choice Flashcards
(33 cards)
for production function
the second derivative is equal to or below zero becuas the marginal product is decreasing
average product is always larger than its marginal product
h
preferences
description of the benefit (or cost) we individually associate with each possible outcome
combinations or bundles
on a grapg these are the combinations of two goods that mutually exclusive
utility
indicator of the value one places on a outcome, such that higher valued outcomes will be chosen over lower valued ones
indifference curve
geometrical locus of all bundles that provide a given level of utility to the individual
marginal rate of substitution
trade off that an individual is willing to make betweeen two goods
measures the amount of one good an individual in willing to give up in order to increase the amount of anouther good slightly
it is the slope of the indifference curve
properties of the indiference curve
*downwards sloping due to trade-offs: if you are indifferent between two bundles, the bundle that has more of one good must have less of the other
*higher ICs correspond to higher utility levels: by moving away from the origin we reach bundles with more of both goods, and our welfare improves
*IC curves do not cross because that would imply that all points on both curves have the same utility and therefore should be on the same curve
law of diminishing marginal returns to consumption
the value to the individual of an additional unit of consumption declines the more that is consumed
this explains the strictly convex nature of IC curves, as the MRS decreases as we go along the curve
diminishing marginal returns for both goods means individuals prefer more balanced bundles
a
opportunity cost
the cost of the best next thing (for alternative and mutually exclusive courses of action)
economic cost
out of pocket cost (accounting cost) and the opportunity cost
feasible set
comprises all bundles that an agent could choose given the constraints they face
feasible frontier
curve that defines the maximum feasible quantity of one good for a given quantity of the other (downwards sloping concave curve)
marginal rate of transformation
measures the quantity of some good that must be sacrificed to acquire one additional unit of another good (the opportunity cost)
it is the slope of the feasible frontier
optimal bundles are where MRT equals MRS
so where the highest indifference curve touches the feasible frontier
equilibrium
situation that is self-perpetuating, meaning that something of interest does not change unless an outside force change is introduced
real wage
wage expressed in units of consumption good
also the MRT of leisure into consumption, therefore the opportunity cost of leisure
income effect
effect of additional exogenous income on Anna’s choice for a constant opportunity cost
an increase in real wage
causes an expansion of the feasible set and an outward pivot of the frontier
anna can increase or decrease her labour supply as w increases
outcome depends on preferences
effects of real wage increases
- the feasible set expands, since the individual earns more real income for each hour worked: income effect
- the opportunity cost of leisure is higher: the marginal rate at which an individual can transfroms leisure into consumption is increased - incentive to work more, since leisure is now more expensive (substitution effect)
income effect tends to reduce the supply of labour
substitution effect increases the supply of labour
end result depends on the rrlative strentght the two effects have on an individual
demand curve
is downards sloping (law of demand)
