Applications of consumer theory Flashcards
What is the idea behind food stamps?
To improve the well being of low income individuals
What is better for the individual, food stamps or cash?
Cash
Why is cash better for the individual than food stamps?
Cash generates a bigger budget constraint
Why does the government give food stamps instead of cash?
The government doesn’t want the individual spending money on illegal products or products that could harm a person’s well being
What is the trade off that people face in terms of labour supply?
Between work and leisure
Define opportunity cost
Whatever must be given up to obtain some item; the value of benefits sacrificed
What opportunity cost needs to be considered by the individual in this trade off?
The individual’s opportunity cost of leisure
If your wage is £15 an hour, what is your opportunity cost of leisure?
The opportunity cost of an hour of leisure is £15
What happens to the opportunity cost of leisure if the wage goes up?
The opportunity cost of leisure also goes up
What does the labour supply curve reflect?
How workers’ decisions about the labour-leisure trade off respond to a change in that opportunity cost
What does an upward sloping labour supply curve mean?
An increase in the wage induces the workers to increase the quantity of labour that they supply.
Why do more hours of work mean that leisure time is less?
Time is limited
How do workers respond to the increase in opportunity cost of leisure?
They take less of it (have less leisure time)
What does a downward sloping leisure supply curve suggest about the leisure demand curve?
It is upwards sloping
What happens for every hour of leisure given up?
One more hour is worked and the individual gets more money for consumption
What happens to the individual’s budget constraint if they spend all of their time on leisure?
They have no consumption
What happens to the individual’s budget constraint if they spend all their time working?
They have a large amount of consumption but they have no time for leisure
What can be used to represent the individual’s preferences for consumption and leisure?
Indifference curves
What is an indifference curve?
A curve that shows consumption bundles that give the consumer the same level of satisfaction
What is assumed about leisure and consumption when looking at indifference curves?
The individual always wants more leisure and more consumption
What point on the indifference curve is more preferable (high or low) ?
High points on indifference curves are more preferable because the individual gets more of both.
What happens to the budget constraint if the wage increases?
It pivots outwards and becomes steeper
What happens to consumption when the price of labour goes up?
Consumption goes up also
What are the two possible effects of income increase?
1- enjoy less leisure, hours of labour increase and the labour supply curve slopes upwards
2- hours of leisure increase, hours of labour decrease and the labour supply curve slopes backwards
What is the reason for a backwards sloping supply curve?
Because of the income and substitution effect
Define income effect
The change in consumption when a price change moves the consumer to a higher or lower indifference curve
Define substitution effect
The choice to substitute consumption for leisure and work more hours as a result of an increase in salary, moving the individual to a higher indifference curve.
What happens if leisure and consumption are normal goods, the wage increases and the substitution effect takes place?
The individual uses this to increase their well being to enjoy both higher consumption and greater leisure
What is a result of the income effect?
The individual works fewer hours and is still better off, causing the labour supply curve to slope backwards
What happens for the individual if the substitution effect is greater than the income effect?
They work more
What happens for the individual if the substitution effect is less than the income effect?
They work less
What are the two possible outcomes from lowering taxes?
People work more
People work less and enjoy more leisure
What are three things that can cause the labour supply curve to shift?
Changes in norms
Changes in alternative opportunities
Immigration
How has a change in norms caused the labour supply curve to shift?
It used to be men that worked, but now women do too which has increased the supply of labour
How can changes in alternative opportunities cause the labour supply curve to shift?
The supply of labour in any one labour market depends on the opportunities available in other markets. If the wage earned by workers in one market increases, people may switch to work in that market, decreasing the labour supply in the other market.
How can immigration cause the labour supply curve to shift?
Movement of workers from region to region, or country to country, is an obvious and often important source of shifts in labour supply. When immigrants move the labour supply market increases in the place they move and contracts from where they leave.
If the labour supply curve is backwards sloping, what type of good is it?
A Giffen good
