Consumer / Leisure Choice Flashcards
Why is real GDP preferred to nominal GDP?
Real GDP accounts for inflation, thus gives a more in depth and true representation of a products price over time. It’s adjusted for current market prices.
How do you calculate the GDP deflator?
Nominal GDP / Real GDP *100
What is partial equilibrium thinking?
Where one does not consider the ‘whole picture’ and solely focuses on an individual / part of it. Removing partial equilibrium thinking, removes bias. Helps us to be rational and realistic when we consider all parts of the model.
What is the goal of the representative consumer?
To choose a diversity of consumption and leisure which makes them as well off as possible while remaining inside the budget constraint. Essentially, want to find the bundle that provides max utility while keeping to their budget (optimal consumption).
What is the budget constraint?
It represents all the combinations of goods and services that a consumer may purchase given current prices at their given income. Budget Constraint = C = w(h − l) + π − T.
What happens when a consumer experiences an increase to their real wage?
Leads to an increase in consumption. Leisure can either rise or fall - due to the opposing substitute and income effect. Whether leisure rises or falls then dictates whether the labour supply rises / falls.
What are the effects of an increase to non - wages?
An increase to non - wages results in an increase to consumption. A consequence of this added income offsets an increase to leisure time - due to the consumer having less incentive to work.
An increase to wages should result in?
An increased wage acts as an incentive to work more hours - increasing labour hours worked, meaning consumers can enjoy leisure time more.
What is the production function?
The production function = Y = zF(K, Nd) Y = Output K = Capital Nd = Total Labour Demanded By Firms z = Captures Total Factor Productivity
Explain marginal product of labour and the consequences of this.
Increasing labour eventually reduces the marginal product of labour (MPN). This is where adding an extra unit of labour has less positive impact than the previous unit of labour. The same concept applies with capital, where eventually adding an extra unit of capital will have a negative effect upon the marginal product of capital (MPk).
Note* adding more capital results in an increase to MPN
Explain what the substitution effect is?
Price of leisure rises, therefore the consumer opts to substitute leisure to consumption.
Explain what the income effect is?
Consumer’s wealth has increased, therefore both consumption and leisure will increase due to the rise in their disposable income.
