Economics Unit 3 Definitions Labour: Production: Utility: Trade-off: Opportunity costs: Feasible frontier: Introduction In this unit we will be looking at the trade-offs between income and free time people make. Since free time is a scarcity as there is a limited amount of free time of can get since there are only 24 hours in a day, decision making is difficult due to limited resources to meet objectives. Economists model these situations first by looking at all feasible options then evaluating which one is the best based on a person’s objectives. This model also explains why there is a difference between people’s working hours in different countries and reason for change in working hours throughout history. The industrial revolution also brought an increase in wages. Thus, many countries experienced a decrease in average hours worked due to the increase in GDP per capita. But it was not experienced at the same level for every county thus there were many disparities in free time and income between countries. For example, the USA and Turkey have similar average free time, the USA’s GDP per capita is higher whereas USA and Netherlands have similar GDP per capita, Netherlands has a higher average free time per worker. Albeit all countries have had an increase in living standards, some still work just as hard and consume more (as they have higher incomes to buy more) while others have more free time. This is the result of decision making under scarcity (cannot have everything we want such as goods and free time) – think of best of both worlds and the model of individual choice (people choose the option that suits their preferences better). Labour and production Labour is defined as work. Work activity is difficult to measure thus making it difficult for employers to determine the exact amount of work their employees are doing. We also cannot measure the effort required to complete different activities to be compared so we use number of hours worked as an indication of labour. So, economists assume that and increase in hours worked equals an increase in goods produced. This is a positive relationship between hours worked and goods produced. We should be very careful when making ceteris paribus assumptions because many factors could play a role in the outcomes. Only if all other factors are held constant can we make a clear differentiation between the relationship of two things for example, the hours worked in relation to the good produced. Production function Definition It is a graph where the input(x-axis) is visually translated into its output (y-axis). But the output can also be influenced by outside forces other than the inputs. So, a production function tells us the output under normal conditions. Shape When the relationship is plotted on the graph, a concave curve forms which implies that the graph is increasing but at a decreasing rate. The graph also starts to flatten out once the maximum output has been reached. This is the maximum outcome that one is capable of and is not necessarily the maximum output.
