Scarcity, Work and Choice Flashcards
What do production functions show?
Production functions show how inputs (e.g. labour) translate into outputs (e.g. goods and services) holding other factors constant (e.g. capital).
How do you find the marginal product at a particular point on a production function?
Change in output / change in input
[for the additional input]
How do you find the average product at a particular point on a production function?
The slope of the line from the origin to the point on the production function.
How does a production function act as a constraint?
If you want to produce or earn more, you need to work more (meaning there is a constraint on how much leisure you can have for a given output). Conversely, if you want to relax more you’re constrained by how much less you will produce or earn.
What is an indifference curve?
An indifference curve is a diagrammatic representation of preferences, which shows all combinations of goods that give the same utility.
What does the marginal rate of substitution represent?
The marginal rate of substitution represents the trade-offs that an individual is prepared to make between two goods i.e. how much of good Y they are willing to sacrifice for an extra unit of good X.
How do you find the marginal rate of substitution?
To find the MRS, calculate the slope of the indifference curve (dY/dX).
What is the feasible frontier?
The feasible frontier is similar to a production function but maps free time instead of labour input, making it essentially as a mirror image of the production function.
What does the marginal rate of transformation represent?
The marginal rate of transformation represents the trade-off on a feasible frontier that an individual has to accept, and can also be expressed in terms of the opportunity cost of an extra hour of free time is the reduction in output/production that the individual will have to accept.
How do you find the marginal rate of transformation?
To find the MRT, calculate the slope of the feasible frontier (dY/dX).
How do you find an individual’s utility maximising choice on a diagram with a feasible frontier and indifference curve?
The utility-maximising choice is where the amount of one good that the individual is willing (or prepared) to trade off for the other good (MRS) equals the trade-off they have to accept between the two goods (MRT) i.e. where MRS = MRT.
What does a ‘budget constraint’ show?
A budget constraint shows the trade-off between hours of free time and income needed to fund consumption.
What does the slope of a budget constraint represent?
The slope of a budget constraint shows the MRT between consumption and free time.
What happens to a budget constraint line if a worker’s non-labour income increases?
If a worker’s non-labour income increases, the budget constraint shifts upwards by the size of the increase in income.
What happens to a budget constraint line if the wage rate changes?
With an increase in the wage rate, the budget constraint line would rotate outwards, or if there is a decrease in the wage rate then it would rotate inwards.
