Aggregate production function

A function mapping aggregate input quantities into aggregate output level. Input and output quantities at the plant level or establishment level or distributed by age may be summed to yield aggregate input and output levels, respectively. Under certain conditions, a function mapping aggregate input quantities into aggregate output level exists. An individual and an aggregate production function may coincide


Estimate or prediction of past events or conditions, which are exogenous to the economic model (determined outside the economic model)


Proceeding by building up detailed structural units to form a high-level description of a problem: working from the specific to the general

Constrained optimization problem

Minimization or maximization of an objective subject to constraints with respect to choices


Designates a welfare difference, expenditure of an enterprise or household, effort reducing production or consumption possibilities, or the value of a foregone alternative

Cost function

A function that gives the minimum cost level that can be obtained when producing an output level at prevailing output price. A cost function usually increases in output level and price. It can be derived from profit maximization given production function and input and output prices with respect to input quantities and substituting the input prices in the expenditure function of input quantities and prices

Decentralized energy production

Energy conversion at the individual level such as a household or a firm for own use

Dynamical system

A set of equations governing the evolution of factors over time given initial conditions such as a set of difference or differential equations

Economic model

A description of an environment to discuss a subject of economic interest. The basic environment of an economic model includes preferences, technology, and information

Economies of scale

Decrease in the average cost per unit of output

Electricity dispatch

Allocation of electricity supply at different nodes of an electricity network at a given time interval

Electricity load

Electricity demand. The electricity load of many grid-connected electricity users in a given geographical area varies over time of day, weekday and weekend, and weather season each with cyclical pattern

Electricity transmission grid

Long-distance connections of nodes and the associated nodes in an electricity network

Endogenous technological change

Some use of resources available alters technology which affects the pool of resources available in an economic model

Energy efficiency

Gives the level of service per unit of energy used to produce the service. One variant is technical energy conversion efficiency the ratio of useful energy being an output to used energy being an input given service equal to useful energy

Energy security

Refers to uninterrupted availability and affordable price of energy necessary for achieving a given welfare level

Energy system model

A model positing structural units of energy conversion


A producer in the form of a firm owned by several households or owned by a sole household


A situation of or including balance of forces, for example, supply equals demand. Imposition of this balance may not be obvious when free disposal is allowed and stated supply is defined as capacity level, so that-if some fraction of capacity is unused-actual supply equals demand below stated supply. In particular, many studies of micro-founded models with goods exchange define an equilibrium as quantities and prices exhibiting supply equal to demand and satisfying the agents' optimization problems or derived necessary conditions for solutions to these problems

Ex ante

Situation of planned outcomes when actions are taken

Ex post

Situation of actual outcomes

Exogenous technological change

A factor determined outside the economic model alters technology which affects the availability of resources in an economic model


Estimate of an economic factor's future value in an economic model. The first moment in a probabilistic model. Different types of expectation formation in an economic model are: rational (expected value at a future date and contingency in the form of an event in a set of values for each future date and event will prevail at the respective future date and event), static or myopic (same value expected to prevail at all future dates and events). Perfect foresight regards the knowledge of a future value when there are no contingencies, that is, rational expectation under certainty. Static expectations may be based on currently or previously realized values. Individuals may form an expectation about an endogenous economic factor (determined inside the economic model) such as a demand or an exogenous economic factor (determined outside the economic model) such as a parameter

Fixed cost

Cost that a firm incurs independent of the output level


Estimate or prediction of coming events or conditions, which are endogenous to the economic model (determined inside the economic model)

Forward-looking decisions

Decisions made taken into account the future economic environment

General equilibrium

Equality of supply and demand holds for all of an economy's goods. All parts of the economy are analyzed bringing about supply or demand of goods

Imperfect competition

Description of price-setting power by agents on the demand or supply side of a market of a homogeneous good. Usually indicated by a low number of agents who are market participants.

Intertemporal condition

States relationship of factors at different dates

Macroeconomic model

An economic model of a whole country's economy

Marginal cost

Designates the increment in cost of an enterprise when output changes by one unit

Marginal cost pricing

Description of output price equal to marginal cost


The act, occurrence, or location of buying and selling

Microeconomic model

An economic model of an individual area of economic activity such as a household's or a firm's area

Net transfer capacity

Maximum electricity flow between two electricity networks considering network-related and interconnection-related issues so that demand can be satisfied at all locations in both networks at a given time interval

Numerical simulation

Quantification of factors determined inside an economic model. Usually done in equilibrium, given values of factors determined outside the economic model inferred from various observations (simulation) or values hypothesized contrasting the values inferred (counterfactual simulation). One can exploit simulation on the sample period to gain better information about values of factors determined outside the economic model


Stands for operating and maintenance. These activities can create fixed or variable cost

Opportunity cost

The value of the next best alternative that must be turned down when some choice is made

Optimal growth model

A model with endogenous investment as a fraction of output (savings rate)

Optimization model

A social planning problem, that is, the maximization of economic welfare subject to constraints on technology and information

Optimization problem

Minimization or maximization of an objective with respect to choices

Partial equilibrium

Equality of supply and demand holds for only a subset of an economy's goods. Some specific part of an economy is analyzed holding constant the effects of the rest of the economy on the specific sector, so that supply or demand is missing for some good

Perfect competition

Description of demand and supply side of a market such that no demanding or supplying agent alone can influence the price of a homogeneous good

Primary production factors

Labor, land or natural resources, and human-made capital goods used in production. Labor includes human effort such as physical effort. Land or natural resources are naturally occurring, for example, soil and minerals. Capital goods produced by humans include machinery equipment and buildings and knowledge capital

Production function

Gives the maximum output level that can be obtained with a combination of input quantities such as capital and labor. A production function can be multi-valued, that is, can have several outputs that mathematically lie on a surface. Then a production function gives the maximum output level that can be obtained with a combination of input quantities holding all other output levels constant


Equals revenue minus expenditure

Returns to scale

Characterized as decreasing (constant, increasing) when output level increases by smaller (same, greater) rate than proportional change of all input quantities given production function mapping input quantities into output level. A production function may exhibit different types of returns to scale in different ranges of input quantity combinations.

Social welfare function

A function mapping allocations of goods to individuals in an economy to a level of welfare for the group of individuals as a whole. A social welfare function may depend only on the levels of utility of the households (Bergson-Samuelson social welfare function) or consumers and producers, for example, the sum of weighted individual utility of households in general equilibrium or the sum of weighted consumer and producer surplus in partial equilibrium

Technological change

Alteration of the transformation possibilities of goods, that is, technology, in an economic model

Technological development

Evolution of an economy that can be attributed to change in technology available to a society that is of use in producing goods


Approaching by breaking general aspects of a problem into specific structural units: working from the general to the specific


Buying and selling (exchange) of good. Contrasts transfer of good, which lacks counterbalancing flow tied to specific good

Utility function

Gives the level of well-being of a household for any combination of goods for which the household has preferences

Variable cost

Cost an enterprise incurs varying with the output level


Gives the level of well-being of a group of individuals such as households or firms, or consumers and producers

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