Econ 101: Chapter 11 Flashcards
In the labour market, the supply curve is represented by…
those who supply labour (workers)
In the labour market, the demand curve is represented by…
those who demand labour (businesses).
Labour market: graph axies
Price axis is represented by the hourly wage. Quantity axis represents the hours of work.
The labour supply curve is…
upward sloping.
The labour demand curve is…
downward sloping.
The labour market is…
perfectly competitive.
In a perfectly competitive market, employers will..
pay the market wage.
Labour demand: cost-benefit principle
hire one more worker if that worker yields a marginal benefit greater than the cost incurred.
The marginal cost of an extra worker is…
the wage of that worker.
Marginal product of labour
the extra output you produce from hiring an extra worker.
Marginal revenue product
the marginal revenue from hiring an additional worker.
= marginal product of labour x price output is sold at
Rational Rule for Employers
hire additional workers as long as their marginal revenue product is greater than or equal to the wage.
the labour demand curve (of the company) =
marginal revenue product curve.
labour demand curve is downward sloping because of…
diminishing marginal product.
4 factors that shift labour demand curves:
changes in demand for your product, changes in the price of capital, better management and productivity gains, and nonwage benefits, subsidies and taxes.
Derived demand
the demand for an input derives from the demand for the stuff that the input produces.
Changes in demand for your product
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.
Changes in the price of capital
the market for labour is closely linked with the market for capital goods (e.g. business machinery).
- leads to the scale or substitution effect
Scale effect
when the price of capital goods decline, your business can produce outputs more cheaply.
- you may require more workers.
- Labour and capital are complements.
Substitution effect
(demand)
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.
Better management and productivity gains
improved management and technological changes will increase the productivity of your workers –> higher marginal product –> higher marginal revenue product –> higher demand for labour
nonwage benefits, subsidies, and taxes
(demand)
retirement benefits, taxes, and health/dental insurance raises the costs of each worker.
government subsidies decrease the costs of each worker.
(businesses) higher wages creates an incentive to…
invest in capital.
Labour demand tends to…
get more sensitive over time, as the price elasticity of demand gets more elastic due to greater flexibility.
the opportunity cost of working is…
everything you do when you’re not working.
Leisure
“time not working for pay.”
Rational Rule for Workers
work one more hour as long as the wage is at least as large as the marginal benefit of another hour of leisure.
Substitution effect
(supply)
higher wages incentivizes people to work more –> higher opportunity costs for 1 hour of leisure.
income effect
higher income means demand for leisure goes up, as leisure is a normal good.
Vertical labour supply curves mean..
the substitution and income effects offset each other
Backward bending supply curves mean…
substitution effect dominates at lower wages, and income effect dominates at higher wages.
wage elasticity of labour supply
measures how the quantity of labour supplied responds to a change in the wage.
the supply of labour tends to be…. (elasticity)
inelastic
intensive margin
the number of hours each worker supplies
extensive margin
describes the number of people in the workforce
How do you decide whether to work or not?
use the cost benefit principle –> evaluate costs and benefits.
Why is the market labour supply curve upward sloping?
- Higher wages induce new people to enter the workforce.
- Existing workers may put in more hours.
- Some people may switch occupations.
4 factors that shift the labour supply curve:
- changing wages in other occupations.
- Changing number of potential workers (population)
- Changing benefits of not working.
- Nonwage benefits, subsidies, and income taxes.
