Unit 3 Flashcards
What is utility?
This is the numerical indicator of the value that one places on an outcome
When is an individual indifferent?
When they get the same level of utility from 2 situations
Whats preference?
Description of the benefit or cost that we associate with a possible outcome
Why do indifference curves slope downwards?
Because of the tradeoffs between two choices, more of one good means less of another
What is the MRS
This is the tradeoff that an individual is willing to make between two goods, amount of one good that they are willing to give up in exchange for another.
What is the slope of the indifference curve?
The MRS
What does a steeper curve mean?
They are more willing to give up the one good
What causes the shape of the indifference curve?
People are more willing to give up a good when they have more of it
What is diminishing MRS?
An individual is willing to give up less of one good for another good as you go down the IC
What does the budget constraint show?
The different combinations of goods that consumers can buy given their income
What does a change in the price of a product do?
Changes the slope and it pivots
What does a change in income do?
Shifts the whole constraint
What two effects can the impact of a change in price of one good be divided into?
- Income effect
2. Substitution effect
What is the feasible frontier?
This shows the maximum feasible quantity of one good for a given quantity of another good. The highest amount that can be produced with a given input
What is MRT?
This the quantity of a good that must be sacrificed to acquire a quantity of another. It is a trade off. It’s the slope of the feasible frontier
What would an individuals trade off be?
As free time increases, MRS decreases
MRT increases
What does the feasible frontier represent?
It represents a constrain on choice
What is the utility maximising choice?
This is a point on the highest indifference curve that is tangent to the feasible frontier
Its where the amount of one good that the individual is willing to trade off for another good is equal to the actual trade off between them
What is the constrained choice problem and what is the solution?
It is the problem about how we can do the best for ourselves given our preferences and constraints and when what value is scarce. The solution to it is the optimal choice
What did John Maynard Keynes state?
He stated that due to technological improvement, we would not face the so called economic problem and that we wouldn’t have to work more than 15 hours a week
When ff expands, what happens?
Its possible to increase both options, but it depends on preferences and the willingness to substitute one good for the other
What are budget constraints?
These are the ff for working hours
c= w(24-t)
It shows what you can afford to buy
What is the slope of a budget constraint?
It is the wage
What happens when you get extra income
-The budget constraint slope stays the same
-The constraint shifts up parallel
income effect
-Working hours decrease
