Final answer:
Paying a hairdresser demonstrates economic principles of indifference curves and opportunity sets, shown by changes in consumption with varying haircut prices. The example highlights Ogden's adjustment to higher haircut prices by reducing haircuts while maintaining his pizza consumption.
Step-by-step explanation:
When you pay a hairdresser $40 for a haircut, this demonstrates an economic principle related to indifference curves and opportunity sets. An indifference curve represents a combination of goods that give a consumer the same level of satisfaction. When the price of haircuts rises, in this case to $30, consumers, like Ogden, must reassess their consumption choices. Ogden starts at choice A on the higher opportunity set and the higher indifference curve. After the haircut price increase, he moves to choice B on the lower opportunity set and the lower indifference curve.
The example also discusses how Ogden reduced his consumption of haircuts from three to two while maintaining the same amount of pizza consumption, which indicates a substitution effect due to the price change. Moreover, the concept of average total cost, which is the total cost divided by the quantity of output, is brought up to highlight the cost aspect of producing goods. For the case of haircuts, if the total cost of producing 40 haircuts is $320, then the average total cost per haircut is $8.
As an establishment produces more haircuts, the average cost initially decreases due to fixed costs being spread across more units. However, as production continues to rise, the average total cost begins to increase again due to the principle of diminishing returns, which reflects the shape of the U-shaped average cost curve.