chapter 11: the labour market

Question 1

when markets are perfectly competitive, what wage do employers pay their workers?

Answer 1

employers pay workers the market wage

Question 2

what is marginal revenue product?

Answer 2

measures the marginal revenue from hiring an additional worker

this is the same as the labour demand curve

Question 3

what is the formula for marginal revenue product?

Answer 3

marginal revenue product = marginal product of labour * price

MRP = MP * P

Question 4

what is the marginal product of labour?

Answer 4

the extra production that occurs from hiring an extra worker

Question 5

what is the rational rule for employers?

Answer 5

hire an additional worker if their MRP is greater than or equal to the wage

Question 6

what is labour demand?

Answer 6

summarizes the wage at which you will buy each quantity of labour

equal to MRP

Question 7

what are the four factors that will shift the market labour demand curve?

Answer 7

1. changes in demand for your product
2. changes in the price of capital
3. better management techniques and productivity gains
4. nonwage benefits, subsidies, and taxes

Question 8

how does a change in demand for the product affect labour demand?

Answer 8

as there is an increase in demand for the product, there is an increase in labour demand (curve shifts right)

Question 9

what is derived demand?

Answer 9

the demand for an input derives from the demand for the stuff that input produces

Question 10

how does a change in price of capital affect the labour demand curve?

Answer 10

decline in the price of capital can lead to either increase or decrease in labour demand, it depends if they are complements or substitutes

Question 11

what is the scale effect?

Answer 11

when the price of capital declines (or any input gets cheaper), you can now produce at a lower cost. this encourages you to produce at a larger scale, which may require more workers (labour demand increases)

Question 12

what is the substitution effect?

Answer 12

many tasks can be done by either workers or machines. when the price of machines falls, the company will replace workers with no cheaper machinery (labour demand decreases)

Question 13

what happens when scale effect dominates?

Answer 13

labour and capital are complements

labour demand shifts right

Question 14

what happens when substitution effect dominates?

Answer 14

labour and capital are substitutes

labour demand shifts left

Question 15

how does better management and productivity gains affect labour demand?

Answer 15

improved management and technological changes can increase the productivity of labour

the MPL increases, so labour demand increases

Question 16

how do nonwage benefits, subsidies, and taxes affect labour demand?

Answer 16

if any nonwage costs rise, labour demand decreases (left)

if any nonwage costs fall, labour demand increases (right)

Question 17

what are considered nonwage costs?

Answer 17

health insurance
retirement benefits
paid days off
employers pay taxes for each worker
contribute to social security

Question 18

what is the rational rule for workers?

Answer 18

work one more hours as long as the wage is at least as large as the MB of another hour of leisure

Question 19

what happens to the slope of an individual’s supply curve with the substitution effect?

Answer 19

when your wage goes up, the opportunity cost of an hour of leisure goes up

higher wages are an incentive to substitute toward work and away from leisure

as a result, if you work longer hours when wages rise, then you get an upward sloping labour supply curve

Question 20

what happens to the slope of an individual’s supply curve with the income effect?

Answer 20

a higher wage increases your income, leading you to choose more leisure and hence less work

leisure is a normal good, and people consume more of a normal good when their income increases

as a result, if you work fewer hours when wages rise, then you get a downward sloping labour supply curve

Question 21

what happens if the income and substitution effects offset each other?

Answer 21

then your incentive to work more hours is perfectly counter balanced by your incentive to work fewer hours

as your wage rises, you do not change your hours worked

hence, the labour supply curve is perfectly vertical

Question 22

what happens if the dominant effect changes for the labour supply curve?

Answer 22

at lower wages, the substitution effect dominates resulting in an upward slope

at the midrange wages, the two effects offset resulting in a vertical slope

at higher wages, the income effect dominates resulting in a downward slope