Introductory Economics

Week 2: Thursday
The choice facing a worker:
A reworking of our model
Dr Robbie Mochrie
 Spending time and money
• Building on the problem of choosing how much Time
to study,
• A much more general problem is deciding how
much to work
Work
• Instead of marks, people work for a wage, so that
they earn an income
• The income finances the purchase of goods Income Free time
• But people only obtain utility from consuming
goods
• As well as the income to purchase goods Consumption
• People need free time to consume them
• Time is a resource Utility
• We divide it between work and free time to
generate as much utility as possible
 Standing back for a moment
• How many parallel lines do you see in the
diagram?
• I know that the answer is 10
• But I have to concentrate on each line to see that
• We’ve started by thinking about how you might
work at university
• I’ve told you a story which economists have found
very helpful for many years
• Now we’ve told a variation of it so that we can model
the choice which a worker makes
• Next week, we’ll retell it so that it applies to firms
• Modelling: start with what we understand and
see how we can adapt it
 Constrained optimisation:
At the heart of economics
• It’s like a franchise
• Constrained optimisation
• Constrained optimisation II:
The worker’s choice Maximum achievable
• Constrained optimisation III: level of objective
Feasible
The firm’s choice Slope is MRS
set
• We have limited resources
• We want to use them efficiently
• We know how to achieve our objective Feasible frontier At maximum,
• When MRS = MRT, we cannot do any Slope is MRT MRS = MRT
better and stay in the feasible set
Time allocation, again
Income/
Work Free time
• Time is the primary resource consumption
• Some will be kept free 0 24 0
• The rest is used in work 2 22 30
• turned into income and then
• turned into goods 4 20 60
• This gives us a constraint on the 6 18 90
capacity to consume 8 16 120
• Have only 24 hours in a day 10 14 150
• Wage is fixed (here at $15/hr)
12 12 180
• Wage is MRT – the expenditure given
up for one hour’s extra free time 14 10 210
16 8 240
 The feasible frontier
• Suppose that someone gives up With wage w= $15, and with
free time to work. 300 Consumption
($) t hours of free time:
• Earning money pays for goods 250 You work 24 – t hours and
and services, which are consumed.200 earn, and spend c = 15(24-t)
• The shaded area shows feasible
150
combinations of free time and
spending. 100
• The orange line is the feasible 50 Feasible choices
frontier. Hours of free time
0
• Its slope is the wage or MRT 8 10 12 14 16 18 20 22 24
 The choice of free time and
consumption
300 Consumption With wage w= $15, and with
• We call this feasible frontier a ($)
IC2
t hours of free time:
IC1
budget constraint 250
You work 24 – t hours and
• Now add indifference curves 200 earn, and spend c = 15(24-t)
• For the preferred choice of 150
free time and consumption [at A
100
point A]
Feasible choices
• the slope of the indifference 50

curve equals the wage, so 0

Hours of free time

that: 8 10 12 14 16 18 20 22 24

MRS = MRT
For study
• I have started to review the discussion in Unit 3.7 in The Economy
• The discussion around Figure 3.15 is the main point.
• The comments on building models anticipate points made in
Unit 3.8
• I am not planning to discuss this in much detail in the videos
• Better for discussion in lectures and tutorials