Unit 3 - Scarcity, Work and Choice Flashcards
Do indifference curves cross?
No.
How does a wage rise effect your choice of free time?
The income effect (because the budget constraint shifts outwards): the effect that the additional income would have if there were no change in the opportunity cost.
The substitution effect (because the slope of the budget constraint, the MRT, rises): the effect of the change in the opportunity cost, given the new level of utility.
(If the income effect dominates the substitution effect, workers will prefer fewer hours of work.)
What are diminishing returns?
A situation in which the use of an additional unit of a factor of production results in a smaller increase in output than the previous increase.
What are preferences?
A description of the benefit or cost we associate with each possible outcome.
What do higher indifference curves correspond to?
Higher indifference curves correspond to higher utility levels: As we move up and to the right in the diagram, further away from the origin, we move to combinations with more of both goods.
What effect does a wage rise do?
raises your income for each level of free time, increasing the level of utility you can achieve
increases the opportunity cost of free time
What happens as you move to the right further along an indifference curve?
As you move to the right along an indifference curve, it becomes flatter.
What is a consumption good?
A good or service that satisfies the needs of consumers over a short period.
What is an economic cost?
The out-of-pocket cost of an action, plus the opportunity cost.
What is an indifference curve?
A curve of the points which indicate the combinations of goods that provide a given level of utility to the individual.
What is an opportunity cost?
When taking an action implies forgoing the next best alternative action, this is the net benefit of the foregone alternative.
What is conspicious consumption?
The purchase of goods or services to publicly display one’s social and economic status.
What is marginal product?
The additional amount of output that is produced if a particular input was increased by one unit, while holding all other inputs constant. The marginal product is the slope of the tangent (corresponds to the slope of the production function.)
What is marginal rate of substitution (MRS)?
The trade-off that a person is willing to make between two goods. At any point, this is the slope of the indifference curve. (is just the slope of the indifference curve)
What is the average product?
Total output divided by a particular input, for example per worker (divided by the number of workers) or per worker per hour (total output divided by the total number of hours of labour put in
