馃攳
The Economy, Unit 3, Video 4: What is feasible? The Marginal Rate of Transformation - YouTube
Channel: unknown
[2]
in the previous video
[3]
we have seen what people want
[6]
and how they want to trade one good for
[10]
another
[11]
to stay basically equally well off
[15]
in this video we'll continue the
[16]
building blocks of our model
[19]
and we'll analyze not what people want
[23]
but what they can actually do
[27]
so let's go back to our production
[29]
function for grades
[31]
a person has 24 hours per day
[34]
right if they don't work at all or study
[37]
at all
[38]
they will work just zero hours
[41]
consequently they will have
[42]
zero success in their exams and will
[45]
have zero
[46]
grade points however
[49]
they will have 24 hours of free time per
[51]
day
[53]
on the other hand if they work 24 hours
[56]
they will be able to achieve the maximum
[57]
grade
[58]
of 90 points however this means they
[61]
will have
[61]
zero hours of free time notice
[65]
that this production function for grades
[67]
have had hours
[69]
of study on the horizontal axis which
[71]
was an input
[72]
into the production process but we can
[75]
represent what is feasible not only in
[77]
terms of hours of study
[79]
but also in terms of free time
[83]
this is exactly what we're doing here in
[86]
this graph
[87]
in this figure notice that the
[89]
horizontal axis now represents
[91]
a mirror image of working hours per day
[95]
it represents the free time a person has
[98]
so if a person has zero hours of free
[101]
time
[102]
they will be able to achieve the maximum
[104]
grade of 90.
[106]
on the other hand if they have 24 hours
[108]
of free time per day
[110]
they will have zero working hours and
[112]
then they will have
[113]
zero grade points this is exactly the
[116]
same logic
[117]
as before the only difference is that we
[121]
have
[121]
on the horizon is what we have on the
[123]
horizontal axis
[125]
before we've had hours of study now have
[129]
hours of free time and because the hours
[132]
of study
[133]
run in the opposite direction to the
[134]
hours of free time
[136]
the two figures are a mirror image of
[139]
one another
[141]
so if you plot what grade you can
[144]
achieve
[145]
with a certain free time you get to see
[148]
what is feasible to you in other words
[152]
you get to know your feasibility
[155]
constraint
[156]
the feasibility constraint does not tell
[159]
you what you want to consume
[162]
it tells you what you're able to consume
[167]
in essence it is the constraint you're
[170]
working with
[171]
when trying to figure out how much free
[173]
time you want to have
[176]
given your own constraints
[180]
so for example with 11 hours of free of
[182]
study time
[184]
and 13 hours of free time you can
[186]
achieve a maximum grade of
[188]
84 like before so the feasibility
[192]
constraint
[192]
separates what is feasible from what is
[196]
not
[198]
for example you may want to have a grade
[200]
of
[201]
70 and work only 4 hours per day
[205]
for for this grade and have 20 hours
[208]
of free time but it will not be
[211]
possible it is outside of your
[214]
feasibility constraint
[218]
however you can definitely get a grade
[220]
of 57 points
[222]
if you work 5 hours per day and enjoy
[225]
free time of 19 hours per day
[230]
notice also that if
[233]
the consumer or if they choose to sit
[236]
inside
[237]
inside the feasibility frontier the
[240]
consumers are wasting
[241]
resources take point d for example
[245]
point d corresponds to a grade of 70 and
[247]
14 hours of work
[249]
per day but notice that you can get a
[253]
grade of 70
[255]
with only seven hours of work per day
[259]
why why would you work 14 hours
[263]
to get the same result you can get in
[266]
seven
[268]
it's not rational reasonable people
[271]
reasonable people don't act like that
[276]
alternatively you can also think about
[278]
it this way point d
[280]
corresponds to 14 hours of working time
[283]
and only 10 hours of leisure but with 14
[287]
hours of study
[288]
you can achieve much more than a grade
[291]
of 70.
[292]
why would you settle for 70 it's not
[294]
rational
[295]
you're wasting resources
[298]
so people typically choose some
[300]
combination of goods
[302]
sitting on the edge of their face
[305]
their feasibility frontier only then
[310]
they can be sure that they're not
[312]
wasting
[313]
any resources so to sum up
[317]
the feasible set represents all the
[320]
combinations of goods
[321]
we care about which are cons which
[325]
which we as consumers can achieve
[329]
the set does not tell you what is
[332]
desirable however
[333]
the set tells you just what is feasible
[337]
and even though all combinations are
[339]
feasible consumers prefer to choose
[341]
something
[341]
on the frontier itself because only then
[345]
they know they have not wasted resources
[349]
the feasible set allows us to look into
[351]
another
[352]
important trade-off in our choices the
[354]
trade-off
[355]
between what is feasible
[359]
notice these two points a and e
[363]
the difference between them is one hour
[365]
of work
[366]
and a few great points and both
[369]
are feasible so let's move the consumer
[373]
from point a to point e
[376]
what happens the consumer gets
[380]
one more hour of free time that's the
[383]
obvious thing that happens
[385]
but he's not able to achieve that
[387]
without sacrificing a few great points
[390]
in a way the price of an hour
[394]
of extra time is embedded in the
[397]
feasible set
[399]
the consumer pays for an hour of extra
[401]
free time
[403]
with three great points
[407]
in other words if he wants an hour of
[409]
free time
[411]
he will have to forgo the benefits he
[413]
gets from three additional great points
[418]
we say that the forgone benefits from
[420]
choosing
[421]
to have something are called
[424]
opportunity costs
[428]
of course as you move along the feasible
[431]
set
[432]
the opportunity cost will vary this is
[435]
because
[436]
when you have worked fewer hours you're
[438]
less tired
[439]
and more productive thus you can produce
[442]
more great points with an hour of study
[445]
this is the case with point c
[448]
getting an extra hour of free time when
[450]
you have worked so little
[452]
costs a lot of those great points
[457]
however as you move up along the
[459]
feasibility set
[460]
back to point a you discover that you
[463]
have you are
[464]
tired and less productive so
[468]
whether you work an hour more or less
[471]
does not make
[472]
such a dramatic difference in your grade
[474]
points
[476]
as a result getting an extra hour of
[479]
leisure
[479]
is relatively cheap in terms of great
[482]
points
[484]
in the jargon of our profession we have
[487]
a lot of some good
[489]
the opportunity cost of giving it up
[493]
is relatively low
[498]
let's think about the slide between
[500]
points
[501]
on the feasibility constraint as i slide
[504]
down from point a to point e i notice
[508]
that my opportunity cost rises
[510]
at the same time the feasibility
[512]
constraint becomes
[513]
steeper therefore the slope of the
[516]
feasibility
[518]
the slope of the feasibility constraint
[521]
reflects the opportunity cost
[523]
of my free time but the slope tells you
[527]
a bit more than that
[528]
it tells you how do you transform
[531]
free time into great points at each
[534]
level of free time
[539]
so let's summarize the slope of the
[542]
feasible frontier
[544]
is your opportunity cost of free time
[548]
but the same slope tells you how you can
[552]
produce
[552]
great points out of free time that is
[556]
it tells you how you can transform free
[558]
time into grades
[559]
by working more it also tells you
[563]
that you can potentially get more free
[565]
time but to do that
[567]
you need to sacrifice a few great points
[572]
that particular quantity of the grade
[574]
points
[575]
you need to sacrifice to get
[579]
one more hour of free time is what we
[581]
call
[582]
the marginal rate of transformation
[586]
geometrically the sacrifice is presented
[589]
by the slope of the feasibility frontier
[593]
a few of you will ask what's the
[595]
difference between
[597]
the marginal rate of substitution and
[599]
the margin rate of transformation
[603]
notice that the marginal rate of
[605]
substitution
[606]
was the amount of goods or services the
[608]
consumer is willing
[610]
to sacrifice to get a unit
[614]
of the other good and at the same time
[616]
stay equally well
[618]
off as before it was embedded
[621]
in the slope of the indifference curve
[624]
now this concept the marginal rate of
[626]
transformation
[628]
does not tell you anything about the
[629]
wills or desires
[631]
of the person it just tells you what is
[634]
technically possible what is feasible
[639]
in the next video we will combine what
[642]
the consumer wants
[644]
what is technically feasible to achieve
[647]
by doing so we will arrive at one of the
[650]
crucial points
[651]
in this course a point which represents
[654]
the best the consumer can get
[656]
given their constraints so
[660]
next video is key keep watching
Most Recent Videos:
You can go back to the homepage right here: Homepage