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1 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 2 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. 3 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 4 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 5 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. 6 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. 7 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. 8 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. 9 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. 10 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. 11 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. 12 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. 𝛿* * *