Cost benefit analysis a resource allocation model

cost-benefit analysis A resource-allocation model that can be used by public sector and not-for-profit
organizations to evaluate programs or investments on the basis of the magnitude of the discounted costs and
benefits.
marginal use value The additional value of the consumption of one more unit; the greater the utilization
already, the lower the use value remaining.
marginal utility The use value obtained from the last unit consumed.
demand function A relationship between quantity demanded and all the determinants of demand.
supply function A relationship between quantity supplied and all the determinantsof supply.
substitute goods Two goods are substitutes if one’s demand increases when the price of the other good rises. If
the cross price elasticity of two goods is positive, they are substitutes.
complement goods Two goods are complements if one’s demand decreases when the price of the other good
rises. If the cross price elasticity of two goods is negative, they are complements.
Inferior goods are those goods that are purchased in smaller total quantities as income level rise.
supply curve A relationship between price and quantity supplied, holding other determinants of supply
constant.
marginal analysis A basis for making various economic decisions that analyzes the additional (marginal)
benefits derived from a particular decision and compares them with the additional (marginal) costs incurred.
present value The value today of a future amount of money ora series of future payments evaluatedat the
appropriate discount rate.
risk A decision-making situation in which there is variability in the possible outcomes, and the probabilities of
these outcomes can be specified by the decision maker.
probability The percentage chance that a particular outcome will occur
expected value The weighted average of the possible outcomes where the weights are the probabilities of the
respective outcomes.
standard deviation A statistical measure of the dispersion or variability of possible outcomes.
coefficient of variation The ratio of the standard deviation to the expected value. A relative measure of risk.
ν =
σ
r
Real Income Effect When the price of a good—for example, apartment housing rent—declines, the effect of
this decline is that the purchasing power of the consumer has increased. This is known as the real income effect
of the price change.

Substitution Effect as a result of the price decline, the rational consumer can increase his or her satisfaction or
utility by purchasing more of the good whose price has declined and less of the substitutes. This is known as the
substitution effect of the price change.
durable goods Goods that yield benefits to the owner over a number of future time periods.