Unit 3: Making choices Flashcards
What effects choices
Free-time, income, sport, social
more work means more income, more free time means higher quality of life potentially
ceteris paribus assumptions matter
Graph of grades vs hours of study
slope = marginal product (how much GPA rises for each hour)
Diminishing marginal product - studying becomes less productive the more you do
Production function with positive marginal product that falls as input increased is called concave
Choice assumption
make choices to do the best they can
choose what they want - optimisation principle
choices depend on preferences
in choosing goods you choose to maximise utility
Indifference curves
all points along line are indifferent from one another as they give the same utility
a higher indifference curve is preferred
Slope of an indifference curve gives the marginal rate of substitution = how much of something you’d give up to gain more of the other to remain indifferent
represents what tradeoff an individual is willing to do
Why indifference curves never cross
can’t be indifferent between points of separate curves as it would imply you prefer points with different utilities
Why indifference curves become flatter
With loads of one good, you’re less willing to give up the other good for already being abundant in the first good
with high final grades, more willing to give up them to get scarce free time
straight line if goods are substitutes
Opportunity cost
cost of not doing something
i.e attending uni and not earning money for three years (avg income for each year 15,000 so OC= 45,000)
Slope of a production function
Marginal rate of transformation
equal to the actual tradeoff between two goods
Income effect
effect of an additional income on the choice of free time
no change in MRT
bundles on different indifference curves
Effect of increasing wage for free time
opportunity cost of free time increases - substitution effect
your earnings increases holding working hours fixed
bundles with same utility but different MRT are the substitution effect
Technological progress on this tradeoff
rise in productivity increases wages
might then bring about change in working hours
if income effect dominates substitution effect, workers prefer less hours
differences in working hours can thus be explained by preferences across different countries
Is the model of working hours and wages a good model
No
- ignores how people think - no MRS/MRT calculations
- people sometimes can’t choose working hours
- government sets laws on working hours
yes
- less is more - lack of realism is intentional
- workers may express their preferences by voting to ‘veto’ EU directive
- people choose which jobs to apply for
