Professional Documents
Culture Documents
Expansion Path: Key Terms
Expansion Path: Key Terms
Expansion Path: Key Terms
AVERAGE PRODUCT - It is defined as the output per unit of factor inputs or the average of the
total product per unit of input and can be calculated by dividing the Total Product by the inputs
(variable factors).
EXPANSION PATH - (also called a scale line) is a curve in a graph with quantities of two inputs,
typically physical capital and labor, plotted on the axes. The path connects optimal input
combinations as the scale of production expands.
ISOCOST - line shows all combinations of inputs which cost the same total amount. Although
similar to the budget constraint in consumer theory, the use of the isocost line pertains to cost-
minimization in production, as opposed to utility-maximization.
LAW OF DIMINISHING MARGINAL RETURNS - returns states that as one input variable is
increased, there is a point at which the marginal increase in output begins to decrease, holding all
other inputs constant. At the point where the law sets in, the effectiveness of each additional unit of
input decreases.
MARGINAL PRODUCT - is the change in total output as one additional unit of input is added
to production. In other words, it measures the how many additional units will be produced by adding
one unit of input like materials, labor, and overhead.
OUTPUT - is the "quantity of goods or services produced in a given time period, by a firm, industry,
or country", whether consumed or used for further production. The concept of national output is
essential in the field of macroeconomics.
ECONOMIC PRODUCTION - is an activity carried out under the control and responsibility of an
institutional unit that uses inputs of labor, capital, and goods and services to produce outputs of
goods or services
BUDGET CONSTRAINT - represents all the combinations of goods and services that a
consumer may purchase given current prices within his or her given income.
CARDINAL UTILITY - is the utility wherein the satisfaction derived by the consumers from the
consumption of good or service can be expressed numerically.
ENGEL CURVE - describes how household expenditure on a particular good or service varies
with household income.
INCOME CONSUMPTION CURVE is a curve in a graph in which the quantities of two goods
are plotted on the two axes; the curve is the locus of points showing the consumption bundles
chosen at each of various levels of income.
INCOME EFFECT - in economics can be defined as the change in consumption resulting from a
change in real income.
LAW OF DIMINISHING MARGINAL UTILITY - states that all else equal as consumption
increases the marginal utility derived from each additional unit declines.
MARGINAL RATE OF SUBSTITUTION (MRS) - is the rate at which a consumer can give
up some amount of one good in exchange for another good while maintaining the same level of
utility. At equilibrium consumption levels (assuming no externalities), marginal rates of
substitutionary identical.
ORDINAL UTILITY - states that the satisfaction which a consumer derives from the consumption
of good or service cannot be expressed numerical units.
SUBSTITUTION EFFECT - the effect on the amount of demand for a product of a change in its
relative price.