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.