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Scarcity and Productivity I
MPA 612: Public Management Economics January 17, 2018
Scarcity and Productivity I MPA 612: Public Management Economics - - PowerPoint PPT Presentation
Scarcity and Productivity I MPA 612: Public Management Economics - - PowerPoint PPT Presentation
Scarcity and Productivity I MPA 612: Public Management Economics January 17, 2018 Plan for today Labor and production Preferences Opportunity costs Making decisions under scarcity Current events No class on Monday Move Monday to
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Current events
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No class on Monday
Move Monday to Wednesday, Wednesday to Friday?
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Labor and production
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Capital, labor, raw materials → outputs Production function
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XYZ Airlines
The optimal way to fly
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2 4 6 8 10 12 14 16 2 4 6 8 10 12 14 16 Planes Workers
Workers 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Planes 1.5 3 5 6 7 8.5 10 11 11.5 12 12.5 13.25 13.5 13.75 14
Average product Marginal product
Planes per worker Planes per additional worker
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Does marginal product always diminish?
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Preferences
How do we know what we want?
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Stuff we care about Exogenous Endogenous
We care about stuff because… reasons We care about stuff because institutions make us
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Theoretical points where we’re equally happy with mix of goods
Indifference curves
Measured in utility or “utils”
(or “happiness points”)
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Hours of free time per day Final grade 100 24 16 75 E C 20 D 50 B 15 84 A F G H
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Slope downward
Indifference curves
Higher curves = more utils Smooth No crossing
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MRS at A = 9 MRS at H = 4
Marginal rate of substitution = slope of indifference curve
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Opportunity costs
The benefit of the forgone alternatives
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Concerts in theaters and parks
Cost for theater concert Value of park concert Economic cost
$25 $15 $40
Value of theater concert
$50 $35
Theater Park
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Making decisions under scarcity
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What are the possible combinations of workers and planes, given resources? What’s the best number of workers to use/planes to make, given firm preferences?
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2 4 6 8 10 12 14 16 5 10 15 20 25 Planes Free workers
Feasible set Slope = OC of free workers Feasible frontier = marginal rate of transformation
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Tradeoffs!
Marginal rate of substitution (MRS) Marginal rate of transformation (MRT)
Theoretical tradeoff between inputs Slope of indifference curve Actual tradeoff between inputs constrained by feasible frontier Slope of feasible frontier
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2 4 6 8 10 12 14 16 5 10 15 20 25 Planes Free workers
MRS = MRT = most utility