as the point where the highest attainable indifference curve is just tangent to the budget line.

When the price of Good X decreases, there is a substitution effect that shifts consumption towards more of Good X.

Because the total expenditure on the consumer's original bundle of goods falls when the price of Good X falls, there is also an income effect.

the income effect can either increase or decrease consumption of a good that has fallen in price

the substitution effect always increases the consumption of a good that has fallen in price.

The substitution effect is positive, and the income effect is also positive- consumption of Good X will increase.

The substitution effect is positive, and the income effect is negative but smaller than the substitution effect-consumption of Good X will increase.

The substitution effect is positive, and the income effect is negative and larger than the substitution effect-consumption of Good X will decrease. These kind of goods are called Giffen goods and they are clearly inferior goods.

A Veblen good is one for which a higher price makes the good more desirable.

A normal good is one for which the income effect is positive

A decrease in the price of a good that a consumer purchases leaves her with unspent income (for the same combination of goods). The effect of this additional income on consumption of the good for which the price has decreased is termed the income effect.

accounting profit = total revenue- total accounting (explicit) costs

Accounting profit may be referred to as net income, net profit, net earnings, or the bottom line (of the firm's income statement).

Accounting costs are explicit costs that represent actual payments for the resources the firm uses in producing its output .

Economic profit is also referred to as abnormal profit.

economic (abnormal) profit = accounting profit - implicit opportunity costs

economic (abnormal) profit = total revenue - total economic costs

For publicly traded firms, implicit costs are typically only the opportunity cost of equity owners' investment in the firm.

Implicit costs are the opportunity costs of resources supplied to the firm by its owners.

For private firms, the implicit costs may include the opportunity cost of owner- supplied capital and the opportunity cost of the time and entrepreneurial ability of the firm's owners.