Welcome to the fourth week of Econ 101. Chapter 4 of the Core Econ textbook “Economy, Society, and Public Policy” explores how we make choices when we can’t have everything we want.
This chapter walks us through economic models for decision-making, specifically the trade-offs between work and leisure. The more we work, the more goods and services we can afford. But an opportunity cost of working more is lost leisure time. Find links to all the lessons in this Crash Course here. If you aren’t enrolled yet, sign up here to get all these lessons emailed to you!
Key takeaways
In 1930, economist John Maynard Keynes predicted his grandchildren would need to work only 15 hours a week to satisfy their economic needs, thanks to improved technology. Nearly a century later, how’s that worked out?
A quick look at this chart shows making more money doesn’t necessarily lead to more free time. Take the United States: It has relatively high real income per capita, but American workers have 435 fewer hours of free time than their German counterparts. That’s because as wages rise, people respond two different ways. Some will cut back on work since their pay remains the same. Others might work more because each additional hour is worth more than it used to be.
So how does one determine who will choose to work more or less? Economic models can help test and predict how people will behave under a specific set of conditions. Behavior will change based on the values or preferences of an individual.
The benefits of an action and the costs associated with another action usually involve trade-offs, and people’s preferences will determine how much they value one objective over another.
A student, for example, may want good grades, but they may also want a certain amount of free time every day. At some point, achieving a higher grade by studying one additional hour may come with higher opportunity cost because the value of that free time goes up.
The chart above shows that the trade-offs associated with the final grade and free time aren’t linear. At Point C, for example, the opportunity cost of one extra hour of free time is a 7-point reduction in the final grade. At Point A, the opportunity cost is only a 3-point decline in the student’s grade.
Economic models that predict complex human behavior can seem cartoonishly simple or unhelpfully abstract. But that’s sort of the point. When deciding how many hours a week you’re likely to devote to Econ 101 homework, for example, you probably follow these decision-making models instinctively.
Important definitions
- Feasibility frontier: the boundary of what’s possible when consuming a combination of two goods, the technical term for the curve in the chart above.
- Indifference curve: all the possible outcomes in which the trade-offs a person must make between a combination of two goods achieve the same level of satisfaction, also known as utility.
- Maximum utility: an outcome that maximizes what’s feasible to produce and aligns with the trade-offs a person is willing to make between two goods based on their preferences. (In mathematical terms, maximum utility occurs when the slope of the feasibility frontier is equal to the slope of the indifference curve.)
David Brancaccio’s thoughts on Chapter 4
Famed University of Chicago economist Milton Friedman argued his case for economic models with this example: A billiards player may not know the rules of physics or geometry that determine whether a shot across the table will sink a ball. But if the player hasn’t learned to follow those very real rules, either through instinct or practice, the ball just isn’t going into that corner pocket. Models explain what people do, even if people aren’t aware of the models.
We see this chapter’s concepts at play in how couples share the responsibilities of maintaining a home and raising a family. Often, it’s not a simple choice between work and leisure, but a more complex balance of work, family and free time, some of which can overlap. It’s commonly accepted that cultural norms encourage men and women to make these choices differently, creating a “gender division of labor.” Indeed, women make up only 5% of chief executives at large companies and only a quarter of the top 10% of earners in the U.S.
But research from Harvard Business Review suggests corporate culture could be what’s driving that division. American employers are more likely to encourage women to go part-time or shift to departments that don’t usually pave the way to the top jobs. “The real culprit was a general culture of overwork that hurt both men and women and locked gender inequality in place,” the researchers found.
More from the show
“Scarcity” and why we don’t have a 15-hour workweek
Juliet Schor, a sociology professor at Boston College who studies the history of work and how it’s changed, says the United States led developed countries in reducing work hours in the early 1900s, primarily thanks to labor and social welfare movements. After World War II, that trend reversed.
Listen to David Brancaccio’s full interview with Schor about the history of the American workweek.
Click here to continue to chapter 5