Econ 101: Chapter 11

Question 1

In the labour market, the supply curve is represented by…

Answer 1

those who supply labour (workers)

Question 2

In the labour market, the demand curve is represented by…

Answer 2

those who demand labour (businesses).

Question 3

Labour market: graph axies

Answer 3

Price axis is represented by the hourly wage. Quantity axis represents the hours of work.

Question 4

The labour supply curve is…

Answer 4

upward sloping.

Question 5

The labour demand curve is…

Answer 5

downward sloping.

Question 6

The labour market is…

Answer 6

perfectly competitive.

Question 7

In a perfectly competitive market, employers will..

Answer 7

pay the market wage.

Question 8

Labour demand: cost-benefit principle

Answer 8

hire one more worker if that worker yields a marginal benefit greater than the cost incurred.

Question 9

The marginal cost of an extra worker is…

Answer 9

the wage of that worker.

Question 10

Marginal product of labour

Answer 10

the extra output you produce from hiring an extra worker.

Question 11

Marginal revenue product

Answer 11

the marginal revenue from hiring an additional worker.

= marginal product of labour x price output is sold at

Question 12

Rational Rule for Employers

Answer 12

hire additional workers as long as their marginal revenue product is greater than or equal to the wage.

Question 13

the labour demand curve (of the company) =

Answer 13

marginal revenue product curve.

Question 14

labour demand curve is downward sloping because of…

Answer 14

diminishing marginal product.

Question 15

4 factors that shift labour demand curves:

Answer 15

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

Question 16

Derived demand

Answer 16

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

Question 17

Changes in demand for your product

Answer 17

increase in price of product will yield a higher marginal revenue product, so you may hire more workers.

decrease in price of product will yield a lower marginal revenue product, so you may hire less workers.

Question 18

Changes in the price of capital

Answer 18

the market for labour is closely linked with the market for capital goods (e.g. business machinery).
- leads to the scale or substitution effect

Question 19

Scale effect

Answer 19

when the price of capital goods decline, your business can produce outputs more cheaply.
- you may require more workers.
- Labour and capital are complements.

Question 20

Substitution effect
(demand)

Answer 20

when the price of capital declines, the demand for workers to do tasks that can be substituted for machines decreases.
- labour and capital are substitutes.

Question 21

Better management and productivity gains

Answer 21

improved management and technological changes will increase the productivity of your workers –> higher marginal product –> higher marginal revenue product –> higher demand for labour

Question 22

nonwage benefits, subsidies, and taxes
(demand)

Answer 22

retirement benefits, taxes, and health/dental insurance raises the costs of each worker.

government subsidies decrease the costs of each worker.

Question 23

(businesses) higher wages creates an incentive to…

Answer 23

invest in capital.

Question 24

Labour demand tends to…

Answer 24

get more sensitive over time, as the price elasticity of demand gets more elastic due to greater flexibility.

Question 25

the opportunity cost of working is…

Answer 25

everything you do when you’re not working.

Question 26

Leisure

Answer 26

“time not working for pay.”

Question 27

Rational Rule for Workers

Answer 27

work one more hour as long as the wage is at least as large as the marginal benefit of another hour of leisure.

Question 28

Substitution effect
(supply)

Answer 28

higher wages incentivizes people to work more –> higher opportunity costs for 1 hour of leisure.

Question 29

income effect

Answer 29

higher income means demand for leisure goes up, as leisure is a normal good.

Question 30

Vertical labour supply curves mean..

Answer 30

the substitution and income effects offset each other

Question 31

Backward bending supply curves mean…

Answer 31

substitution effect dominates at lower wages, and income effect dominates at higher wages.

Question 32

wage elasticity of labour supply

Answer 32

measures how the quantity of labour supplied responds to a change in the wage.

Question 33

the supply of labour tends to be…. (elasticity)

Answer 33

inelastic

Question 34

intensive margin

Answer 34

the number of hours each worker supplies

Question 35

extensive margin

Answer 35

describes the number of people in the workforce

Question 36

How do you decide whether to work or not?

Answer 36

use the cost benefit principle –> evaluate costs and benefits.

Question 37

Why is the market labour supply curve upward sloping?

Answer 37

1. Higher wages induce new people to enter the workforce.
2. Existing workers may put in more hours.
3. Some people may switch occupations.

Question 38

4 factors that shift the labour supply curve:

Answer 38

1. changing wages in other occupations.
2. Changing number of potential workers (population)
3. Changing benefits of not working.
4. Nonwage benefits, subsidies, and income taxes.