Unit 3 - Scarcity, work and choice Flashcards
Marginal product
= the increase in output resulting from an increase of one unit of input
Diminishing marginal returns
When the marginal product stops increasing and the production function goes flat
Diminishing marginal product
An extra unit of input does not yield an increase in output
(an extra hour of study does not increase the percentage grade)
Indifference curve - definition
= all the combination of two goods that provide equal utility or satisfaction
Indifference curves - characteristics
- downward sloping - due to trade offs
- higher ICs corresponds to higher utility levels
- ICs do not cross
- the slope of the IC - the marginal rate of substitution (MRS)
Opportunity cost
= the unavoidable trade-offs in the presence of scarcity
= the value of what you lose when choosing between two or more options
The feasible set (PPC) - definition
= any combination of two goods that can be produced given the available resources
- the slope of the feasible frontier - the MRT - the rate at which one of the elements can transform into another one
Constrained choice problem
= a decision maker pursues an objective subject to a constraint
example - objective is utility maximization which is constrained by the feasible frontier
At which point is utility maximized?
Where MRS = MRT
What is the effect of new technology?
- Increased marginal product of labour - workers will value working time more - opportunity cost of free time is higher, therefore greater incentive to work
- Shift in feasible frontier
- Production function is steeper
Income effect
Causes - increase in Real income (outward shift in budget constraint)
Income effect - the effect of the additional income if there were no change in the opportunity cost