Factor markets

Question 1

What are FOP, how are price and quantity determined?

Answer 1

Inputs used to produce goods and services.
Labour, land and capital
Price and quantity determined by supply and demand.

Question 2

What does derived demand mean?

Answer 2

Firms demand for FOP is dependant on supply of a good.

Question 3

What are the assumptions about the labour market?

Answer 3

A single commodity is produced in a perfectly competitive market.
Firm aims to profit maximise
Labour is the only FOP

Question 4

What is the production function?

Answer 4

Shows reltionship between the quantity of inputs and the quanitity of output.
Q (output) = f(L)

Question 5

What is the marginal product of labour?

Answer 5

The increase in the amount of ouptut from one extra unit of labour. Change in output or total product / Change in labour

Question 6

What is diminishing marginal product?

Answer 6

As the no.of workers increases the marginal product of labour falls as when more workers are hired each worker contributes less to production than the previous so the production function curve gets flatter with greater number of workers.

Question 7

What is the value of marginal product of labour?

Answer 7

Value of additional output of hiring one more worker in monetary terms.VMPL = P x MPL

Question 8

What happens to the VMPL as workers rise and why?

Answer 8

Diminishes as no.of workers rise as in a perfectly competitive market the price is constant.

Question 9

Where is the profit maximising point of hiring labour?

Answer 9

Where VMPL (MB) = wage (MC) therefore the VMPL curve is the labour demand curve in a perfectly competitive market.

Question 10

What factors shift the labour demand curve?

Answer 10

Change in the output price, increase price = shift right
Tech change (affects MPL), improvements = shift right
Supply of other factors e.g more equipment = workers more productive so MPL rises and VMPL rises shifting labour demand curve upwards

Question 11

What does the upward sloping demand curve illustrate?

Answer 11

Reflects how consumers consumers decisions on the labour-leisure trade off respond to changes in the opportunity cost.
Upward sloping means increase in wages induces workers to increase their supply.

Question 12

What are the assumptions made in the optimal work-leisure decision?

Answer 12

• worker has 24 hours to split between leisure and work
• worker is paid a competitive wage
• worker consumes consumption goods
• leisure and consumption goods are two goods that the worker consumes.

Question 13

Why are there labour market distortions?

Answer 13

-minimum wage
-trade unions
-monopsony
-bilateal monpoly
-eos
-insiders/outsiders
efficiency wages

Question 14

What is the result of insufficient labour market flexibility?

Answer 14

Market is prevented from clearing .

Question 15

What are the benefits to a NMW?

Answer 15

• tackles povert
• reduces gap between the rich and poor
• prevents monposony power
• creates a fiscal benefit
• increases fairness in some professions
• decreases voluntary unemployment

Question 16

What are the effects of a NMW?

Answer 16

Set above the equilibirum wage so there is excess supply.
Creates involuntary unemployment between Qd and Qs whereby those that are willing and able to work arent able to.

Question 17

What does the extent of unemployment created by NMW depend on?

Answer 17

Depends on EOD/S. If elastic then greater unemployment

Question 18

Why is setting the NMW below the equilibirum wage not economically binding?

Answer 18

Because the market will clear as the excess demand for labour will put upward pressure on the wage causing Qs of labour to rise until equilibirum is reached.

Question 19

What is a trade union and its assumptions we make about them?

Answer 19

Formed by workers to improve their conditions of work
Assume;
-closed shops (all workers are union members creating a monopsony supplier of labour)
-bargain for higher wages
-collective bargaining

Question 20

Where is the trade union wage on a diagram, what is the new supply curve ?

Answer 20

Trade union wage is higher than the perfectly competitive wage acheived through collective bargaining. New supply curve = WTUSupply. Those that are paid below the WTU wage will be happy to work at the new bargained wage (horizontal, wage takers at this point) whereas those that are already earning above the WTU wage will not work at bargained wage and the firm will have to increase the wage to hire more workers.

Question 21

How does a trade union affect wage and employment?

Answer 21

Increases wage but decreases employment as more workers are willing to supply at this wage than firms are willing to demand.

Question 22

What is a monopsony? What are characteristics?

Answer 22

a single buyer or employer of labour,
. wage setter
.aims to profit maximise by hiring workers at VMPL = MCL

Question 23

Where is a monposonys wage set, what is the new supply curve? What is the new Mc curve and why is it not the same as the AC curve?

Answer 23

Set at profit max point VMPL=MCL and determined by the supply curve, set below perfectly competitive wage. New supply curve = WmSupply. New MC curve = WmPQMCL as in horizontal up until point of P as cost of hiring new worker = wage, beyond this point in order to hire more workers the firm needs to increase wage not only for that worker but for all previous workers.

Question 24

How does monopsony affect employment and wage?

Answer 24

Decreases wage and employment below the perfectly competitive level.

Question 25

What is a bilateral monopoly?

Answer 25

A market where a monopsony buyer faces a monopoly seller (Trade unions).

Question 27

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Question 28

How do scale economies generate involuntary unemployment?

Answer 28

Economies of scale act as a barrier of entry for firms joining an industry, therefore the unemployed are prevented from starting a business even if they would work for a lower wage than what is paid in existing firms.

Question 29

What is an insider?
What is an outsider?
How do they cause market imperfections in the labour market?

Answer 29

Insider = have jobs and are represented by collective bargaining.
Outsider= dont have jobs and arent represented by collective bargaining.
Insiders have bargaining power which allows them to threaten industrial action and create strategic barriers to entry to prevent outsiders being hired by increasing their wage and causing firms to hire less people despite outsiders being prepared to work for less.

Question 30

What are 2 problems firms face when hiring labour?

Answer 30

• Adverse selection; dont know how productive labour will be.
• Moral hazard; hard to monitor whether workers will shirk after being employed.

Question 31

What does efficiency wage theory suggest and how does it create labour market distortions?

Answer 31

Suggests that it will be profitable to pay workers above their reservation wage (minimum amount required to keep them in employment). This is because it incentivises labour to increase their productivity. However this rise n wage means employers employ less labour generating involuntary unemployment.

Question 32

What are other labour market imperfections?

Answer 32

• Imperfect information between workers and firms
• Persistent equilibrium as wage response to supply and demand
• non maximising behaviour
• discrimination