Unit 3 — Complete Study Notes · Sections 3.1–3.12 · All graphs included · All quiz questions answered
Doing the Best You Can:
Scarcity, Wellbeing & Working Hours
CORE Econ Microeconomics · Scarcity · Indifference Curves · MRS · MRT · Feasible Set · Income & Substitution Effects · Veblen Effect · Gender Division of
Labour
3.1 Would You Work Fewer Hours if Your Wage Doubled?
The central question of Unit 3: if wages rose sixfold (as US wages roughly did over the 20th century), would workers choose to work the same, more, or
fewer hours? The answer differs dramatically between countries and people — explaining why requires the full model developed in this unit.
Historical Evidence
● US: real hourly wages rose >6× during the 20th century; annual hours fell by ~⅓; real earnings still rose ~4× — people gained both more
goods AND more free time
● Netherlands: hours fell from ~3,000/yr to ~1,380/yr (54% drop); GDP per capita still reached ~$49,000 — income effect dominated strongly
● France: hours fell to ~1,520/yr; GDP per capita ~$41,000
● USA post-1960: hours stabilised near 2,000/yr even as GDP per capita soared to ~$57,000 — substitution effect was relatively larger
● South Korea vs France: similar incomes but very different hours — culture, institutions, and preferences all matter
,▲ Figure 3.1 — Annual Hours of Work vs Income (1870–2018). All three countries began near 3,000 hrs/yr. The Netherlands and France fell dramatically; the US
levelled off post-1960. Income and free time BOTH rose — but in different proportions.
, ▲ Figure 3.2 — Annual Free Time vs Income, Cross-Country (2020). Richer countries generally have more free time, but major exceptions exist: South Korea and
France have similar incomes but French workers have far more free time. Wages alone don't determine hours.
Key Takeaway
Rising wages led people to consume more AND enjoy more free time — but in different proportions. The model in Unit 3 explains this variation using
the income effect (work less) vs substitution effect (work more), whose balance varies with preferences and institutions.
3.2 A Problem of Choice and Scarcity
Scarcity A good is scarce if it is valued AND there is an opportunity cost of acquiring
more of it. Every extra hour of free time costs Karim €30 in foregone wages.
Disposable The maximum a household can spend without borrowing, after taxes and
Doing the Best You Can:
Scarcity, Wellbeing & Working Hours
CORE Econ Microeconomics · Scarcity · Indifference Curves · MRS · MRT · Feasible Set · Income & Substitution Effects · Veblen Effect · Gender Division of
Labour
3.1 Would You Work Fewer Hours if Your Wage Doubled?
The central question of Unit 3: if wages rose sixfold (as US wages roughly did over the 20th century), would workers choose to work the same, more, or
fewer hours? The answer differs dramatically between countries and people — explaining why requires the full model developed in this unit.
Historical Evidence
● US: real hourly wages rose >6× during the 20th century; annual hours fell by ~⅓; real earnings still rose ~4× — people gained both more
goods AND more free time
● Netherlands: hours fell from ~3,000/yr to ~1,380/yr (54% drop); GDP per capita still reached ~$49,000 — income effect dominated strongly
● France: hours fell to ~1,520/yr; GDP per capita ~$41,000
● USA post-1960: hours stabilised near 2,000/yr even as GDP per capita soared to ~$57,000 — substitution effect was relatively larger
● South Korea vs France: similar incomes but very different hours — culture, institutions, and preferences all matter
,▲ Figure 3.1 — Annual Hours of Work vs Income (1870–2018). All three countries began near 3,000 hrs/yr. The Netherlands and France fell dramatically; the US
levelled off post-1960. Income and free time BOTH rose — but in different proportions.
, ▲ Figure 3.2 — Annual Free Time vs Income, Cross-Country (2020). Richer countries generally have more free time, but major exceptions exist: South Korea and
France have similar incomes but French workers have far more free time. Wages alone don't determine hours.
Key Takeaway
Rising wages led people to consume more AND enjoy more free time — but in different proportions. The model in Unit 3 explains this variation using
the income effect (work less) vs substitution effect (work more), whose balance varies with preferences and institutions.
3.2 A Problem of Choice and Scarcity
Scarcity A good is scarce if it is valued AND there is an opportunity cost of acquiring
more of it. Every extra hour of free time costs Karim €30 in foregone wages.
Disposable The maximum a household can spend without borrowing, after taxes and
