Exam 3 - Chapter 10 - Factor Markets Flashcards
What do all factors of production have in common?
the payment they receive should be based on their economic contribution to the firm.
Marginal physical product (MPP)
The additional output created by employing one more unit of a factor of production is it’s marginal physical product. The marginal physical product (MPP) is a measure of the economic value of the worker to the firm.
In general, we expect that the MPP of workers is
subject to the Law of Diminishing Returns. That is, we expect that as we add more workers, without adding the other factors of production, the output per worker will decline.
The Marginal Revenue Product (MRP)
is the additional revenue generated by adding one unit of a factor of production.
The Marginal Revenue Product (MRP) of a factor of production is the
marginal revenue times the marginal physical product. MRP = MR x MPP
What two factors will affect the MRP?
- diminishing returns, affects the physical productivity of the workers.
- marginal revenue often declines as output increases. These two things together tell us that the MRP will decline as output increases, ceteris paribus
Factors Affecting the MPP
First is the human capital of the workers. This is their native skills, plus their education, training and experience. We get better at our jobs as we learn how to do them, discover tricks that make them easier, figure out how to please our boss and so on. People who have stronger education and training will usually do better at a job requiring their training
Why workers in the US might be paid higher wages?
at least in part, because they have greater human capital in the form of education and training. Or, they might, on average, be more experienced in their jobs, taking advantage of tricks learned on the job.
What is the second factor that influences the MPP?
physical capital. This is buildings, machines, trucks, and other goods made by people to make other goods. The worker who employs the most capital will likely be the worker who produces the most.
In general, capital makes
workers more productive.
Combination of advanced technology and capital will produce
the highest income for labor.
Marginal Factor Cost
The additional cost of hiring one more unit of an input is called the Marginal Factor Cost, and represents the supply of that factor.
What is the optimal amount of labor, or any factor of production, to employ?
Workers should be hired up to the point that the additional benefits obtained from hiring them is just equal to the additional costs.
What is the rule of hiring factors of production for the profit-maximizing firm?
MRP = MFC.
- that supply should equal demand.
The MRP curve is downward sloping curve
because of diminishing returns and the decline in MR as quantity sold increases. MFC is upward sloping because a higher wage is required to entice resources to enter the market.
The MRP of each worker is
not the MRP that existed when they were hired, but the MRP of the last worker hired.
The demand for a factor of production is a
derived demand. This means that we do not value land, labor or capital for themselves, but we value them for what they can produce for us
What rule should we follow to make this happen?
Clearly, the rule needs to be related to two things: the productivity of the factors of production and their costs.
In economists terms, the relationship of the marginal physical productivity of labor (or land or capital) to its price will determine
the optimal amount to employ
Monopoly occurs when there
is one seller of a good.
A monopsony occurs when there is
one buyer.
The monopoly restricts
output to raise price.
The monopsonist will restrict
employment to lower wages.
A union
is a monopoly!
A labor union is
an association of workers who unite for a common purpose.
What are the three basic kinds of unions used in the United States?
- Craft or Trade Unions.
- Industrial Unions.
- Public Employee Unions.
Craft or Trade Unions.
A trade union is a union made up of workers who share the same skill. This includes the carpenters union, electricians union, or, perhaps, the teachers union.
Industrial Unions.
An industrial union is made up of all workers who work within an industry, regardless of their respective skills. Examples include the United Auto Workers, the Oil, Chemical and Atomic Workers, or the Culinary Union, which represents hotel and restaurant industry workers.
Public Employee Unions.
These are forms of the industrial union, however, the workers involved are government employees.
these unions operate under
different rules than private sector unions.
Company unions.
This means that only the employees of a single company form a union. These occur in countries where the relationship between labor and management is cooperative, not combative.
professional associations
such as the American Medical Association, which may act like unions, but are not legally one
Why are the activities of unions are critical for two reasons.
- unions tend to occur in large, economically vital industries such as airlines, automobile manufacturing and mining.
- union contracts often affect wage increases for non-unionized workers. That is, union workers set the size of wage increases for much of the country
Unions have a
wide variety of goals, and the goals fluctuate over time.
- good times increases wages
- bad times (recession) maintain employment of members.
What are the many goals of unions?
The many goals of unions may include:
- Maximizing wages and benefits.
- Maximizing total wages and benefits paid.
- Employment
- Work rules and working conditions
Maximizing wages and benefits.
the union may be interesting in raising wages as high as possible. This strategy may have a negative impact because high wages may cause the firm to substitute additional capital for labor. However, if the union has 100,000 members, and it can get a 10% raise for 95,000 of them, with 5,000
Maximizing total wages and benefits paid.
. The firm might want to bargain for the largest possible payment from the firm to the workers. This means it would find the optimal balance between raising wages and the reduction in employment it would cause.
Employment
The union protected employment at the expense of wages.
Work rules and working conditions
Unions may bargain for improvements in working conditions, or for a set of rules to be applied in the workplace.
Union tactics include:
- Collective Bargaining
- Boycotts and public pressure
- Legislature lobbying.
- Strikes.
Collective Bargaining
occurs when the union bargains for the workers as a group, rather than each bargaining separately. This creates the monopoly union against the monopsony firm, theoretically creating a more equal bargaining position. Surprisingly, this was only made possible in many industries in the 1920s
Boycotts and public pressure
A union may try to bring public opinion to bear on an employer. They will advertise against an employer they see as unfair to the union, and in the extreme case, organize a boycott. For example, in the 1960s, the farm workers organized a boycott of grape producers. Consumers were urged not to buy grapes that had not been picked by union workers.
Legislature lobbying.
Unions lobby state legislatures and the US Congress to create laws more favorable to unions and their goals. In addition to concern for its relationship with the employers, a union may argue for laws that protect the industry, such as tariffs or trade restrictions against foreign competitors. In that sense, the union and firm may have a common interest.
Strikes.
A strike occurs when workers refuse to work. Typically, they will march in picket lines outside the firm to alert customers to the existence of the strike.
Unions can “belong” to the firm and its workers in three ways.
- closed shop
- union shop
- right to work law
closed shop
occurs when workers must already belong to the union before they can be hired by the firm. Closed shops are illegal in the United States, prohibited by the Taft-Hartley Act of 1947 (which was passed over the veto of President Truman)
union shop
is legal in most states. A union shop exists when workers are required to join the union after being hired.
right to work law
prohibits all requirements for workers to join the union. The union may exist in the industry, but each firm will have both union and non-union workers on its payroll.
unionized workers.
union workers pay union dues,
non-unionized workers
Since only the union workers pay union dues, the union and its members will believe that some workers get value for nothing.
Effects of Unions
- The most obvious would be the increase in wages possible with the exercise of their monopoly power.
- raising wages and benefits.
- maximize employment - they would sacrifice wage increases if it means preventing layoffs of their members.
Some argue that unions are positive factors in the workplace, because
they have increased worker safety (lowering costs to the firm), and they provide a more stable labor force, lessening training and hiring costs for the firm
Violence Against Unions
When the union movement began in the US, violence by companies against the founding of the union was common. Unions organizers were often often killed and sometimes killed
Violence By Unions
Unions are also sometimes guilty of violence. Striking workers have attacked workers who cross the picket line and continue to work (scabs). They may also attack customers entering businesses where the workers are on strike.
Discrimination
In the past, unions often limited the types of members allowed, often on the basis of race. Union labels, today thought to symbolize “Made in America”, once meant “Made By Whites.”
Unions Around the World
developing countries, there are no unions and workers are at the mercy of the business. In other countries, unions are seen as partners with the business.
Many unions outside the United States
are company or even factory unions.
federations
groups of unions that band together to seek political or social aims. These federations usually do not conduct bargaining
Japanese labor federations
such as the Japanese Trade Union Confederation (Rengo), and The National Confederation of Trade Unions (Zenroren) have strong social and political agendas
Rengo
by far the largest, includes in its goals improving working conditions, particularly for “non-regular” workers, promoting gender equality, and “to help create sustainable societies through fair globalization.”
Zenroren
is far more extreme in its goals, which include the end to the US/Japan defense treaty, organization of all workers, changes to the Japanese tax system, higher wages, and many more
Unions in China
are company and factory based, and belong to the government-controlled All-China Federation of Trade Unions (ACFTU). Union leaders are selected by the government and unions in general are considered to be “laoban gonghui,” meaning they are the “boss’ union.”
In the United Kingdom
unions represent industries (e.g., the Association of Flight Attendants) and companies (e.g., Accord, which represents workers at Lloyd’s Bank).
Almost all unions in England belong to the
Trades Union Congress, which lobbies the government on behalf of workers.
In Germany,
unions may represent industries or single companies, and they negotiate wages, benefit, and working conditions.
“worker’s councils”
that work with management, and often have voting membership on the board of directors of German companies.
why in many countries, union membership has been declining since the 1970s or 1980s.
In part, this is due to anti-union policy changes at the governmental level such as the Thatcher administration in England and the Reagan administration in the US.
- decline in manufacturing in these nations, and the increase in service industries which are
Only three major countries have more than 50 percent of their workforce unionized:
Norway, Denmark, and Sweden.
How is capital is different than labor in one fundamental way?
Labor is purchased for a short period of time: an hour, a day, a week, a month. Labor can quit and walk away
How do we value capital?
by comparing the income it will earn us over a long period of time to the costs of buying it, which may be paid in advance
Production with capital is
“round about.”
- That means we spend money to buy the factory or airplane, and then get our money back over time.
Land has value because
it has alternate uses.
So while the value of labor is defined by what is
producing, the value of land will be based, at least in part, on the value of what it could produce in its best alternative use.
Why are profits necessary?
- some profits are necessary to keep entrepreneurs in business. Without profit, there would be no businesses.
- profits are signals to other entrepreneurs
allocation is
made most efficiently in an economy where profit maximizing entrepreneurs are free to move resources to their most profitable uses.
Factors of production should be paid based upon
their economic contribution to the firm.
The output created by an additional unit of input is called
the marginal physical product.
The marginal revenue product
equals the marginal physical product times the marginal revenue.
The MRP represents
the demand for factors, their economic contribution to the firm.
Human capital is the
skills, training and abilities of a person.
The MPP of people depends on
their human capital and on the amount of physical employed with them.
The additional cost of hiring one more unit of input is the
marginal factor cost.
- This is the supply of that factor.
Equilibrium in factors markets occurs where the
MRP = MFC
Demand for factors of production is a
derived demand, based on the demand for the products they produce.
Monopsony exists when there is
only one buyer of a good, such as one employer in a town. Monopsony firms will try to lower wages by restricting the number hired. C
Craft or trade unions
cover people with similar skills.
Industrial unions
cover all persons within an industry regardless of skill.
public employee unions
which are a form of industrial union for government workers.
Unions may be interested in
maximizing wages, employment, benefits, working conditions or some combination of goals.
Unions achieve their goals
via collective bargaining, strikes, political lobby efforts, boycotts and public pressure.
Unions do raise wages in their industries,
but may have negative impacts on the productivity of workers.
Union shops exist
in most states. These require workers to join unions after they are hired.
In right to work states
workers can never be forced to join a union.
Capital has value only when
it is expected to create revenue over its life span. It differs from labor in that it is paid and creates a return for many years.
Land has value based on
its alternative uses (its opportunity cost). Land that can be used in many ways will be more valuable than land with no obvious uses.
Profit is important in that
it is necessary to allow businesses to operate, but it is economically important as a signal to entrepreneurs to guide the allocation of resources in society.
