Ch.15 - Economics of factor markets

Question 1

Define factors of production

Answer 1

• they are inputs used to produce goods and services

Question 2

What are some factors of production?

Answer 2

land
labour
capital

Question 3

Derived demand definition

Answer 3

a situation where demand is determined by the supply in another market

• A firm’s demand for a factor of production is derived from its decision to supply a good in another market.

Question 4

Marginal product of labour def

Answer 4

the increase in the amount of output from an additional unit of labour

MPL = ΔQ/ΔL

Question 5

value of the marginal product/ (aka) marginal revenue product

Answer 5

= a worker’s contribution to a firm’s revenue

VMPL = the marginal product of an input x price of the output

VMPL = P x MPL

Question 6

Diminishing Marginal Product of Labour

Answer 6

where the marginal product of input declines as the quantity of the input increases

Question 7

What causes the labour demand curve to shift?

Answer 7

1) output price - increase raises the VMPL & increases the demand for labour; and decrease follows suit but value lowers and decreases demand

2) Technological change - tech advance => raises MPL => raises value of the MPL

2) change in the supply of other factors - the quanitity available of one factor of prduction can affect the marginal product of other factors

Question 8

What causes the labour supply to shift?

Answer 8

• a change in norms
• changes in alt. opps (other occupations)
• immigration and emigration

Question 9

what does an increase in the supply of labour lead to?

Answer 9

• surplus of labour
• downward pressure on wages
• profitable for firms to hire more workers
• diminshing marginal product
• (=>) lowers value of marginal product
• new equilibrium

Question 10

What does an increase in demand for labour result?

Answer 10

• profitable for firms to hire more workers
• upward pressure on wages
• raises value of the marginal product
• new equilibrium

Question 11

Causes of wage differentials?

Answer 11

1. compensating differentials
2. human capital
3. ability, effort, chance
4. signalling
5. the superstar phenomenon

Question 12

What are compensating differentials?

Answer 12

a difference in wages that arises from non-monetary characteristics of different jobs.

e.g. night shift workers are paid more than day workers - perhaps due to risks etc.

Question 13

Human capital def

Answer 13

the accumulation of investments in people, such as education and on the-job training.

Question 14

Why do people with more education earn higher wages?

Answer 14

Firms are willing to pay more for highly educated workers because highly educated workers have higher marginal products.

Question 15

Why are wages sometimes above their equilibrium values?

Answer 15

• min wage laws
• market power of labour unions
• efficiency wages

Question 16

minimum wage def

Answer 16

lowest price an employer may legally pay its employees.

If the minimum wage is above the equilibrium wage in the labour market, a surplus of labour will develop (unemployment bc the quantity of labour supplied exceeds the quantity demanded).

◦ The minimum wage will be a binding constraint only in markets where equilibrium wages are low.
=> Thus, the minimum wage will have its greatest impact on the market for teenagers and unskilled workers.

Question 17

What is a union?

Answer 17

a worker association that bargains with employers over wages and working conditions.

Question 18

What does the theory of efficiency wages state?

Answer 18

a firm can find it profitable to pay high wages because doing so increases the productivity of its workers

Question 19

What are some things that high wages leads to?

Answer 19

• reduces worker turnover
• increases worker effort
• raise the quality of workers that apply for jobs at the firms

Question 20

What is discrimination (in econ)?

Answer 20

It occurs when the marketplace offers different opportunities to similar individuals who differ only by race, ethnic group, sex, age, or other personal characteristics.

Question 21

Why is it difficult to measure labour market discrimination?

Answer 21

Discrimination is often measured by looking at the average wages of different groups.
However, simply observing differences in wages among broad groups says little about the prevalence of discrimination. Bc, even in a labour market free of discrimination, different people have different wages.
- People differ in the amount of human capital they have and in the kinds of work they are willing and able to do.

Question 22

When might the market solve the problem of discrimination? When might it not?

Answer 22

Competitive markets tend to limit the impact of discrimination on wages.