Unit 3 - Scarcity, work and choice
How individuals do the best they can, and how they resolve the trade-off between earnings
and free time;
- Economist model situations where people have to make choices with limited
resources by defining all actions and evaluating which option is best
- Opportunity cost = trade-off that occurs due to scarcity
3.1 Labour and production
● Work activity is difficult to measure (hard to measure the effort required)
● Often just measured as the number of hours worked
● Careful of ceteris paribus assumptions as work conditions may be different e.g. hours
studying in a busy room vs. in a quiet library
● The Production Function = the relationship between the quantity of output and the
different quantities of inputs used in the production process.
● Marginal production = increase in output for one extra increase in input e.g. increase
in grade for studying one extra hour.
● Marginal product is diminishing as the extra benefit gained falls.
● If the output increases as input increases but marginal benefit falls the graph is
concave.
3.2 Preferences
● Indifference curves show points on the graph that
offer the same level of utility
● Points A-D offer the same satisfaction and,
therefore, the same preference, he is indifferent to
any of these points
● Indifference curves slope downward due to trade-
offs: If you are indifferent between two
combinations, the combination that has more of
one good must have less of the other good.
● Higher indifference curves correspond to higher
utility levels
● Indifference curves are usually smooth: Small changes in the amounts of goods don’t
cause big jumps in utility.
● As you move to the right along an indifference curve, it becomes flatter. - as you
become less willing to sacrifice as things get more scarce (The marginal rate of
substitution)
● Indifference curves never cross because this contradicts, a non-sensical conclusion
as you can't be indifferent to two points on different curves.
3.3 Opportunity costs
● Opportunity cost = the benefit lost of the next best alternative foregone.
● Explains when in mutually exclusive events and we have to make a choice about
which options in best
● Economic cost = opportunity cost + monetary cost
● Economic rent = benefits - economic cost (monetary + opportunity cost)
How individuals do the best they can, and how they resolve the trade-off between earnings
and free time;
- Economist model situations where people have to make choices with limited
resources by defining all actions and evaluating which option is best
- Opportunity cost = trade-off that occurs due to scarcity
3.1 Labour and production
● Work activity is difficult to measure (hard to measure the effort required)
● Often just measured as the number of hours worked
● Careful of ceteris paribus assumptions as work conditions may be different e.g. hours
studying in a busy room vs. in a quiet library
● The Production Function = the relationship between the quantity of output and the
different quantities of inputs used in the production process.
● Marginal production = increase in output for one extra increase in input e.g. increase
in grade for studying one extra hour.
● Marginal product is diminishing as the extra benefit gained falls.
● If the output increases as input increases but marginal benefit falls the graph is
concave.
3.2 Preferences
● Indifference curves show points on the graph that
offer the same level of utility
● Points A-D offer the same satisfaction and,
therefore, the same preference, he is indifferent to
any of these points
● Indifference curves slope downward due to trade-
offs: If you are indifferent between two
combinations, the combination that has more of
one good must have less of the other good.
● Higher indifference curves correspond to higher
utility levels
● Indifference curves are usually smooth: Small changes in the amounts of goods don’t
cause big jumps in utility.
● As you move to the right along an indifference curve, it becomes flatter. - as you
become less willing to sacrifice as things get more scarce (The marginal rate of
substitution)
● Indifference curves never cross because this contradicts, a non-sensical conclusion
as you can't be indifferent to two points on different curves.
3.3 Opportunity costs
● Opportunity cost = the benefit lost of the next best alternative foregone.
● Explains when in mutually exclusive events and we have to make a choice about
which options in best
● Economic cost = opportunity cost + monetary cost
● Economic rent = benefits - economic cost (monetary + opportunity cost)
