Unit 3 Flashcards
Technology impact on wages and hours worked
Technological revolution has led to huge increase in productivity globally, so GDP per capita has risen, while annual hours worked has fallen drastically.
Average product (AP) =
total output divided by a particular input
Marginal Product =
additional amount if output produced if a particular input increased by 1 unit, ceteris paribus.
Link between MRT curve and DAPL
As you go along MRT curve, marginal product falls, DAPL. As at a certain grade level, students much less encouraged to drop grades for more free hours.
Why will we always produce on the feasible frontier
Assuming the person is rational and aims to maximise utility:
- Will always produce on the feasible frontier given that if 2 grades with same free time - prefers one with higher grade and vice versa.
How to form an indifference curve?
by figuring out which combinations of two goods derive same utility - can join these points to form an indifference curve.
Why do indifference curves slope downwards?
- Indifference slope down due to tradeoff, if you are indifferent between 2, combo of more of 1 good needs less of another.
- Higher indifference curves are further from origin.
MRS =
tradeoff a person is willing to make between goods, gradually falls as less willing to get more free time for less points as points get lower.
- slope of indifference curves
Constrained choice problem between grades and free time optimum at:
MRS = MRT
Income effect =
effect of additional income if there was no change in opportunity cost, so shift isocost/ feasible frontier parallel upwards until you meet the new indifference curve - that’s the income effect.
Substitution effect =
effect only due to changes in price or opp. Cost, might choose to work more hours as the cost of not working has increased.
Shifts/ changes in feasible frontier gradient:
Increase in productivity/ tech shifts feasible frontier outwards, for each same level of hours worked - consumption/ wages rise.
Increase in wages make feasible frontier steeper.
Why does MRS change
As you move right from middle, you are less willing to sacrifice one for the other, so MRS decreases.
- different at the same level of free time on different indifference curves
- different at different levels of one, as if one is very low, less willing to trade off this already low grade for more free time
OPPORTUNITY COST ON FEASIBLE FRONTIER
What would it cost on one axis to get one more unit of the other axis.
- i.e the slope at that point
- i.e the MRT
Constrained optimisation maths example
U(t,y) = t^3y^2
Py = w(24-t) -> total spending = total income
P=2 w=2
MRS = (Du/Dt)/(Du/Dy)
MRT = mod(dy/dt)
