Download Induction: It is proceeding from particular result to general principle

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GLOSSARY
Accounting Cost: Monetary expenditure on inputs of various kinds.
Additive utility: Utility derived from different units of a good can be
added.
Arc Elasticity of Demand: It measures the price elasticity of demand
between two points on the demand curve.
Average Cost: Average cost is the cost per unit of output
Average Fixed Cost: Fixed cost per unit of output AFC= (TFC/ output)
Average Product: It is production per unit of labour denoted as
APL = ( TPL/ Units of L ).
Average Variable Cost: It is variable cost per unit of output denoted as
(AVC=TVC/ output)
Balance of Payments: It is a summary of all economic transactions
between the residents of one country and those of all other countries
during a given period of time.
Bandwagon effect: Bandwagon effect refers to the desire or demand for
a good by a person who wants to posses that good for a fashion and
therefore many others also demand the same.
Budget line (or) Price line: It is a line showing all those combinations of
commodities that are just obtainable given a household’s income and the
prices of all commodities.
Budget space: Budget space is the set of all commodity bundles
that
can be purchased by spending all or part of money income.
Capital elasticity of output: It is degree of responsiveness of output to
capital which is equal to (MPPK/APPK)
Capital: Capital refers to all man-made appliances.
Cardinal utility: Utility from different goods is measurable in numbers.
Cardinalism: It is measuring utility in absolute numbers.
Ceteris paribus: A latin phrase meaning other things remaining
constant.
Cobb-Douglas production function: Cobb-Douglas production function
is a power function of inputs with Q = ALaKb. It is a homogenous
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production function of degree (a+b) which denotes nature of returns to
scale. a refers to labour intensity and b refers to capital intensity.
Compensating variation: Hicks’ compensation in income is to wipe out
the change in the satisfaction of the consumer by the change in the price
of a commodity.
Constant marginal utility of money: The marginal utility of money will
not diminish when money is spent on goods.
Constant returns to scale: If the proportionate increase in inputs and
the proportion of increase in output are same, then it is the stage of
constant returns to scale.
Constrained cost minimization: A rational producers chooses the input
combination that leads to the lowest cost of producing a fixed level of
output.
Constrained output maximization: A rational producer chooses input
combination that yields the maximum level of output possible with a
fixed cost.
Consumer Equilibrium: Consumer equilibrium is a position depicting
maximum satisfaction for a consumer .According to Marshall, it is the
point where
(MUX /PX)
=
(MUY /PY) =MUm. According to Hicks, it is the
point where MRTSXY =PX /PY.
Consumption: Using up of non-durable goods (fruits, vegetables etc) or
the enjoyment of services from durable goods (cars, T.V etc)
Convexity: It means that the indifference curve lies above its tangent at
each point on it.
Cost difference: When price of good changes, consumer’s income is
changed by the amount which leaves the consumer to buy the same
combination of goods is known as Slutsky’s cost difference.
Cost Function:
It explains the relation between input prices
and output quantity.
Cost of production:
It is input costs or the value of the factors
employed in the production process.
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Cost-output Elasticity: Degree of responsiveness in the cost when the
output changes. It is obtained by dividing percentage change in the total
cost of production by percentage change in the output level.
Cross Elasticity of Demand: It measures how the quantity demanded of
one good change as the price of other good changes.
Decreasing returns to scale: If the proportionate increase in output is
less than the proportionate increase in all inputs, then it is decreasing
returns to scale.
Decreasing returns in Short-run Production: Total product of varying
input continues to increase at a diminishing rate until it reaches its
maximum. It is a law of life and average product diminishes.
Deduction: Deduction is a descending process in which we proceed from
a general principle to particular result.
Deflation: A continuous fall in the general price level.
Demand curve: It relates the quantity demanded at various price levels.
Demand schedule: It is a table representing the quantity demanded at
various price levels.
Devaluation Policy: Devaluation Policy refers to the policy of the
government to devalue the currency to avoid deficit in a country’s
balance of payments.
Diminishing Marginal Rate of Substitution: It denotes diminishing
MRSXY as more and more of Good X is substituted for Good Y.
Diminishing
Marginal
Utility:Additional
utility
derived
from
the
additional unit by the consumer diminishes.
Direct relation: If an increase in one variable is associated with an
increase in the other, then there is positive or direct relationship between
two variables.
Distribution: The division of nation’s income among its members.
Duality Theorem: A rational producer either maximizes output subject
to a given cost or minimizes cost subject to a given output, to obtain his
equilibrium. According to this theorem MRTSLK =
w
MPL
=
r
MPK
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Economic Model: It is formal representation of economic theories, which
can take the form of verbal explanations, charts, graphs or a set of
equations.
Economic region of Production: Economic region of production
includes those segments of the isoquants, which are convex to the origin
and lie between the ridge lines with either MPL =0 or MPK=0
Economies of Scale: Internal economies mean reduction in
cost when
a firm expands its scale of production.
Efficiency: It refers to the optimum allocation of scarce resources to
maximize the welfare of the people.
Elastic Demand Market: It refers to a market where the demand for a
good is showing greater response to a change in price.
Elasticity of Substitution: It is σ 
Percentage change in (K/L)
Percentage change in MRTS
Elasticity: It refers to degree of responsiveness of a variable to a change
in another variable.
Equi-marginal Utility: The marginal utility derived from different goods
consumed by one individual is equal.
Equity: Maximizing welfare of the society without reducing the welfare of
any individual.
Euler theorem: According to Euler for a homogeneous production
function of degree (n), L (Q/L) + K (Q/K) = nQ
Exchange Rate: The number of units of one currency required in
exchange for one unit of another.
Expansion Path: It is derived from the least cost combinations of inputs
and is got by connecting all points of tangency of isocost lines with
isoquants. It is a line or curve passing through the origin for a
homogenous production function.
Explicit Cost: It refers to money costs which are actually paid out.
Exponential function: It is a non-linear functional relation of the form
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External Diseconomies: These are disadvantages that originate
outside the firm in the input markets and due to natural
constraints.
External Economies: External or pecuniary economies accrue to the
expanding firms from the advantages arising outside the firm.
Fixed proportion Isoquant: It is at right angles (L-shaped) implying the
impossibility of substituting two inputs to produce output.
Flow charts: Flow charts explain the relationships between
participants or variables in the economy.
Full Employment: The state of the economy where there is no
involuntary unemployment.
Function coefficient: The sum of output elasticities of different inputs
is called function coefficient (S).
It is nothing but the degree of
homogeneity of the production function for a homogenous production
function.
Functional relations: These are relations between variables expressed in
linear or non- linear mathematical equations with parametric constants.
Giffen Paradox: It explains direct relation between price and demand as
negative income effect is exceeding the substitution effect.
Homogeneous production function: Q = f (L,K) it is defined as
a
homogeneous function of degree n if by increasing the inputs L and K
by m times the output would be increased by mn times.
Implicit Cost: It refers to costs which are not actually paid out.
Import Tariff: The government imposes tariff on imports to reduce the
volume of imports of a country.
Income consumption curve: It is a curve showing how consumption
bundles at equilibrium changes as income alone changes in an
indifference map.
The effect on quantity demanded of a good due to a change in real
income (or) money income.
Income Elasticity of Demand: It is the degree of responsiveness of
quantity demanded of a good to a change in income of the consumer.
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Increasing returns to scale: If the proportionate increase in output is
more than the proportionate increase in all inputs, then it is increasing
returns to scale.
Increasing returns in Short-run Production: Initially total product of
the varying input increases at an increasing rate and then at a
decreasing rate. In this stage average product always increases.
Incremental Cost: It refers to additional cost incurred for new or
extended activity
Index number: It is value of an observation in a given time period
expressed as a ratio to the observation in a base period and then
multiplied by 100.
Indifference curve (or) Isoutility curve (or) Constant Utility contour:
It is a smooth curve joining equally preferred combinations of two goods
which gives same level of satisfaction to the consumer.
Indifference in Preference: It is depicting various combinations of two
commodities which give equal level of satisfaction to the consumer.
Indifference map: A group of indifference curves constitutes an
indifference map of a consumer.
Induction: It is proceeding from particular result to general principle. It
is also known as historical, empirical or ‘a posteriori’ method of economic
analysis.
Inelastic Demand Market: It refers to a market where the demand for a
good is showing less response to a change in price.
Inferior good: It is a good for which consumer’s income and demand are
inversely related.
Inflation: It is a sustained rise in the general price level in an economy.
Internal Diseconomies: These are disadvantages that originate from
expansion in the scale of production that lead to rise in cost of
production.
Interpersonal comparisons of utility: Utility derived from a good for
different individuals are compared.
Introspection: Ability of the observer to know what is going in the mind
of another person by self observation process.
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Inverse relation: If an increase in one variable is associated with a
decrease in the other, then there is negative or inverse relationship
between two variables.
Isocost line: The isocost line is the producer’s budget line C = rK + wL
Isoquant map: It is a set of isoquants f (L, K) = Q which are sloping
downwards and convex to the origin and are parallel curves.
Isoquant: An Isoquant f (L, K) =Q0 represents alternative combinations of
two inputs L and K that produce a given level of output Q0.
Kinked Demand Curve: In oligopoly market, the demand curve faced by
the sellers is kinked having higher elasticity before kink and lower
elasticity after kink.
Labour elasticity of output: It is degree of responsiveness of output to
labour, which is equal to (MPPL/APPL)
Labour: It refers to the services rendered by workers.
Land: It refers to all natural resources which are gifts of nature.
Law of Demand: Other things remaining constant, as price of a good
rises its quantity demanded falls and vice versa.
Law of Variable proportion of inputs: According to this law, if one
factor in a combination of a fixed factor is increased, after a point, first
the marginal and then the average product of variable factor will
diminish.
Linear function: It is a first degree functional relation of the form
Y=a+bX with the constant marginal value of Y equal to b.
Linearly homogeneous production function: Q = f (L,K) is defined as a
homogeneous function of degree one if by increasing the inputs L and K
by m times the output would also be increased by m times.
Long – run: In the long run, all inputs are variable without any fixed
input but with constant technology. It leads to the operation of the laws
of return to scale in the production process.
Long run cost: It refers to cost incurred in the long run, which changes
with the level of output.
Long-run behaviour of Production: It is explained in terms of the laws
of returns to scale.
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Macro economics: A study of aggregates such as national income, total
savings, and total investment.
Macro production function: It is output per worker related with capital
stock per worker and the efficiency of labour. Economic growth depends
on efficiency of labour and capital parameter.
Margin: The additional cost and benefit involved in a decision.
Marginal Cost: It is additional cost of producing one extra unit of
output.
Marginal Product: It is addition to total product by one more unit of an
input.
Marginal Rate of Substitution (MRS): It is the amount of one
commodity that a consumer is willing to give up in order to gain one
additional unit of another commodity to get the same level of satisfaction.
Marginal Rate of Technical Substitution (MRTSLK:): It is equal to slope
of an isoquant =
K
L
, which gives the rate at which labour is
substituted for capital to produce the same level of output.
Marginal utility: It is the additional utility derived by the consumer by
consuming an extra unit of a good.
Mathematical method: It explains the relation of mutual dependence,
which may exist between different economic variables such as supply,
demand and price.
Micro Economics: The study of individual unit such as individual
household, individual firm and individual market.
Monopolist Price Discrimination: Monopolist discriminates prices
based on the elasticity of demand for their products.
Negative returns in Short-run Production: In this stage of negative
returns, the marginal product of the variable factor is negative.
Negative slope: The curve is downward sloping from left to right.
Non-satiety: It implies that consumer always prefers more of a
commodity to less.
Normal good: Consumer’s income and quantity demanded are directly
related.
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Normative economics:
It is explaining the conditions that should
prevail in the economy. It deals with “What ought to be”.
Opportunity Cost: Benefit foregone in the next best alternative decision.
Optimum Firm: It refers to the best or ideal size of the firm which
ensures the most efficient utilization of resources.
Optimum Output: It refers to a particular level of output which has the
lowest average cost of production.
Ordinal Utility: It is ranking the preference of the consumer. So utility
from different goods can be compared and ranked.
Ordinalism: Assigning ranks to preference is known as ordinalism
Organisation: It refers to the services of the organiser
Parametric Constant: It provides either marginal value (linear function)
or elasticity value (power function) or growth rate (exponential function).
Partial Analysis: In this analysis economists assume that all economic
conditions remain the same except that being studied.
Perfectly elastic demand: It is an infinite change in the quantity
demanded of a good for a small change in price.
Perfectly inelastic demand: It is no change in the quantity demanded of
a good for a very large change in its price.
Point Elasticity of Demand: On any point on a straight line demand
curve, lower segment divided by the upper segment of the demand curve
is point elasticity of demand.
Positive economics: It is a statement of facts or it deals with “What is”
the actual conditions prevailing in the economy.
Power function: It is a non-linear functional relation of the form Y= aXb
with constant elasticity value of Y equal to b.
Price consumption curve: It is a curve on an indifference map showing
how consumption bundles change at equilibrium as price of one
commodity alone changes.
Price Elasticity of Demand: It refers to the degree of responsiveness of
demand to a change in price.
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Producer’s equilibrium: It is point of tangency of isocost line and
isoquant giving optimum resource combination in production and MRTS
is equal to factor price ratio.
Production Function: It is a technical relation between inputs and
output which gives maximum possible output for the given inputs at
constant technology.
Production Subsidy: A government gives subsidy to the producers to
reduce their cost of production.
Production: It is the process of using material and labour inputs to
make goods and services.
Proportionality rule: In production
MPL MPK

is proportionality rule
w
r
Rational Consumer: A consumer who aims at maximum satisfaction out
of the total money spent on goods and services.
Real income: The purchasing power of money income, measured by
deflating national income by consumer price index.
Relatively elastic demand: It is large change in the quantity demanded
of a good for a change in price.
Relatively inelastic demand: It is small change in the quantity
demanded of a good for a change in price.
Resources or Inputs: Resources are the basic inputs used in the
production of goods and services.
Ridge line (or) Ridge curve: It is locus of points with either MPL =0 or
MPK=0 in the production process.
Sales Tax: A government imposes sales tax on goods to get revenue.
Scarcity: The resources that are available to the society are limited to
satisfy the wants of the human beings.
Scientific method: From hypothesis to theory and then to scientific law
is the continuous march of the scientific method of reasoning.
Short – run: In this time period, some inputs are variable and other
inputs remain fixed.
It leads to the operation of the laws of variable
proportions in the production process.
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Short-run Cost: It refers to costs incurred in the short run. In the short
run fixed cost remains constant and variable cost changes with the level
of output.
Slope of Isocost Line: It is the ratio of input prices, that is, (price of
labour/ price of capital)
Slope of Price line: It is the steepness of price line given by the price
ratio of two commodities.
Slope of the Demand Curve: It measures the rate of change in demand
to a change in price.
Snob effect: It refers to the desire or demand for a good by a person who
wants to possess that good for its snob value and therefore many others
do not have it.
Stage I in Short-run Production: In this stage of increasing returns
marginal product of the fixed factor is negative.
Stage II in Short-run Production: This stage of decreasing returns
represents the range of rational production decisions.
Stage III in Short-run Production: In this stage of negative returns, the
marginal product of the variable factor is negative.
Statistical method: It is collection of data followed by classification,
presentation and analysis of data.
Substitutes and Complements: Fall in the price of a good reduces the
demand
for
its
substitutes
and
increases
the
demand
for
its
complements.
Substitution effect: When the price of a good rises, consumers buy less
of it and substitute cheaper good for costlier good and vice versa.
Technology: It refers to the known means and methods available for
combining resources to produce goods and services.
Terms of Trade: The rate at which one country’s products is exchanged
for another country’s products.
Total Cost: It is total value of resources used in the production of goods.
It is the sum of total fixed cost and total variable cost.
Total Fixed Cost: It is cost incurred on the employment of fixed factors
of production in the short run.
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Total utility: It is utility derived from all the goods consumed.
Total Variable Cost: It is cost incurred on the employment of variable
factors of production
Trade Cycles: These are recurring fluctuations in the general level of
economic activity.
Trade-off: It is sacrifice of one goal to attain another goal.
Transitivity: It states that if A is preferred to B and B is preferred to C
then A is preferred to C.
Unemployment Rate: It is the percentage of the labour force that is
unemployed.
Unitary elastic demand: It is equal change in the quantity demanded
and in the price of a good.
Utility: It is the want satisfying power of a good or service.
Variable proportion Isoquant: It is convex to the origin that denotes
possibility of input substitution.
Variable: It is a character whose values change. In any economic relation
there are endogenous variables whose value is determined from the
model and exogenous variables whose values are predetermined.
Veblen effect: It refers to the purchase or demand for conspicuous
consumption. When the price of conspicuous good falls, the demand for
those goods decreases.
Very long run: In the very long run, all inputs are variable without any
fixed input and with changing technology.
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