Unit 3 - Scarcity, Work and Choice Flashcards
What does the Marginal Product of Labour (MPL) represent graphically
The slope of the tangent to the production function
What is utility
Measure of value on an outcome (level of happiness)
What is the Marginal Rate of Substitution (MRS)
The trade-off a person is WILLING to make; their choice whether they would like to substitute or not
Slope of the indifference curve
What is Opportunity Cost
The tangent/slope of the feasible frontier at a certain point i.e. the cost of t (comparing to the point after)
What is the Marginal Rate of Transformation (MRT)
The trade-off from one good that MUST happen to gain an additional unit of another good
Slope of the feasible frontier
What does MRS = MRT represent
Maximum utility
Also indicates consumer equilbrium
What is Income effect
(Within the concept of increased wage)
The idea that if your income has increased you can afford to buy more of everything
The consumption change due to ONLY income is income effect
What is Substitution effect
(Within the concept of increased wage)
Gaining more free time is now more expensive as you’re giving up more money; The opportunity cost has increased
The consumption change due to ONLY change in price is substitution effect
What is economic rent
A payment or other benefit greater than what the individual would have received with their next best alternative (or reservation option)
What does the derivate of the production function show
The marginal product (gradient)
What are perfect complements in indifference curves
Right angled indifference curves. The idea that no more how more of good 1 or 2 I gain (on the same IC) I do not get any happier. The goods have to be consumed in a 1:1 ratio
E.g. a sandwich; handing more bread does not increase utility
