Chapter 3 Flashcards
What is labour?
Work, an input in the production of goods and services
What is the production function?
Shows how inputs translate to outputs holding other factors constant
What is a constant vs diminishing marginal product?
Constant would be that the larger the input the larger the output, always rising at a steady rate.
Diminishing means that after a certain point the output may stop increasing or may even go down
What do indifference curves show?
Show all the combinations of goods and give the same utility (the one with many curves). The trade off between two enjoyable things
Name three important features of indifference curves
Ones farther from the origin correspond to higher utility levels
They don’t cross each other
As you move to the right along it becomes flatter
Points of the same curve are equally preferred
What is the marginal rate of substitution?
Slope of the IC and represents the trade offs that an individual faces
How much are they willing to give up in exchange for the other
How is the MRS calculated?
(Y1 - Y2)/(X1 - X2)
What is the opportunity cost of an action?
The net benefit of the next best alternative action
How do you calculate economic cost?
Out of pocket costs (money) + opportunity cost
What is economic rent and how is calculated?
It is the enjoyment of activity minus the economic cost
What is the feasible set?
All the combinations that can be achieved
What is the feasible frontier?
The max output that can be achieved with given amount of input, edge of the feasible set
What is the marginal rate of transformation?
The slope of the feasible frontier and represents the trade offs that an individual faces
How do you find the MRT?
Y1-Y2/X1-X2
Match the graph to the slope:
Production function. Marginal rate of substitution
Indifference curve Marginal rate of transformation
Feasible frontier Marginal product
Production function. Marginal product
Indifference curve Marginal rate of substitution
Feasible frontier Marginal rate of transformation
At what point is the utility maximising choice?
Where the amount of one good the individual is willing to trade off for the other good equals the actual trade off between the two goods
MRS=MRT
On a graph it’s where the feasible frontier and the indifference curve meet
What can affect the feasible frontier and production function?
Technological change can push it upwards
If what is being produced is grain then drought or bad weather can move it downwards
What happens when the feasible frontier changes?
Is the FF moves upwards that results in the ability to consume more and have more free time (input can be decreased but still result in more output)
How would you calculate budget constraint?
Price of good on x-axis multiplied by same goods quantity plus price of good on y-axis multiplied by its own quantity equals income.
Or c=w(24-t)
What are budget constraints and where is it optimal?
The feasible frontier for consumption choices
Optimal choice is where slope of indifference curve equals the wage (MRS=MRT)
What will a wage increase effect in terms of MRT?
Total earnings will increase, holding working hours fixed (income effect)
The opportunity cost of free time increase (substitution effect)
What is the income effect?
The change in optimal choice when income changes, keeping opportunity costs fixed
Wage increase gives more income per hour worked -> incentive to decrease work hours
Slope stays at the same gradient but moves down
What is the substitution effect?
The change in the optimal choice when the opportunity cost changes, at the new level of utility
Wage increase raises the opportunity cost of free time -> incentive to increase hours worked
Slope changes gradient
What is the overall effect of a wage increase on labour choice?
The income effect is positive
Substitution effect is negative
Overall effect = income + substitution
Which effect dominates depends on individual preference
How would you calculate income and substitution effect?
Income:
Two points on different indifference curves that hit the slope (larger one - smaller one)
Substitution :
Two points on same indifference curve, one that hits old slope and one that hits new (smaller - larger)
Then add together to get net effect
What explanations can be used to explain why countries have different preferences for working hours?
Differences in culture
Politics (legal working limit)
Social preferences
What limitations does the model for showing how technology can change labour choices have?
People don’t do MRS/MRT calculations
Most people can’t choice their working hours
