Unit 3: Scarcity, work & Choice Flashcards
What is scarcity?
The condition of limited resources and unlimited wants.
What does a production function show?
The relationship between input (e.g. hours) and output (e.g. GPA or income).
What is the Marginal Product of Labour (MPL)?
The additional output from one more unit of labour.
What is the Average Product of Labour (APL)?
Output divided by the number of units of labour.
What is utility?
A measure of the satisfaction or happiness derived from consumption.
What is an indifference curve?
A curve showing combinations of goods that give the same level of utility.
What is the Marginal Rate of Substitution (MRS)?
The rate at which a person is willing to trade one good for another to maintain the same utility.
What is the feasible frontier?
The set of all combinations of goods a person can achieve given constraints.
What is the Marginal Rate of Transformation (MRT)?
The rate at which one good must be sacrificed to gain another, given technology.
When is consumer equilibrium achieved?
When MRS = MRT.
What is constrained optimization?
Maximizing utility subject to a feasibility constraint.
How does technological progress affect the feasible set?
It expands the set by increasing output per input.
What is the budget constraint?
A line showing the maximum possible combinations of goods based on income and prices.
What is the slope of the budget constraint?
The wage rate, which is the opportunity cost of free time.
What is the income effect of a wage increase?
The effect where higher income allows more consumption, including leisure.
What is the substitution effect of a wage increase?
The effect where leisure becomes more expensive, incentivizing more work.
What is the total effect of a wage change?
The combined income and substitution effects.
Why do working hours differ across countries?
Differences in preferences, institutions, and technology.
Why have working hours fallen over time in rich countries?
Rising productivity allows people to afford more leisure.
What is the trade-off central to Unit 3?
Between free time and work (or GPA/consumption).
