Unit 5 economics

A1S1

property owners have bargaining power when? (3)

1. set the terms of exchange (how much)

2. bargain with multiple workers (to whom)

3. distribution of product (what happens with it)

the outcome of an economic interaction is an allocation, which describes?

• everyones contrition to project

• the product

• distribution

Pareto efficient VS Pareto inefficient?

Pareto efficient= at least 1 person better off without making anyone worse off

Pareto inefficient = only solution would be that one person gets more by worsening friend - so anything that isn Pareto efficient = inefficient

how will the oil prices affect us using the income and substitution effect

• Higher petrol prices reduce real income → negative income effect (consume less petrol and other goods)

• Petrol becomes relatively more expensive → negative substitution effect (substitute away from petrol)

When a good is essential and lacks substitutes, consumers adjust by cutting other spending rather than reducing consumption of that good. 

substantive judgement looks at allocation of: how unequal outcomes look

substantive judgement looks at allocation of:

• income or wealth

• happiness/other measures of well being

• freedom to act without socially imposed limits

procedural judgement of fairness consider whether the outcomes are a result of (how came about)

• voluntary exchange of private property acquired through legitimate means

• equal opportunity fro economic advantage

• deservingness based on individuals efforts or ethics

3 things that economics can clarify?

1. how the dimension of fairness can be connected ( rules that give others special advantage affect degree of inequality )

2. trade-offs between the dimensions of fairness ( do we have to give up equality of income for equality of opportunity)

3. public policies to address concerns about unfairness

what happens to the slope of the production function the more hours she works?

the slope is the MP of Angelas labour and it decreases the more hours she works

what happens to the slope of the feasible frontier the more hours she uses for free time?

the slope which is the MRT. the FF becomes steeper the more hours she used for free time

what happens to the indifference curve the more time that Angela spends in free time?

the slope indifference curve is the MRS- how much grain for free time

the indifference curve becomes flatter leading to a diminishing MRS

how do we determine if this is a technically feasible allocation?

introduce an additional constraint to the model: Biological survival constraint

shows: minimum amount of grain needed for each amount of work to survive

slope of survival constraint = MRS of work hours into subsistence requirements

as free time increases the grain she is willing to sacrifice decreases

what is economic rent?

what you receive over and above your reservation option ( in this case its 0)

if bruno demands Angela to work more the the predetermined amounts?

he will receive less than determined because she will be working more hours and will need more grain as she needs more to survive

work out her max amount of hours a day and that will be where Brunos economic rent is maximised

slope of feasible frontier (MRT of work hours into grain) does what with free time?

increases with free time

slope of survival constraint (MRS of work hours into subsistance requirements) does what with free time

decreases with free time

when will Brunos share of grain be maximised?

when distance between FF and relative indifference curve is maximised

occurs when MRS = MRT

ie: slope of FF = slope of angela’s RIC

what happens to the slope of biological constraint under coercion

it equals the slope of FF

without coercion, joint surplus is maximised where the slope of RIC equals the slope of FF

total surplus is lower when both parties have to agree to the proposal