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 SAVING FUNCTION: The positive relation between household saving and household disposable income. The saving function is commonly presented as the saving line or propensity-to-saving line. The slope of this line is the marginal propensity to save, which is the proportion of any additional income used for saving. The saving function and the marginal propensity to saving play key roles in the multiplier and accelerator concepts. Because consumption is the difference between disposable income and saving, the consumption function is a complementary relation to the saving function.
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 Lesson 4: Production Possibilities | Unit 1: Getting Started Page: 2 of 24

 Topic: Assumptions <=PAGE BACK | PAGE NEXT=>

Every economic analysis builds on certain preconditions or assumptions. Assumptions, whether reasonable or seemingly unrealistic, let us:
1. Establish abstract benchmarks for comparison or
2. Break an analysis into simpler, more easily manageable parts.

Four key assumptions:

• Two Goods: Resources are used to produce one or both of only two goods. This is a simplifying assumption that lets us display graphs on the screen.
• Fixed Resources: The quantities of the labor, capital, land, and entrepreneurship resources do not change. This is a reasonable assumption that we can change to analysis resource changes.
• Fixed Technology: The information and knowledge that society has about the production of goods and services is fixed. This is another reasonable assumption that we can change to analysis technology changes.
• Technical Efficiency: Resources are used in a technically efficient way. We get the maximum possible production out of the resource inputs.

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DECREASING RETURNS TO SCALE

A given proportional change in all resources in the long run results in a proportional smaller change in production. Decreasing returns to scale exists if a firm increases ALL resources--labor, capital, and other inputs--by a given proportion (say 10 percent) and output increases by less than this proportion (that is, less than 10 percent). This is one of three returns to scale. The other two are increasing returns to scale and constant returns to scale.

 YELLOW CHIPPEROON[What's This?] Today, you are likely to spend a great deal of time at a flea market wanting to buy either a graduation present for your niece or nephew or a toaster oven that has convection cooking. Be on the lookout for jovial bank tellers.Your Complete Scope
 More money is spent on gardening than on any other hobby.
 "Sometimes our light goes out, but is blown into flame by another human being. Each of us owes deepest thanks to those who have rekindled this light. "-- Albert Schweitzer, missionary physician
 CRRAConstant Relative Risk Aversion
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