1 Scope – Economics (INCOMPLETE)

1.1 What is economics?

It is important to note that economics encompasses a wide range of interpretations. There is no single definition that covers all facets. Nevertheless, there are certain aspects on which there is a certain consensus. This is the subject of the next chapter.

1.1.1 Production and productivity

Economics is the study of how to maximize welfare, production, consumption of goods and services, and whatever may be considered beneficial for an economy and the people that live therein.

Wikipedia (2022): “An economy is an area of the production, distribution, and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasizes the practices, discourses, and material expressions associated with the production, use, and management of scarce resources. Simplified, one can say that an economy is a system for providing livelihoods to people.”

Wikipedia. (2022). Wikipedia, the free encyclopedia. https://en.wikipedia.org/.

Exercise 1.1 Production and Productivity

Discuss the meaning of the terms production and productivity.

1.1.2 Efficiency and effectiveness

Economics and successful management revolves around two key concepts: Efficiency and Effectiveness.

Efficiency refers to the ability to achieve an intended result while minimizing waste in terms of time, effort, and resources. It emphasizes performing tasks in the most optimal manner, such as achieving results quickly or at the lowest cost. However, it’s important to note that efficiency can sometimes be applied to the wrong activities, meaning that while the task may be done optimally, the outcome may not be the desired one.

Please keep in mind that efficiency is not an indicator of doing the right things. For example, if you are a business that provides a product that nobody wants to buy anymore, you can produce this product with the highest efficiency possible, but you will ultimately fail.

Effectiveness, on the other hand, is the capacity to produce better results that deliver greater value or achieve more favorable outcomes. It focuses on ensuring that the right tasks are carried out, completing activities successfully, and ultimately reaching one’s goals.

Managers and individuals with goals should choose actions that are effective—meaning those actions allow them to achieve their intended objectives—and they should strive to execute these actions efficiently.

Exercise 1.2 Wisdom of the Dakota Indians

A well-known piece of wisdom from the Dakota Indians states: “If you realize that you are riding a dead horse, get off!”

Discuss what could that mean in a management context.

Solution

When managers are not doing the right thing they sometimes refuse to accept that they have the wrong business idea or the wrong strategy or product. Instead, they often tend to pursue the chosen strategy trying to do things more efficiency. To stay in the metapher:

They procure a stronger whip.
They change the rider.
They argue, “That’s how we’ve always ridden this horse!”
They form a working group to analyze the dead horse.
They visit other places to see how they handle dead horses there.
They raise the quality standards for riding dead horses.
They create a task force to revive the dead horse.
They schedule a training session to learn how to ride better.
They make comparisons between different dead horses.
They change the criteria that determine whether a horse is dead.
They hire external experts to ride the dead horse.
They yoke several dead horses together to make them faster.
They assert, “No horse can be so dead that it can’t be beaten!”
They allocate additional resources to improve the horse’s performance.
They commission a study to find out if there are cheaper consultants.
They purchase something that claims to teach dead horses to run faster.
They declare that our horse is better, faster, and cheaper when dead.
They form a quality circle to find a use for dead horses.
They revise the performance criteria for dead horses.
They establish an independent cost center for dead horses.
They have the horses certified as quickly as possible.
They freeze the horses and wait for a new technology that will allow them to ride dead horses.
They form a prayer group to pray for the horse’s health.
They place the horse in someone else’s stable and claim it as theirs.
They note that others are also riding dead horses and declare this the norm.
They change the requirements for riding and movement and issue a new development mandate.
They outsource the horse.
They bet that the horse is just pretending to be dead.
If you can’t ride a dead horse, it can at least pull a cart.

1.1.3 Economic topics

You are studying economics at a time of enormous change. Some of these changes are for the better, while others are for the worse. Studying economics will help you to understand the powerful forces that are shaping and changing our world.

Recent topics in economics:

COVID
Protectionism/trade war
Brexit
Euro crisis
Monetary policy
Refugees
Germany’s trade surplus
Greece’s debt crisis
Real estate crisis
Global financial crisis in 2009
Economics of the Corona Crisis
Oil price fluctuations
U.S. Dollar strength
Economics of climate change

1.1.4 Definitions

All economic questions arise because we want more than we can get.
Our inability to satisfy all our wants is called scarcity.
Because we face scarcity, we must make choices.
The choices we make depend on the incentives we face. An incentive is a reward that encourages or a penalty that discourages an action.

Economics is a social science, and like all social sciences, many of the terms used in it are poorly defined. For example, the term economy can be understood differently, as the following quotes from Figure 1.1 to Figure 1.4 demonstrate:

Figure 1.1: John Maynard Keynes (1883-1946)

Figure 1.3: James Duesenberry (1918-2009)

Colander (2006): “Economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of society.”

Colander, D. C. (2006). Economics (6th ed.). McGraw-Hill Irvin.

Parkin (2012): “Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices.”

Gwartney et al. (2006): “[E]conomics is the study of human behavior, with a particular focus on human decision making.”

Gwartney, J. D., Stroup, R. L., Sobel, R. S., & MacPherson, D. A. (2006). Microeconomics: Private and public choice. Mason.

Backhouse & Medema (2009): “[E]conomics is apparently the study of the economy, the study of the coordination process, the study of the effects of scarcity, the science of choice, and the study of human behavior.”

Greenlaw & Shapiro (2022): “Economics seeks to solve the problem of scarcity, which is when human wants for goods and services exceed the available supply. A modern economy displays a division of labor, in which people earn income by specializing in what they produce and then use that income to purchase the products they need or want. The division of labor allows individuals and firms to specialize and to produce more for several reasons: a) It allows the agents to focus on areas of advantage due to natural factors and skill levels; b) It encourages the agents to learn and invent; c) It allows agents to take advantage of economies of scale. Division and specialization of labor only work when individuals can purchase what they do not produce in markets. Learning about economics helps you understand the major problems facing the world today, prepares you to be a good citizen, and helps you become a well-rounded thinker.

Greenlaw, S. A., & Shapiro, D. (2022). Principles of economics (2nd ed.). OpenStax.

Backhouse & Medema (2009): “Perhaps the definition of economics is best viewed as a tool for the first day of principles classes but otherwise of little concern to practicing economists.”

Although many textbook definitions are quite similar in many ways, the lack of agreement on a clear-cut definition of economics is not necessarily problematic, as Backhouse & Medema (2009) states:

Backhouse, R. E., & Medema, S. G. (2009). Retrospectives: On the definition of economics. Journal of Economic Perspectives, 23(1), 221–233.

“[E]conomists are generally guided by pragmatic considerations of what works or by methodological views emanating from various sources, not by formal definitions.”

1.2 Microeconomics vs. Macroeconomics

Parkin (2012): “Microeconomics is the study of the choices that individuals and businesses make, the way these choices interact in markets, and the influence of governments. […] Macroeconomics is the study of the performance of the national economy and the global economy.’’

Parkin, M. (2012). Economics (10th ed.). Addison-Wesley.

Microeconomics and macroeconomics are two different perspectives on the economy. The microeconomic perspective focuses on parts of the economy:

Individuals
Firms
Industries

Some examples of microeconomic questions are:

Why are people downloading more movies?
How would a tax on e-commerce affect eBay?

The term macro comes from the Greek word makros, meaning large. Thus, it studies groups or the entire economy using aggregate measures related to welfare and standards of living such as:

National income
Money
Total (un)employment
Aggregate demand and supply
Total savings
Inflation
General price level
International trade
Balance of trade,
…

Macroeconomics employs two key policy approaches to pursue these objectives:

Fiscal policy pertains to the regulation of government revenue, expenditures, and debt to generate positive impacts while averting negative effects on income, output, and employment.
Monetary policy involves controlling money supply and credit to stimulate business activities, foster economic growth, stabilize price levels, attain full employment, and achieve balance of payments equilibrium.

Some examples of macroeconomic questions are:

Why is the U.S. unemployment rate so high?
Can the Federal Reserve make our economy expand by cutting interest rates?

Why separate micro and macroeconomics? Certainly, events occurring at the micro-level can provide insights into phenomena observed at the macro-level, and vice versa. Thus, there is an interdependence of these disciplines. Nevertheless, there remains value in distinguishing them because:

What is good at the micro level doesn’t have to be good for the economy as a whole.
Macroeconomic problems can only be comprehended and solved through macro-level policy actions and programs.

Exercise 1.3 Read Krugman (1996), which is also available online: Harvard Business Review.

Discuss why Trump may not like Krugman’s expertise on international trade and comment on Krugman (1996)’s quote:

“The next time you hear business people propounding their views about the economy, ask yourself: Have they taken the time to study this subject? Have they read what the experts write? If not, never mind how successful they have been in business. Ignore them, because they probably have no idea what they are talking about.”

Discuss the following quote from the article What Do Undergrads Need to Know About Trade? by Nobel Laureate Paul Krugman (1993):

“It should be possible to emphasize to students that the level of employment is a macroeconomic issue, depending in the short run on aggregate demand and depending in the long run on the natural rate of unemployment, with microeconomic policies like tariffs having little net effect. Trade policy should be debated in terms of its impact on efficiency, not in terms of phony numbers about jobs created or lost.”

Krugman, P. R. (1993). What do undergrads need to know about trade? American Economic Review, 83(2), 23. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=9306305796&site=ehost-live

Krugman, P. R. (1996). A Country Is Not a Company. Harvard Business Review, 74, 40–51.

1.3 The scope of economics in five questions

How do choices end up determining what, where, how, and for whom goods and services get produced?
When do choices made in the pursuit of self-interest also promote the social interest?

1.3.1 What?

As demonstrated in Figure 1.6, what we produce changes over time.

Figure 1.6: Clark’s Sector Model for US economy with current events highlighted.

1.3.2 How?

Goods and services are produced by using productive resources that economists call factors of production:

Land (aka natural resources): These are the gifts of nature that we use to produce goods and services.
Labor: This is the work time and effort that people devote to production. The quality of labor depends on human capital, which encompasses the knowledge and skill that people obtain from education, on-the-job training, and work experience.
Capital: Refers to the tools, instruments, machines, buildings, and other constructions employed in the production process.
Entrepreneurship: This is the human resource that organizes labor, land, and capital. Entrepreneurs come up with new ideas about what and how to produce, make business decisions, and bear the risks that arise from these decisions.

What determines the quantities of factors of production used to produce goods and services is a typical economic question.

1.3.3 For whom?

Who gets the goods and services depends on the incomes that people earn. People earn their incomes by selling the services of the factors of production they own:

Land earns rent.
Labor earns wages.
Capital earns interest.
Entrepreneurship earns profit.

Why is the distribution of income so unequal? Why do women and minorities earn less than white males?

1.3.4 Where?

We all know the World is not flat: The placement of land, labor, capital, and entrepreneurs in space is important. In particular, Regional Science considers that importance.

“No other discipline can claim such a wide scope of interest and relevance to today’s rapidly changing World. Thus, contrary to the claims of the ‘end of geography’, the process of globalization is making geography more important than ever.” Sokol (2011)

Sokol, M. (2011). Economic geographies of globalisation. Edward Elgar Publishing.

Unfortunately, the main microeconomic and macroeconomic textbooks usually refrain from discussing the question “Where?”. One reason for this could be that the introduction of space into the theory is not trivial. Ignoring the existence of regional differences and transport is accompanied by a lack of reality and may lead to wrong conclusions.

1.4 When is the pursuit of self-interest in the social interest?

7,800,000,000 people make economic choices every day that result in What, How, and For Whom goods and services get produced.

Do we produce the right things in the right quantities?
Do we use our factors of production in the best way?
Do the goods and services go to those who benefit most from them?

Well, it depends on whether we consider self-interest or social interest:

Self-interest: A choice is in your self-interest if you think that choice is the best one available for you. You use your time and other resources in the ways that make the most sense to you.
Social interest: A choice is in the social interest if it leads to an outcome that is the best for society as a whole. The social interest has two dimensions: efficiency and equity (or fairness). What is best for society is an efficient and fair use of resources.

Exercise 1.4 Do you act in self-interest and who decides?

Are you acting in your own interest or are you acting in the interest of a third party? And, do you have freedom of choice?
Who decides what, how, and for whom? Discuss.
Is it possible that when each of us makes decisions that are in our own best interest, it also turns out that those decisions are also in society’s best interest?
Do public ownership and central planning do a better job than private corporations and free markets?
Don’t corporate scandals show that large corporations work against society’s interest?
Should pharmaceutical companies be forced to provide HIV/AIDS drugs (or others) to poor people at low cost?
Why are we destroying the environment?
Why don’t all people have jobs?

1.5 The economic way of thinking

The questions that economics attempts to answer tell us something about the scope of economics, but they do not tell us (1) how economists think and (2) how economists conduct research to find answers.

Exercise 1.5 TANSTAAFL

A friend gifts you a shirt, as shown in Figure 1.7. You like it; however, you want to learn what the acronym TANSTAAFL means before you wear it. Take a moment to discover the message associated with the shirt’s imprint. Do you think your friend’s gift was truly altruistic?

Solution

See Wikipedia (2025).

Wikipedia. (2025). No such thing as a free lunch. https://en.wikipedia.org/wiki/No_such_thing_as_a_free_lunch

1.5.1 A choice is a tradeoff

Before discussing how economists do research, let’s look at six key concepts that define the economic way of thinking:

A choice is a tradeoff.
People make rational decisions by comparing benefits and costs.
Benefit is what you get out of something.
Cost is what you have to give up to get something.
Most choices are how-much choices made at the margin.
Choices respond to incentives.

Due to scarcity, we are forced to make a choice. Whenever we make a decision, we choose from the available alternatives. It can be helpful to think of each choice as a trade-off - an exchange in which we give up one thing to get another.

The questions of what, how and for whom become clearer when we consider trade-offs:

What? Trade-offs occur when individuals decide how to divide their income, when governments decide how to spend tax revenues, and when companies decide what products to make.
How? Trade-offs occur when companies evaluate different production technologies to maximise efficiency.
For whom? Trade-offs affect the distribution of purchasing power among citizens. Government redistribution of income from the wealthy to the less fortunate is an example of the great trade-off - the balance between equality and efficiency.

The production of goods and services—what is produced, how it is produced, and for whom it is produced—changes over time, leading to improvements in the quality of our economic lives, provided we make wise decisions. The quality of those decisions hinges on the tradeoffs we face.

Example

We encounter three significant tradeoffs between enjoying current consumption and leisure time versus increasing future production, consumption, and leisure time:

By saving more today, we can invest in productive capital, such as machinery, which will enhance our production capacity in the upcoming time.
By reducing our leisure time, we can focus on education and training, ultimately becoming more productive in the long run.
If businesses choose to decrease current production and allocate resources to research and development of new technologies, they can boost future output.

The decisions we make in this area of conflict have a significant influence on the speed at which our economic conditions improve.

Exercise 1.6

Name choices that involve tradeoffs.
Give some examples for choices without tradeoffs.

1.5.2 Rational choices

Economists view the choices that people make as rational. A rational choice is one that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice.

Exercise 1.7 The businessman and the fisherman

A classic tale that exists in different versions goes like this:

One day a fisherman was lying on a beautiful beach, with his fishing pole propped up in the sand and his solitary line cast out into the sparkling blue surf. He was enjoying the warmth of the afternoon sun and the prospect of catching a fish.

About that time, a businessman came walking down the beach, trying to relieve some of the stress of his workday. He noticed the fisherman sitting on the beach and decided to find out why this fisherman was fishing instead of working harder to make a living for himself and his family.

“You aren’t going to catch many fish that way,” said the businessman to the fisherman.

“You should be working rather than lying on the beach!”

The fisherman looked up at the businessman, smiled, and replied, “And what will my reward be?”

“Well, you can get bigger nets and catch more fish!” was the businessman’s answer. “And then what will my reward be?” asked the fisherman, still smiling.

The businessman replied, “You will make money and you’ll be able to buy a boat, which will then result in larger catches of fish!”

“And then what will my reward be?” asked the fisherman again.

The businessman was beginning to get a little irritated with the fisherman’s questions. “You can buy a bigger boat, and hire some people to work for you!” he said.

“And then what will my reward be?” repeated the fisherman.

The businessman was getting angry. “Don’t you understand? You can build up a fleet of fishing boats, sail all over the world, and let all your employees catch fish for you!”

Once again the fisherman asked, “And then what will my reward be?”

The businessman was red with rage and shouted at the fisherman, “Don’t you understand that you can become so rich that you will never have to work for your living again! You can spend all the rest of your days sitting on this beach, looking at the sunset. You won’t have a care in the world!”

The fisherman, still smiling, looked up and said, “And what do you think I’m doing right now?”

Source: This version of the tale stems from theStorytellers.com (2025).

Who is acting rationally here? The fisherman or the businessman? What are the costs and benefits of both?

theStorytellers.com. (2025). The businessman and the fisherman. https://thestorytellers.com/the-businessman-and-the-fisherman/

1.5.3 Benefit: What you gain

The utility of an item refers to the gain or pleasure it provides and is determined by preferences, that is, what a person likes or dislikes and the intensity of those feelings. Economists measure utility as the maximum amount a person is willing to give up to obtain something.

1.5.4 Cost: What you must give up

When considering a choice as a tradeoff, it is essential to emphasize cost as an opportunity foregone. The opportunity cost of something is the highest-valued alternative that must be sacrificed to get it.

Utility as a general measure

The concept of utility within economics is used to model worth or value, and its usage has evolved significantly over time by many significant people including those shown in Figure 1.8. Initially introduced as a measure of pleasure or happiness within the theory of utilitarianism by moral philosophers such as Jeremy Bentham and John Stuart Mill, the concept was later developed and popularized by Léon Walras. In microeconomics, it typically represents the satisfaction or pleasure that consumers derive from consuming a bundle of goods and services.

1.5.5 Choosing at the margin

Choosing between studying or watching Netflix is rarely an all-or-nothing decision. Instead, you consider how many minutes to allocate to each activity. In making this decision, you compare the benefit of a bit more study time against its cost, effectively making your choice at the margin.

People often make choices at the margin, which means they evaluate the consequences of making incremental changes in the use of their resources.

The benefit derived from pursuing a small increase in activity is known as its marginal benefit, while the opportunity cost of that incremental increase is referred to as its marginal cost.

Our choices respond to incentives. For any activity, if the marginal benefit exceeds the marginal cost, people have an incentive to increase that activity. Conversely, if the marginal cost exceeds the marginal benefit, people have an incentive to reduce that activity.

Exercise 1.8 Marginal analysis

Watch this video and solve the associated problems.

1.6 International economics

International economics is covered in more detail in ?sec-monetary, Chapter 20 and Chapter 25. However, let us briefly discuss the scope of this important area of economics.

1.6.1 What is international trade?

International trade is the exchange of capital, goods, and services across international borders or territories. Questions of international trade include:

Why do nations trade?
What do they trade?
What is the effect of trade policies on trade and welfare?
Can trade in goods substitute for factor mobility?
Is free trade better than autarky?
What are the effects of trade on income distribution?
If there are winners and losers from trade liberalization, can the former compensate the latter?
If nations gain from trade, how are the gains distributed?
What are the welfare effects of various trade policies?

Exercise 1.9 Trade and Putin

Discuss the following quote in the context of the war between Russia and Ukraine.

“International trade and international capital flows link national economies. Although such links are considered to be beneficial for the most part, they produce an interdependence that occasionally has harmful effects. In particular, shocks that emanate in one country may negatively impact trade partners.” (Helpman & Itskhoki, 2010)

Helpman, E., & Itskhoki, O. (2010). Labour Market Rigidities, Trade and Unemployment. Review of Economic Studies, 77(3), 1100–1137.

1.6.2 COVID and international economics: Stylized facts

See Figure 1.9 to Figure 1.11 and read Arriola et al. (2021) for further information.

Figure 1.9: Imports and exports in USD billion, OECD countries

Figure 1.10: Year-on-year growth rates of export volumes

Figure 1.11: World merchandise trade and industrial production volumes

1.6.3 What is international monetary economics?

International monetary economics focuses on the financial aspects of international trade. It studies the flows of money across countries and their effects on economies as a whole.

Exercise 1.10 Discuss the content of Figure 1.12 to Figure 1.14.

1.7 What is international trade policy?

International trade policy encompasses the interplay of national interests affecting trade across borders. It is based on the assumption that a country’s international trade policy serves its citizens’ and companies’ interests.

Exercise 1.11 Read euronews.com, see Figure 1.15.

Figure 1.15: Juncker responds on 03/03/2018

European Commission chief Jean-Claude Juncker has vowed to fight back against US President Donald Trump’s threat of a 25% tariff on steel and 10% on aluminium imports (see Figure 1.15).

“So now we will also impose import tariffs. This is basically a stupid process, the fact that we have to do this. But we have to do it. We will now impose tariffs on motorcycles, Harley Davidson, on blue jeans, Levis, on Bourbon. We can also do stupid. We also have to be this stupid,” he said in Hamburg on Friday evening.

While Trump may be comfortable with the idea of a trade war, it wasn’t just across the Atlantic where the leader’s plans ruffled feathers.

“We are impressing upon the American administration the unacceptable nature of these proposals that are going to hurt them every bit as much as they will hurt us,” said Canadian Prime Minister Justin Trudeau.

The warnings from leaders around the world mirrored those of the International Monetary Fund, which said Trump’s plan would cause damage both internationally and within America itself.

Trump, however, remains defiant, insisting that trade wars are good and easy to win.

Watch this video. Also see Figure 1.16.

Figure 1.16: Trump and Juncker talk (7/25/2018)

Exercise 1.12 Free trade: Good or bad?

Please consider the following subfigures of Figure 1.17 and discuss whether trade is something ‘good’ or ‘bad’.

Some comments on a solution

The costs and benefits of international trade is a controversial topic in politics and academia. In academia, it is a widely shared belief that free trade can be (don’t have to be!) a positive-sum game. Outside of academia, however, many people fear international trade because they might loose their competitive advantage in business or their jobs to foreign competitors. Nevertheless, it has to be stated that consumers decide to buy a lot of items from foreign suppliers without being forced to do so. Politicians take advantage of the topic to make popular statements.

1.7.1 Glossary of terms in international economics

Trade: Trade involves the transfer of goods or services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market.
International trade: International trade is the exchange of capital, goods, and services across international borders or territories.
Export: An export in international trade is a good or service produced in one country that is bought by someone in another country. The seller of such goods and services is an exporter; the foreign buyer is an importer.
Import: An import in the receiving country is an export from the sending country. Importation and exportation are the defining financial transactions of international trade.
Balance of trade: The balance of trade, commercial balance, or net exports (sometimes symbolized as NX), is the difference between the monetary value of a nation’s exports and imports over a certain time period.
Trade deficit/surplus: If a country exports a greater value than it imports, it has a trade surplus or positive trade balance; conversely, if a country imports a greater value than it exports, it has a trade deficit or negative trade balance.
Balance of payments: The balance of payments, also known as balance of international payments and abbreviated B.O.P. or BoP, of a country is the record of all economic transactions between the residents of the country and the rest of the world in a particular period of time (e.g., a quarter of a year). These transactions are made by individuals, firms, and government bodies. Thus, the balance of payments includes all external visible and non-visible transactions of a country. It is an important issue to be studied, especially in the international financial management field.
Trade barrier: Trade barriers are government-induced restrictions on international trade.
Tariff: A tariff is a tax on imports or exports between sovereign states. It is a form of regulation of foreign trade and a policy that taxes foreign products to encourage or safeguard domestic industry. Traditionally, states have used them as a source of income. They are now among the most widely used instruments of protectionism, along with import and export quotas.
Trade war: A trade war is an economic conflict resulting from extreme protectionism in which states raise or create tariffs or other trade barriers against each other in response to trade barriers created by the other party.
Protectionism: Protectionism is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations.
Autarky: Autarky is the characteristic of self-sufficiency; the term usually applies to political states or their economic systems. Autarky exists whenever an entity survives or continues its activities without external assistance or international trade.
Closed economy: If a self-sufficient economy also refuses to conduct any trade with the outside world, then economists may term it a “closed economy.”
Production-possibility frontier: A production–possibility frontier (PPF) or production possibility curve (PPC) is a curve that shows various combinations of the amounts of two goods that can be produced within the given resources and technology— a graphical representation showing all the possible options of output for two products that can be produced using all factors of production, where the given resources are fully and efficiently utilized per unit time.
Indifference curve: In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. That is, any combinations of two products indicated by the curve will provide the consumer with equal levels of utility, and the consumer has no preference for one combination or bundle of goods over a different combination on the same curve.
Utility: Within economics, the concept of utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or satisfaction within the theory of utilitarianism by moral philosophers such as Jeremy Bentham and John Stuart Mill. The term has been adapted and reapplied within neoclassical economics, which dominates modern economic theory, as a utility function that represents a consumer’s preference ordering over a choice set. It is devoid of its original interpretation as a measurement of the pleasure or satisfaction obtained by the consumer from that choice.