Econ 200: Scarcity and Choice Notes

Scarcity and Choice

• Scarcity refers to the limited resources available to meet unlimited wants and needs.
• Choice is the act of selecting among alternatives when faced with scarcity.

Decision Making Under Scarcity

• Decision making involves choosing how to allocate limited resources effectively.
• Important to consider trade-offs and opportunity costs when making decisions.

Historical Context

• Life standards have generally improved since 1870, but disparities still exist in free time and income across different countries.
• Data Point: In 1880, lifetime leisure time was only 25% of lifetime work hours, whereas by 1995, leisure time surpassed work hours.
• Robert Fogel predicted lifetime leisure hours would triple by 2040.

Workers' Preferences

• Individuals desire to balance consumption (goods/services) and free time, but must often sacrifice free time to work for income.
• Understanding how individuals choose an optimal combination of free time and consumption can shed light on:
  • Changes over time
  • Inequality issues
  • Gender-based differences
  • International comparisons

Alexei's Production Function

• Alexei’s production function illustrates how study hours translate into final grades.
• Starts at 0 study hours with an initial grade of 15 points (y-intercept).
  • Example values include grades associated with particular study hours.

Indifference Curves

• An indifference curve represents combinations of two goods (free time vs. grades) that provide the same level of utility to a consumer.
• Points on the curve (e.g., A, E, F, G, H) indicate different trade-offs between free time and grades that result in the same satisfaction level.

Marginal Rate of Substitution (MRS)

• MRS indicates how many points Alexei is willing to sacrifice for one additional hour of free time.
• Values of MRS change based on the context, with examples given:
  • From A to E: 10 pts/hr
  • From H to D: 2 pts/hr
• Higher grades decrease willingness to exchange points for free time (increasing MRS), while more free time increases the MRS.

Marginal Rate of Transformation (MRT)

• MRT represents the rate at which Alexei must forego grades to gain an extra hour of free time.
• The slope of the feasible frontier indicates his trade-offs between the two variables.

Feasible Set

• Alexei's feasible set illustrates all combinations of free time and grades that are possible given his constraints:
  • Points outside the feasible frontier are infeasible and thus not attainable.
  • Optimal choices are attained where the highest indifference curve touches the feasible frontier.

Combination of MRS and MRT

• The optimal choice occurs when MRS = MRT, ensuring the best trade-off between grades and free time.
• At this point, Alexei maximizes his utility based on his preferences and constraints.

Evaluating Statements on Decision Making

• Evaluations of various statements based on Alexei's indifference curves illustrate his preferences:
  • Prefers combinations that yield higher utility (more free time or higher grades).
  • Demonstrates a willingness to trade between grades and leisure time based on actual scenarios of utility gain or loss.