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Econ 200: Scarcity and Choice Notes

Decision Making Under Scarcity

  • Scarcity: A key concept in economics that refers to the limited nature of society's resources, which forces individuals to make choices about how to allocate them.

Feasible Frontier

  • Feasible Frontier Diagram: A graphical representation of the trade-offs between two goods (e.g., consumption and free time).

    • Y-axis: Consumption (money spent on goods/services).

    • X-axis: Free time (leisure hours).

    • Equation: Budget constraint is given by c = w(24-t), where:

    • c = Total consumption

    • w = Hourly wage

    • t = Free time in hours

  • In this case, Karim's wage is $15/hour and he cannot work more than 16 hours per day, leading to particular limits on choice.

    • x-intercept: Maximum free time if no hours worked, calculated as 24 hours.

Marginal Rate of Transformation (MRT)

  • MRT Definition: The rate at which a consumer can transform one good into another (here, consumption into free time).

  • Determined by the slope of the budget constraint in a feasible frontier graph.

Marginal Rate of Substitution (MRS)

  • MRS Definition: The rate at which a consumer is willing to give up consumption for more free time while maintaining the same level of utility.

  • Important at specific points (e.g., point A in the feasible frontier).

Changes in Wage Impact on Behavior

  • Increased Wage Example: If Karim's wage increases from $15 to $45/hour:

    • The trade-offs will change as the opportunity cost of free time increases, likely leading to:

    • Greater consumption relative to free time due to higher earnings.

    • Increased MRT and MRS, indicating a steeper indifference curve.

Income and Substitution Effects

  • Income Effect: Refers to the change in consumption resulting from a change in real income when the price does not change.

    • Illustrated when income increases can allow for more leisure time.

  • Substitution Effect: Refers to changes in quantity demanded of one good as the price of another good changes, affecting consumers' choices due to varying opportunity costs.

Technological Progress

  • Impact on Work Hours:

    • Typically increases workers’ incomes.

    • Raises the cost of free time.

    • If the income effect is stronger, workers may choose more free time; if substitution effect dominates, they may work more hours (i.e., less free time).

Employer and Employee Choices

  • Working Hours Regulation:

    • Employers typically dictate working hours but employees can choose job types based on preferences.

    • Differences in working hours globally can reflect cultural and political factors influencing worker preferences.

Economic Cases of Income Changes

  • Example: How income impact decisions regarding working hours.

    • If fixed income or wages change, the budget constraint shifts:

    • If m (fixed income) increases while hours worked remain constant, overall consumption will increase, affecting free time choices.

    • If wages decrease, a worker may have to work more hours to maintain the same consumption level (e.g., down from $20/hr to $16/hr requires working more hours to keep earning $800).

Summary of Examples

  • Practical Scenarios:

    • Balancing work and leisure during breaks requires evaluating trade-offs between income and valuable free time.

    • Different preference sets illustrate variance in how individuals respond to changes in income, affecting free time and consumption intricacies.