The consumer is not interested in any of these combinations.
The consumer finds each combination acceptable.
A curve composed of a set of consumption every combination of the two goods in question yields the same level of satisfaction.
The consumer wants every point along the indifference curve.
The slope and shape of indifference curves have special properties.
The indifference curve on the preceding page slopes downward.
The indifference curve has a negative slope.
Figure F-2 is below.
The indifference curve that we drew in panel (b) of Figure F-1 is special.
It is curved.
Consider the implications to find out why we don't have straight-line indifference curves.
The indifference curve is shown on the facing page.
The consumer only eats five fast-food meals a week.
Movie tickets give up the same number of fast-food meals to get one more ticket.
Movie tickets are one ticket to a movie.
It doesn't seem plausible that a consumer is willing to give up one fast-food meal per week to watch a movie.
The indifference curve shown in Figure F-3 is no longer plausible.
An indifference curve is not always a straight one.
Figure F-1 is on page 453.
As the rate of consumption of the original item changes, the quantity of the substitute is considered acceptable changes.
The indifference curve in panel (b) of Figure F-1 will be different when viewed from the origin.
Total satisfaction remains constant because the marginal rate of substitution is equal to the change in the quantity of onegood that just offsets a one-unit change in the consumption of another good.
3:1 is the marginal rate of substitution.
If we rearrange panel (a) of Figure F-1 on page , we can see what happens to the marginal rate of substitution.
Fast-food meals are shown in the second column and movie tickets are shown in the third column.
A three-unit decrease in fast-food meals requires an increase of one movie ticket to leave the consumer's total utility unaffected.
The three fast-food meals are equivalent to one movie ticket for the consumer.
As fast-food meals decrease, the marginal rate of substitution goes from 3:1 to 2:1.
The consumer values fast-food meals more than movie viewings.
The first movie ticket is worth three fast-food meals.
Only one fast-food meal is worth the last movie ticket.
The marginal rate of substitution is measured by the slope of the consumer's indifference curve.
We can no longer stay on the same indifference curve that we drew in Figure F-1 when we do this.
Movie tickets and fast-food meals were equally satisfying combinations.
A new indifference curve will have to be drawn if the individual can get more of both.
An indifference curve will have to be drawn below and to the left of the one in panel (b) of Figure F-1 if the individual faces the possibility of having less of both movie tickets and fast-food meals per week.
We can look at a whole set of indifference curves.
If the indifference curves are higher than others, then more of the other good can be obtained on a higher indifference curve.
We could do it differently.
The higher an indifference curve is for a consumer, the greater their total level of satisfaction.
An infinite number of curves can be drawn.
There are three possible ones we show.
The possibility of higher rates of consumption of both goods is represented by a higher indifference curve.
More is preferred to less in the indifference curve.
We need to find a way to maximize consumer satisfaction.
There are combinations of goods that have a budget constraint.
Everyone has a limited consumption potential.
We need to find the prices of the goods in the budget.
Let's assume that a fast-food meal costs $5 and a movie ticket costs $10.
Let's assume our consumer has a budget of $30 per week.
The budget line's anchor points are obtained by dividing money income by the price of each product.
The budget line is linear because prices are constant.
The budget constraint slopes downward from left to right.
There is a special meaning to the slope of that line.
On the previous page, look at the budget line.
The budget constraint has a slope of -2/1.
We are going to figure out how the consumer gets the optimum con sumption rate.
Consumers will try to get the highest level of total utility possible.
The two are drawn in Figure F6.
The consumer will strive to be on the highest indifference curve possible because a higher level of total satisfaction is represented by a higher indifference curve.
Subject to the optimum, this consumer can maximize total utility.
The consumer's income is being exhausted.
Consumer optimum is achieved when the marginal rate of substitution is equal to the rate of exchange between meals at fast-food restaurants and tickets to movies.
There is an indifference curve and a budget constraint.
Movie tickets are sold per week.
The slope of the budget constraint is represented by the absolute value.
The indifference curve analysis will be used to derive the demand curve.
In panel (a) of Figure F-7 below, we show what happens when the price of tickets to movies decreases, holding the price of meals at fast-food restaurants and income constant.
The two optimum points are given by the indifference curve that just touches the two budget lines.
Two price-quantity pairs are given by those two points.
In panel a, we show the effects of a decrease in the price of movie tickets from $10 to $5.
There are two $10 movies viewed.
We transfer the price and quantity down to the panel.
DIMENSIONS OF MICROECONOMICS is $10 and the quantity demanded is 2.
We can transfer one point to panel (b) of Figure F-7 on the preceding page.
We have another pair of pricequantity.
The price has fallen and the quantity demanded has increased.
This other point is transferred to the panel.
The demand curve for tickets to movies slopes downward when we connect these two points.
After reading this appendix, you should know what to look for.
Every combination of the two goods in question yields the same level of satisfaction.
Study Plan 20.9 curves tend to slope downward.
In order to allow the consumer to consume one more unit of the other good while still remaining on the same indifference curve, the marginal rate of substitution has to be given up.
As one moves down the indifference curve, the marginal rate of substitution falls.
Study plans represent preferences.
Consumer optimum Figure F-5, 457 is obtained when the highest feasible indifference curve is just outside the budget constraint line.
The consumer reaches the highest indifference curve at that point.
The budget constraint is the rate of exchange between two goods, which is the ratio of their dollar prices.
The budget line rotates due to the price of an item in Study Plan 20.13.
A new consumer optimum is created when the individual chooses to consume more units of the item.
A decrease in price causes an increase in quantity demanded or a movement down along a derived demand curve.
Log in to MyEconLab, take an appendix test, and get a personalized study plan that tells you which concepts you need to review.
MyEconLab will give you further practice, as well as videos, animations, and guided solutions.
Sue's budget constraint has a slope.
The indifference curve illustrated in Problem F 3 can be found on page 453.
The curve is convex to the origin in economic goods that satisfy Sue's utility maximization terms.
Sue's budget can be increased by two soft drinks and three hamburgers by using the indifference curve diagram.
Illustrate the utility-maximizing combination of bottled water and soft drinks.
The table shows Sue's preferences for bottled water and soft drinks.
The rate of substitution to marginal utility is determined by the answers to Problems F-5 and F-7.
Draw Sue's horizontal axis and soft drinks on the vertical demand curve for soft drinks using your answer to Problem F-8.
Sue has a budget for bottled water and soft drinks.
In October 2007, the wak Distinguish had a value of more than 15,000.
The value of the DJIA was close to explaining the advantages and disadvantages of each 6,000.
Explain the difference between accounting profits and economic profits after the Great Crash of wak, and how the interest rate performs when average stock prices plummet.
Key topics of this chapter are the concepts.
There was more variability in the U.S.
Between October 9, 2007, and March 9, 2009, there was a key index measure of the U.S.
You stock prices went down more than 50 percent.
Within a period of less than two months, the average level of stock prices declined by about 50 percent more rapidly than during the stock market crash of 1929.
You will learn the answers to the questions in this chapter.
That is, the minimum payment that would be required.
It was thought that land's supply was inelastic.
The supply curve for land was thought to be a vertical line, so that no matter what the market price was for land, the quantity supplied would remain the same.
The concept of economic rent is associated with a British economist.
The analysis of economic rent for land was done by Ricardo.
He assumed that all land is equally productive.
In terms of supply and demand, we draw a supply curve for land vertically.
The amount of land is not affected by the change in price.
The supply curve is inelastic.
Economic rent can be applied to other factors of production, such as land and natural resources.
The analysis is more applicable to labor.
Some of the people who provide different labor services are likely to receive large amounts of economic rent.
Much of their earnings is economic rent.
Specific resources can't be replicated exactly.
Today's most highly paid entertainment figures receive economic rent because no one can duplicate them.
Superstars do well financially.
The earnings wealth is shown in Table 21-1 below.
For a two-year period, earnings are totaled.
A highly paid movie star would make the same number of movies at half their current earnings.
The demand for his or her services is the reason for the high price.
The market decides where the resources should be used.
Rent resources are directed to people who can use them the most efficiently.
The answers can be found on page 482.
Businesses and individuals seek the highest possible returns.
Entrepreneurs, managers, and workers make up the organizational structure of a typical firm.
The person who takes the risks is called an entrepreneur.
Any profits that are made will be paid to the entrepreneur.
Entrepreneurs combine land, labor, and capital to make a good or a service.
New production and new products are what entrepreneurs innovate in.
The firm's owner decides who to hire to manage it.
Some economists believe that the true quality of anentrepreneur can be seen with the selection of managers.
Managers decide who should be hired and fired and how the business should be run on a day-to-day basis.
The workers use the other inputs to make the products and services that the firm sells.
Workers and managers are paid.
They get a specified amount of income.
Entrepreneurs aren't paid contractual wages.
They don't get a reward in advance.
Entrepreneurs make profits if there are any, for profits accrue to those who are willing to take risks.
Firms are different from one another.
Some make automobiles and others sell frozen yogurt.
Some advertise and some don't.
Some have annual sales of a few thousand dollars, others have billions of dollars.
The differences are probably endless.
Close to 72 percent of firms in the A business are owned by one individual in the United States, as shown in Table 21-2 above.
Each is owned by a single individual who makes the business decisions, receives all business decisions, receives all the profits, and is legally responsible for the debts of the firm.
Although there are many of them, they are mostly small debts of the firm.
Even though there are more than 22 million businesses in the United States, they account for only 4.1 percent of all business revenues.
There are several advantages to being a proprietor.
The simplest way to start a business is to work.
One simply stops working to dissolution.
No partners, shareholders, or board of directors need to be consulted.
All profit is treated as the net income of the proprietor and is subject to personal income taxation.
The personal assets of the owner are personally responsible for all of the firm's debts.
It is possible to seize the second disad of the owner of a firm in order to get a large sum of money from the lender.
As shown in Table 21-2 above, partnerships are less numerous than businesses owned by two or more partners.
The profits of the firm and more co-owners are called partners in a partnership.
A partnership may be seen as a partnership with more than one owner.
It is very easy to form a partnership.
Interpersonal skills are important for successful performance and in lines of business, even after the fact, it is difficult to measure performance objectively.
Attorneys and physicians organize themselves as a partnership.
There are also disadvantages to partnerships.
There are more people involved in making decisions and they may have differing opinions.
This could cause uncertainty for employees.
A legal entity can conduct business because they own shares in the firm.
By law, shareholders have their own name.
Corporations own the greatest advantage.
The liability of shareholders is limited to the value of their shares.
The corporation's existence does not depend on the life of any one of the firm's owners, as people are able to buy ownership shares or lend funds to the corporation knowing that their liability is limited to the amount of funds they invest.
The corporation's profits are subject to taxation.
Corporations' profits are taxed at the corporate level, so owners of corporations pay higher taxes on their profits.
The owners and managers of a corporation may have different incentives.
Problems that can result are discussed later in the chapter.
Law firms in the United Kingdom were given the authority to restructure liability in 2011.
The firm will be able to continue as a corporation instead of remaining private partnerships.
A business concern after the death of an attorney.
There was some law that died.
The threat of this possibility is removed for law firms that have switched firms have used the proceeds of the IPOs to expand their operations.
Most people think of a firm's profit as the difference between the amount of revenues it takes in and the amount it spends.
They must be paid, so it's appropriate when used by account.
Wages, taxes, and rent are some of the things economists are interested in.
They are measured by out of pocket and not what the resources currently used in producing a particular good or explicitly calculate, such as the opportunity service could earn in other uses.
The cost of factors of production that are owned is a better definition of implicit cost.
The full opportunity cost is used by economists.
People won't invest their wealth in a business if they don't get a positive.
Unless their invested wealth pays off, the rate of return is normal.
When a firm requires the use of a resource in producing a particular product, it must compete against other users of that resource.
The firm needs to offer a price that is at least as much as other users are willing to pay.
The normal rate of return, or the available opportunity cost of capital, is the amount of income, or yield, that could have been return on the next-best alternative.
Capital won't stay in firms.
This cost tries in which the expected rate of return falls below its opportunity cost, that is, of production, and it is included in our cost what could be earned elsewhere.
Some capital equipment can be examples.
The revenue that the firm could have earned if it leased out equipment is gone if the firm uses it for production.
The opportunity cost of the labor that the proprietor provides to the business is what causes single-owner proprietorships to grossly exaggerate their profit rates.
The opportunity cost of labor is referred to.
You may know people who run a store.
At the end of the year, these people will figure out what their "profits" are.
They will subtract what they had to pay to other workers, what they had to pay to their suppliers, what they had to pay in taxes, and so on.
If they had worked for someone else in a similar job, they would have figured into their costs the salary they could have made.
After all explicit costs have been accounted for, they become residual claims.
The owner-operator's salary should be included in the costs.
An example of a skilled auto mechanic working 14 hours a day at his own service station is six days a week.
He could make 84 hours a week as a trucking company mechanic.
The self-employed auto mechanic might have an opportunity cost of $35 an hour.
He forfeited $2,940 for his 84-hour week in his own service station.
He is incurring losses in an economic sense unless his service station shows accounting profits of more than that per week.
It is possible to look at the opportunity cost of running a business by looking at the implicit and explicit costs.
The link to Internal Revenue Service reports on explicit costs is taken into account by accountants.
After only explicit U.S. annual revenues and expenses, accounting profit ends up being the residual.
The same analysis can be applied to owner-supplied capital.
The value of the next-best alternative use for the building and land still has an opportunity cost.
Economic profits are the total revenues minus the total opportunity costs.
Remember that implicit costs include a normal rate of return on invested capital.
The total revenues have explicit accounting costs.
Economic profit is the same as total revenues minus economic costs.
The basis for the analysis was provided by the theory of consumer demand, utility maximization by the individual.
The goal of the firm is to maximize economic profits, and the firm is expected to make the positive difference between total revenues and total costs as large as it can.
Our assumption of profit maximization by firms is similar to our assumption of utility maximization by individuals.
Firms must first obtain financing from investors to obtain labor, capital, and other resources.
Although investors watch managers' performances to make sure the funds aren't used, they are most interested in the earnings on the funds and the risk of losing their money.
Firms that can provide relatively higher risk-corrected returns will have an advantage in obtaining financing needed to continue or expand production.
It is expected that a policy of profit maximization will become the dominant mode of behavior for firms that survive.
The answers can be found on page 482.
The most common form of business is day-to-day operations.
They enjoy close to 72 percent of all firms.
The full opportunity cost of capital is the profit of the business.
Each partner's liability for the debts of the firm is not included as a cost when accounting profits.
We assume all revenues.
The goal of the firm is to economic the firm's profits but usually the owners have little responsibility for profits.
Funds used to purchase physical capital in physical capital and rights to patents and trademarks from which they hope to goods, such as buildings and equipment, and make a satisfactory return.
Borrowing and lending take place in these markets.
The payment for obtaining credit is interest.
You have command over $100 worth of goods and services if you command over resources.
It is possible to pay less than 4 percent in annual interest on Treasury securities.
The rate of annual interest that must be paid depends on a number of factors.
The longer the loan is outstanding, the higher the interest rate will be.
The interest rate charged is related to the risk of nonrepayment of the loan.
The risk is assessed on the basis of the creditworthiness of the borrowers.
If the borrower fails to comply with the loan agreement, the asset will become the lender's property.
Review flashcards and saved quizzes
Getting your flashcards
You're all caught up!
Looks like there aren't any notifications for you to check up on. Come back when you see a red dot on the bell!