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LAW OF DIMINISHING MARGINAL RETURNS: A principle stating that as more and more of a variable input is combined with a fixed input in short-run production, the marginal product of the variable input eventually declines. This is THE economic principle underlying the analysis of short-run production for a firm. Among a host of other things, it offers an explanation for the upward-sloping market supply curve. How does the law of diminishing marginal returns help us understand supply? The law of supply and the upward-sloping supply curve indicate that a firm needs to receive higher prices to produce and sell larger quantities. Why do they need higher prices?

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INVESTMENT, PRODUCTION POSSIBILITIES: Investment typically refers to the purchase of productive capital by business in anticipation of increasing production and (presumably) generating more profit. More generally, investment can be considered as sacrificing the current satisfaction of wants and needs (consumption goods) to expand productive capability (capital goods). Production possibilities analysis can be used to illustrate the tradeoff between consumption and capital as a movement along a production possibilities curve.

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CONTRACTIONARY FISCAL POLICY

A form of fiscal policy in which a decrease in government purchases, an increase in taxes, and/or a decrease in transfer payments are used to correct the inflationary problems of a business-cycle expansion. The goal of contractionary fiscal policy is to close an inflationary gap, restrain the economy, and decrease the inflation rate. Contractionary fiscal policy is often supported by contractionary monetary policy. An alternative is expansionary fiscal policy.

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