Unit 3 - Scarcity Flashcards
Labour
input in the production of goods and services
Production function
translating the labour input into output
Marginal product.
the increase in the output by increasing the input by one more unit
Concave production function
when the function goes flat, as marginal product stops increasing - diminishing marginal returns
an extra unit of the input does not give you more output
Concave production function
when the function goes flat, as marginal product stops increasing - diminishing marginal returns
an extra unit of the input does not give you more output
Indifference Curves
joins together all of the combinations that provide equal utility or satisfaction
slope downwards due to trade offs
if you are indifference between 2 combinations, the combination that has more of one good must have less of the other one
Higher indifference curves correspond to higher utility levels= the further right we move, the more of both goods will be produced
Indifference curves are smooth = small changes in the amount of goods will not make drastic changes
Indifference curves do not cross
Marginal rate of substitution (MRS)
the amount of a good that a consumer is willing to consume compared to another good, as long as the new good gives the same level of utility
The gradient of the indifference curve
Opportunity cost
the value of what you lose when choosing between two or more options
Opportunity costs describe the unavoidable trade-offs in the presence of scarcity: satisfying one objective more means satisfying other objectives less.
economic rent
- If an action bring greater net benefits than the next best alternative, it yields
- you receive an economic rent from an action when it results in a greater benefit than its economic cost
economic cost
literal cost
- time, money, effort spend
Feasible frontier
- production possibility curve
- Any combination of free time and final grade that is on or inside the frontier is feasible (can be achieved with the given inputs of resources)
Marginal rate of transformation
- the rate at which one of the elements can transform into another one
- The number of units or amount of a good that must be forgone to create or attain one unit of another good.
- The number of units of good Y will be foregone to produce an extra unit of good X while keeping the factors of production and technology constant.
- MRT is the slope of the production possibility frontier
Constrained choice problem
a decision maker pursues an objective (utility maximisation) subject to a constraint (feasible frontier)
If max utility is the goal, the optimal combination is the point on the PPC where MRS = MRT
Effects of new technology on the graph
increased marginal product of labour - shift in feasible frontier
Example - self-sufficient farmer, Angela - an additional hour of work produces more grain tha under the old technology
Technology definitely makes it feasible (shift of FF), but whether she’ll do it depends on preferences over the two goods, and her willingness to substitute one for the other (MRS)
Technological change makes the production function steeper → increases Angela’s marginal product of labour (increases the value of her working time) → opportunity cost of free time is higher, giving her a greater incentive to work
income effect
the effect that the additional income (increase in real income) would have if there were no change in the opportunity cost (translated Indifference curve i think)
In the case on a shift in BC (increase in real income) - workers will want more free time
