| Line 134: |
Line 134: |
| | *a '''transaction cost''' is not the overall cost of the transaction. It is not the overall price paid for something, but is the portion of the overall cost that is due to "friction", or the time and expense of obtaining what you really want from the transaction. Examples include tips, taxes, commissions, salesmen, broker fees, gas to drive there, etc. | | *a '''transaction cost''' is not the overall cost of the transaction. It is not the overall price paid for something, but is the portion of the overall cost that is due to "friction", or the time and expense of obtaining what you really want from the transaction. Examples include tips, taxes, commissions, salesmen, broker fees, gas to drive there, etc. |
| | *a '''variable cost''' is not any cost that varies over time. It is a type of production cost for a firm that '''varies with output'''. It is a cost that grows bigger as the number of units made increases, such as more electricity for staying open later, more paper and ink costs for making more copies of lectures, higher gas costs for taking more taxicab rides, etc. | | *a '''variable cost''' is not any cost that varies over time. It is a type of production cost for a firm that '''varies with output'''. It is a cost that grows bigger as the number of units made increases, such as more electricity for staying open later, more paper and ink costs for making more copies of lectures, higher gas costs for taking more taxicab rides, etc. |
| − | *'''Returns to scale''' are in the "long run" and have nothing to do with "marginal" effects. There are not "diminishing" returns to scale like "diminishing marginal utility" which suggests a rapidly declining rate. Instead, there are "decreasing" returns to scale. If someone says "diminishing returns" then he is talking about the short run. "Returns to scale" have to do with the long run, when you can double the size of your factory or build a new stadium. | + | *'''Returns to scale''' is the answer to this question: if you own a firm, and you double the amount of your inputs (such as the size of your factory and the number of employees), does the output of your firm increase precisely double also, or increase by less than 2 times, or more than 2 times? Example: doubling the size of a car can carry more than twice as many people. That means it has increasing economies of scale. But if you double the size of your workforce in a restaurant, then you problem won't be able to serve twice as many people, because your waiters and waitresses will waste time talking to each other instead of working. That has decreasing economies of scale. |
| | *In calculating '''overall utility''', keep in mind in which order someone chooses to maximize his marginal utility. Exam questions might ask how someone specifically spent his third hour of time based on assumptions about how the utility for different activities diminish over time. | | *In calculating '''overall utility''', keep in mind in which order someone chooses to maximize his marginal utility. Exam questions might ask how someone specifically spent his third hour of time based on assumptions about how the utility for different activities diminish over time. |
| | *the concept of '''marginal product''' is specific to an input, as in "marginal product of labor," which is the additional overall output (product) produced due to an additional unit of that input (labor). | | *the concept of '''marginal product''' is specific to an input, as in "marginal product of labor," which is the additional overall output (product) produced due to an additional unit of that input (labor). |
| − | *speaking of inputs, we might as well include this concept: '''factors of production.''' These include the four basic resources for a firm or company: land, labor, capital and entrepreneurship. Exam questions typically ask most about the input of labor for a firm or company. | + | *speaking of inputs, we might as well include this concept: '''factors of production.''' These include the four basic resources for a firm or company: '''land, labor, capital and entrepreneurship'''. Exam questions typically ask most about the input of labor for a firm or company. |
| − | *last week's homework assignment had a question that asked about "wealth or '''consumer surplus'''." Consumer surplus is a form of wealth, a savings made possible by the free market. The buyer is wealthier by the amount of his consumer surplus in a transaction, because consumer surplus is the excess of what he would have paid above what he did pay for something. It is his net benefit from the transaction. | + | *'''consumer surplus''' is the extra amount a consumer would have paid for something, but did not have to because the free market brought the price down lower than what the consumer was willing to pay. The buyer is wealthier by the amount of his consumer surplus in a transaction, because consumer surplus is the excess of what he would have paid above what he did pay for something. It is his net benefit from the transaction. |
| | | | |
| | == Example 1: Economic Insights into Politics == | | == Example 1: Economic Insights into Politics == |