Scarcity, Work and Choice
Production Function = The relationship between the quantity of inputs and the output, holding
others inputs constant.
(the relationship between the quantity of labour and the quantity of output produced, holding
other inputs constant)
Average Product = Total output divided by a particular input
Marginal product = the additional amount of output this is produced if a particular input was
increased by one unit, while holding all other inputs constant.
- the slope of the production function (total product curve) is the marginal product
Slope = Vertical distance / horizontal distance
Concave = when a line joining two points on a curve lies entirely below the curve.
Convex = when a line joining two points on the curve lies entirely above the curve.
Important graphical points:
• In ection point of Total Product, where Marginal Product is at a maximum (this is where
diminishing returns sets in)
• Where MP = 0 , total product is at a maximum
Preferences= A description of the bene t or cost we associate with each possible outcome
Indi erence curves = combinations of two goods that provides the same level of utility to an
individual
• indi erence curves slope downward due to trade-o s
• higher indi erence curves correspond to higher utility levels
• indi erence curves are usually smooth
• indi erence curves do not cross
• as you move to the right along an indi erence curve, it becomes atter.
Marginal rate of substitution (MRS) = the trade o that a person is willing to make between two
goods. Slope of indi erence curve.
Opportunity cost= when taking an action implies forgoing the next best alternative, this is the net
bene t of the forgone alternative.
Economic cost= the out of pocket cost of an action plus the opportunity cost.
Feasible Set/Frontier (also called budget line) = the maximum output that can be achieved with
a given amount of input.
Marginal Rate of Transformation= The quantity of some good in order to acquire one additional
unit of another good. Slope of the feasible frontier
• The utility maximising choice is where the amount of one good the individual is willing to trade
o for the other good (MRS) equals the actual trade o between two goods (MRT)
MRS=MRT
Caitlin Willis
fffl fffffi
ff ff ff fi ffff ff fl
Production Function = The relationship between the quantity of inputs and the output, holding
others inputs constant.
(the relationship between the quantity of labour and the quantity of output produced, holding
other inputs constant)
Average Product = Total output divided by a particular input
Marginal product = the additional amount of output this is produced if a particular input was
increased by one unit, while holding all other inputs constant.
- the slope of the production function (total product curve) is the marginal product
Slope = Vertical distance / horizontal distance
Concave = when a line joining two points on a curve lies entirely below the curve.
Convex = when a line joining two points on the curve lies entirely above the curve.
Important graphical points:
• In ection point of Total Product, where Marginal Product is at a maximum (this is where
diminishing returns sets in)
• Where MP = 0 , total product is at a maximum
Preferences= A description of the bene t or cost we associate with each possible outcome
Indi erence curves = combinations of two goods that provides the same level of utility to an
individual
• indi erence curves slope downward due to trade-o s
• higher indi erence curves correspond to higher utility levels
• indi erence curves are usually smooth
• indi erence curves do not cross
• as you move to the right along an indi erence curve, it becomes atter.
Marginal rate of substitution (MRS) = the trade o that a person is willing to make between two
goods. Slope of indi erence curve.
Opportunity cost= when taking an action implies forgoing the next best alternative, this is the net
bene t of the forgone alternative.
Economic cost= the out of pocket cost of an action plus the opportunity cost.
Feasible Set/Frontier (also called budget line) = the maximum output that can be achieved with
a given amount of input.
Marginal Rate of Transformation= The quantity of some good in order to acquire one additional
unit of another good. Slope of the feasible frontier
• The utility maximising choice is where the amount of one good the individual is willing to trade
o for the other good (MRS) equals the actual trade o between two goods (MRT)
MRS=MRT
Caitlin Willis
fffl fffffi
ff ff ff fi ffff ff fl
