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Chapter 3 - Coggle Diagram
Chapter 3
Unit 1
The average product = slope = vertical distance / horizontal distance = 50 / 4 = 12.5 The average product falls by moving along the curve
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E.g. Alexei is a student. He can vary the amount of hours he studies. The hours he spends studying will increase the percentage grade that he will receive at the end (Ceteris Paribus).The graph shows how his grade will vary if he change his study hours, if all factors are held constant. This is a production function
The marginal product is below the average product. e.g. when he works for 4 hours his average product is 12.5 but an extra hours work raises his grade from 50 to 57, so the marginal product is 7. This happens because the marginal product is diminishing, each hour is less productive than the ones that came before.
Work activity is difficult to measure, because employers find it difficult to determine the exact number of hours work that the employee is doing
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Unit 2
Higher indifference curves correspond to higher utility levels: As we move up and to the right in diagram,, further away from the origin, we move to combinations with more of both goods
When Alexei has more free time and a lower grade, the MRS - the number of percentage points he would give up to get an extra hour of free time - gradually falls
Indifference curves slop 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
When free time is scarce relative to grade points, Alexei is less willing to sacrifice an hour for a higher grade, his MRS is high and his indifference curve is steep
Suppose he says he is indifferent between A and D meaning he would feel equally satisfied with either outcome. We say these 2 outcomes give Alexei the same utility
Unit 3
Free time has an opportunity cost: to get more free time, Alexei has to forgo the opportunity of getting a higher grade
When we consider the cost of taking action A we include the fact that if we do A, we cannot do B. So not doing B becomes part of the cost of doing A. This is called opportunity cost because doing A means forgoing the opportunity to do B
Unit 6
Notice that the new production function is steeper than the original one for every given number of hours. The new technology has increased Angela's marginal product of labour
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We now apply our model to Angela, a self-sufficient farmer who chooses how many hours to work. We assume that Angela produces grain to eat and does not sell it to anyone else. Angela also values free time. Her choice is constrained: producing grain takes labour time, and each hour of labour means Angela foregoes an hour of free time
You can see that technological progress expands the feasible set: it gives her a wider choice of combinations of grain and free time
Technological change raises Angela's standard of living: it enables her to achieve higher utility. She increases both her consumption of grain and her free time.
This means that the opportunity cost of free time is higher, giving her a greater incentive to work. But also, now that she can have more grain for each amount of free time, she may be more willing to give up some grain for more free time, that is, reduce her hours of work
Unit 5
The indifference curves (MRS) indicate what Alexei prefers, and their slopes show the trade-off that he is willing to make, the feasible frontier (MRT) is the constraint on his choice, and its slope shows the trade-off he is constrained to make
MRT - the number of percentage points Alexei would gain or lose by giving up or taking another hour of free time
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Unit 4
The feasible frontier shows the marginal rate of transformation: the rate at which Alexei can transform free time into grade points
Unit 7
While considering this decision, you receive an email. A mysterious beneficiary would like to give you an income of %50 a day for life
Notice that the extra income of %50 does not change your opportunity cost of time: each hour of free time still reduces your consumption by $15
Your optimal combination of consumption and free time is the point on the budget constraint where: MRS = MRT = w
Your new ideal job is at B, with 19.5 hours of free time
Your preferred choice is point A, with 18 hours of free time. At this point your MRS - the rate at which you are willing to swap consumption for time - is equal to the wage
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Your realize it might not be wise to give the mysterious stranger your bank account details, and go back to your original plan
A year later your employer offers you a pay rise of $10 per hour and the chance to renegotiate your hours. Your budget constraint is: C = 25 (24-t)
Your feasible set has expanded. And now you achieve the highest possible utility at point D, with only 17 hours of free time. So you ask your employer if you can work longer hours - a 7 hour day
You decide to increase your working hours. Why does this happen? Because there are two effects of a wage increase:
-More income for every hour worked: for each level of free time you can have more consumption, and your MRS is higher: you are now more willing to sacrifice consumption for extra free time
-The budget constraint is steeper: The opportunity cost of free time is now higher. The marginal rate at which you can transform time into income (MRT) has increased. And that means you have an incentive to work more - to decrease your free time. This is called the substitution effect
The overall effect of a wage rise depends on the sum of the income and substitution effects. In this example the negative substitution effect is bigger than the positive income effect, so free time falls
The slope of the budget constraint corresponds to the wage: for each additional hour of free time, consumption must decrease by $15. The area under the budget constraint is your feasible set
You are looking for a job after you leave college. If we write for the wage, and you have t hours of free time per day, then you work for (24-t) hours, and your maximum level of consumption (c), is given by: c = w (24-t) We will call this your budget constraint, because it shows what you can afford to buy
Unit 9
The graph shows the estimates of average amounts of daily free time and goods per day for employees in the US in 1900 and 2013
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In the previous section, our model omitted two important explanations, which we called culture and politics
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Unit 8
The lack of realism is an intentional feature of these models, not a shortcoming
Economic theory can help to explain, and sometimes even predict, what people do - even though those people are not performing the mathematical calculations that economists make in their models
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Unit 10
Countries with higher income (GDP per capita) workers tend to have more free time, but also that there are big differences in annual hours of free time between countries with similar income levels
Point Q is the point of intersection of the two indifference curves shown for South Korea and the US. At that point the US indifference curve is steeper than the South Korea one. This means that the average American is willing to give up more units of daily goods for an hour of free time than the average Korean.
Unit 11
The choice that maximizes utility is a point on the feasible frontier where the marginal rate of substitution (MRS) between goods and free time is equal to the marginal rate of transformation (MRT)
Peoples preferences with respect to goods and free time are described by indifference curves, and their production function determines their feasible set