What is the Production Function?
Visually displays how inputs translate to outputs (eg g/s) assuming ceteris paribus.
How does new technology impact INDIVIDUAL living standards?
It creates a tradeoff between more earnings and free time.
Why does the Production Function hit a plateau?
- Productivity falls after a certain amount of input is applied to a set process/technology.
- Every technology/process has a limit in its capabilities - once that threshold is hit, nothing will enable it to be surpassed to reach a higher level of output.
What is marginal product?
The gradient of the Production Function - the change in output per additional unit of input
What is average product?
the amount of output per unit of input
What is diminishing marginal product?
The returns of output per additional unit of input diminishes over time.
What is an indifference curve?
It displays all combinations of alternatives that produce the same utility (ie satisfaction).
What is the marginal rate of substitution?
The slope of the indifference curve + represents the tradeoffs when moving from one point on an indifference curve to another.
What is opportunity cost?
The net benefit of the next best alternative - the benefit is determined by comparing the economic cost of both alternatives
What is economic cost?
The sum of monetary costs (eg transport) and subjective costs (eg effort of work)
What are the properties of indifference curves?
- Downward sloping - an increase in one good will cause a decrease in the other
- Higher difference curves correspond to higher utility levels - the further a curve is away from the origin, the greater number of goods it offers overall which is associated with higher utility
- Indifference curves are smooth - a small change in one good will not cause drastic changes in the overall utility
- Curves do not cross - preferences for the ratio of goods are fairly consistent
- Curves get flatter as you move right along them - beyond a certain point, an increase in a particular good in exchange for a decrease in another, will produce diminishing returns on utility
What is the Feasible Frontier?
The curve that displays the maximum output that can be produced with a given amount of input.
What is the marginal rate of transformation (MRT)?
The slope of the feasible frontier that represents the tradeoffs an individual faces. Specifically it shows the quantity of one good that must be sacrificed to obtain one of the other good.
How can we determine the optimal decision choice in a tradeoff situation? Explain
The utility-maximising choice is determined by:
1. Overlaying the feasibility frontier on the indifference curves
2. Seeing at what point they overlap/intersect
The indifference curves represent different levels of utility. These curves are hypothetical.
The feasibility frontier represents the maximum level of output with a given level of inputs. This is a realistic representation.
By overlaying the hypothetical on the realistic we can see which indifference curve is feasible with the realistic maximum output. Hence, this allows us to determine the optimal decision choice.
MATHEMATICS: The utility-maximising choice is where an IC and the FF are in tangent to eachother (ie the MRS=MRT OR the slope of the IC is the same as the slope of the FF)
