Scarcity, choice and work (unit 3) Flashcards
Utility
A numerical indicator of the satisfaction derived from consuming a good or service.
indifference curve
combinations of goods that provide the same level of utility to the individual, making him indifferent
why is the indifference curve convex?
People are generally more willing to give up (trade away)
goods that they have in abundance and less willing to give up
goods that are scarce
Normal goods vs inferior goods
The quantity consumed of a normal
good tends to increase as a
consumer’s income rises
The quantity consumed of an inferior
good tends a fall as a consumer’s
income rises
Budget constraint
represents all combinations of goods and services that one could acquire that exactly exhaust one’s budgetary resources
explain income and substitution effect of wages on consumption and working hours to someone to lock in the knowledge
.
income effect in free time vs consumption model
The effect of additional income on the choice of free time, given no
change in the price or opportunity cost (if wages rise, consumption and free time also increase)
What does a production function show?
Production functions show how inputs (e.g. study hours) translate
into outputs (e.g. final grade), holding other factors constant (e.g.
environment).
Average product vs marginal product
- Average Product (AP) is the total output (e.g. final grade) divided
by the number of inputs (e.g. study hours) used. - The Marginal Product (MP) is the additional amount of output that is
produced if a particular input was increased by one unit, or the slope
of the production function – ceteris paribus
feasible frontier
feasible frontier (FF)
shows the maximum feasible
quantity of one good for a
given quantity of the other good.
(shows a constraint on choices)
where is the utility maximising point?
The utility-maximising choice is where the amount of one good the
individual is willing to trade off
equals the actual tradeoff
for the other good (MRS)
between the two goods (MRT)
income effect
change in consumption that results when a change in income moves the consumer to a higher or lower IC, holding relative prices constant
substitution effect
change in consumption that occurs as a result of a change in relative prices of two goods
