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Production Function
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shows how inputs translate to output, holding other factors constant
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Concave Function
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(y = sqrt(x)) function of two variables for which line segment between any two points on function lies entirely below the curve
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Average Product
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total output divided by a particular input (average output per unit input); straight line connecting parts of slope
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Marginal Product
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change in output per unit change of input (slow of tangent line)
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Diminishing Returns
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Situation in which the use of an additional unit of a factor of production results in smaller increase in output that the previous increase
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Preference
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description of the benefit or cost associated with each possible outcome
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Utility
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numerical indicator of the value that one places on an outcome such that higher valued outcomes will be chosen over lower valued ones when both a feasible
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Indifference Curve
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curve of points which indicate the combination of goods that provide a given level of utility to the individual
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Consumption Good
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good or service that satisfies needs of consumers over a short period
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Marginal Rate of Substitution (MRS)
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trade-off that someone is willing to make between two goods (preferences); slope of the indifference curve at any point
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Opportunity Cost
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when taking an action implies foregoing the next best alternative; net benefit of foregone alternative
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Economic Cost
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out of pocket cost of an action plus opportunity cost; monetary costs + subjective costs
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Feasible Frontier
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curve showing maximum feasible quantity of one good for a given quantity for another; maximum output levels that can be achieved with various amounts of input
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Feasible Set
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all combinations of things under consideration that a decision maker could choose given economic/physical/other constraints being faced
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Marginal Rate of Transformation (MRT)
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represents trade-off being faced; slope of the feasible frontier; quantity of some good that must be sacrificed to acquire an additional unit of another good
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Constrained Choice Problem
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how to do best for oneself given preferences, constraints, and scarcity
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Budget Constraint
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equation representing all combinations of goods and services that one could acquire that exactly exhaust one's budget resources
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Income Effect
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effect additional income would have if there were no change in price or opportunity cost; wage increase yields more income per hour worked --> incentive to decrease work hours
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Substitution Effect
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effect due only to changes in price or opportunity cost; wage increase raises opportunity cost of free time --> incentive to increase hours worked
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Overall Effect
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= income effect + substitution effect
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