CABANDING, SHEMIAH RUTH M.

BSBA FM1-G2
MIRCOECONOMICS

CHAPTER 5: THE CONSUMERS BEHAVIOR

KEY TERMS

 Budget Line - The budget line is a graphical delineation of all possible combinations of the two
commodities that can be bought with provided income and cost so that the price of each of these
combinations is equivalent to the monetary earnings of the customer.
 Cardinal Ranking of Preference -  Cardinal utility gives a value of utility to different options. It
states that the level of satisfaction a consumer acquires after consuming any goods and services
can be measurable and expressed in quantitative numbers.
 Engel Curve - The Engel curve describes how the spending on a certain good varies with
household income by either proportion or absolute dollar amount.
 Income Consumption Curve -  is the set of tangency points of indifference curves with the
various budget constraint lines, with prices held constant, as income increases shifting the budget
constraint out.
 Income Effect - The income effect states that when the price of a good decreases, it is as if the
buyer of the good's income went up.
 Indifference Curve - An indifference curve is a graph showing combination of two goods that
give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that
a consumer is indifferent between the two and all points give him the same utility.
 Law of Diminishing Marginal Utility - states that for any good or service, the marginal utility of
that good or service decreases as the quantity of the good increases, ceteris paribus. In other
words, total utility increases more and more slowly as the quantity consumed increases.
 Marginal Rate of Substitution -  is the amount of a good that a consumer is willing to consume
compared to another good, as long as the new good is equally satisfying. MRS is used in
indifference theory to analyze consumer behavior.
 Marginal Utility – is the added satisfaction a consumer gets from having one more unit of a good
or service. The concept of marginal utility is used by economists to determine how much of an
item consumers are willing to purchase. 
 Ordinal Ranking of Preferences - an ordinal utility function is a function representing
the preferences of an agent on an ordinal scale. Ordinal utility theory claims that it is only
meaningful to ask which option is better than the other, but it is meaningless to ask how much
better it is or how good it is.
 Price Consumption Curve - shows the quantity of goods a consumer is able to purchase when
the price of the good changes. Hence, It not only helps in indifference curve analysis but also
indicates the elasticity of the goods involved.
 Substitution Effect - The substitution effect states that when the price of a good decreases,
consumers will substitute away from goods that are relatively more expensive to the cheaper
good.
 Utility - is a term used to determine the worth or value of a good or service. More specifically,
utility is the total satisfaction or benefit derived from consuming a good or service.
CABANDING, SHEMIAH RUTH M.
BSBA FM1-G2
MIRCOECONOMICS

Chapter 6: CONCEPT OF PRODUCTION

KEY TERMS

 Average Product -  The term average product refers to the average output (or products) produced
by each input (factors of production like labor and land). It's a way for companies to measure
total output produced with a particular combination of variable inputs.
 Expansion Path – An expansion path shows the collection of a producer’s equilibrium caused by
varying total outlay while keeping factor prices unchanged.
 Isocost – shows the different combination of capital (K) and labor (L) that producers can
purchase or hire given their total outlay and the factor prices. An isocost that shift to the right
indicates increase in total outlay, while a leftward shift denotes a decrease in total outlay.
 Isoquant – is a curve which shows the different combinations of capital (K) and labor (L) which
yield the same level of output.
 Law of Diminishing Marginal Returns – it describes a pattern in most production portion in the
short-run. By holding one of the inputs constant except for one (it may be capital or labor)
continually increasing the other input, a certain point will be arrived at wherein the rate in the
increase of output will fall.
 Marginal Product - The marginal product(MP) refers to the total output quantity generated by
each extra input unit utilized in production. It is calculated by dividing the total product change
by the change in the inputs used. The rise in the marginal returns means every additional variable
input is more effective than the last input.
 Marginal Rate of Technical Substitution - The marginal rate of technical substitution (of labor
for capital) is the rate at which capital can be reduced for every one unit increase in labor, and
keeping output constant. It is defined as the absolute value of slope of the isoquant drawn with
labor on the horizontal axis, and capital on the vertical axis.
 Output – is the result that has been created by the inputs (in this case, when labor and capital are
combined) We have two types of outputs: goods and services.
 Production – is a process of combining two inputs to come up with an output. Capital and labor
are two important factors of production.
 Returns to Sale - Return on sales is a financial ratio that calculates how efficiently a company is
generating profits from its top-line revenue. It measures the performance of a company by
analyzing the percentage of total revenue that is converted into operating profits