Unit 4 Flashcards
Produce where
MRP=MRC
Marginal Revenue Product is the same as
Demand for resources
MPP
Marginal Physical Product
MRC
Wages
Key points of the resource market
- firm is the buyer
- derived demand
- if workers become more productive, the MRP goes up which causes the demand to shift right and then they hire more workers
MRP determinants
- price or demand for a product
- productivity
- price of other resources
Least cost combination
MPl/Pl=MPc/Pc
Profit Maximizing
MRPl/Pl=MRPc/Pc=1
Firms and markets are
wage takers
MRC is graphed
above the supply curve
If the wage goes above the MRC=MRP, then the firm is
worse off
Bilateral Monopoly
monopsony and an inclusive union, should be better off for society
-monopsony tends to higher fewer workers at a lower wage which is less than socially optimal
Unions
Improve the wellness of its members (at the cost of others)
1) Demand enhancement model
2) Craft
3) Inclusive Union
Demand enhancement model
1) increase demand–increase mrp–increase employment
by political lobbying
Exclusive or Craft Union Model
decreasing supply (regulations on who can work) ie: med school, restricting immigration, reducing child labor, encourages retirement, enforces shorter work week
Inclusive Union
collective bargaining
ie: teachers union
Rent
payment for a resource that is inelastic
Nominal
Not adjusted by inflation
Real
Adjusted by inflation–attract productivity (technology, more capital, more resource, education, health, health, life span)
Interest Rate Determinants
-Risk factor
-Size of loan (greater risk and inflation)
-
-
Loanable funds market
Supply is determined by people putting savings in the bank
- businesses want loans from the bank
- higher interest=less demand
Total Revenue=
TP*Product price
Resource pricing is significant because
- Money income determination (resource prices determine income)
- Cost minimization (resource prices=costs for firms)
- Resource Allocation (technology and productivity change)
- Policy issues (minimum wage? labor union restriction?)
Firm is a ______ in the competitive resource market
price taker
derived demand
demand for a resource that is derived from the demand for the products that the resource helps to produce, the strength of the demand depends on the
1) productivity of the resource
2) the market value of the product
MRP
change in TR/unit change in quantity
MRC
change in total resource cost/ unit change in resource quantity
Profit maximizing
MRP=MRC
Determinants of resource demand
1) changes in product demand
2) changes in productivity
3) change in the price of other resources
4) occupational employment trends
Demand for labor increases when
- demand for the product goes up
- productivity goes up
- Substitute input price goes down
- price of substitute input goes up
- complementary input goes down
Elasticity of resource demand
less elastic the greater the difficulty of substituting other resources for the resource, the smaller the elasticity of a product demand the smaller the proportion of the total cost accounted for by the resource
Marginal theory of income distribution
all resources are paid according to their marginal contributions to output
Nominal wage
amount of money received per hour, day, or year
real wage
adjusted for inflation
Purely competitive labor market
- firms are wage takers
- no union assumed
- intersection of demand and supply determines wage and level of employment
- no single firm can enhance the wage rate
- supply of labor is perfectly elastic
- mrc is constant*****
- TR=sum of MRP
Monopsony Model
- one buyer of a specific type of labor
- workers have few other options
- firm is wage maker
- employs fewer workers and has lower wages than purely competitive
Minimum wage
Leads to fewer workers being employed because of downsloping labor demand curve but it may not be significant unemployment….controversial
Wage Differentials
- differences in MRP
- amounts of human capital
- nonmonetary aspects of the job
- market imperfections
Pay for Performance
piece rates, commissions, royalties, bonuses, efficiency wages
-tries to fight the principal agent problem
Negatives of pay for performance
- poor product quality and compromise of safety
- questionable practices
- “free ride” on other workers
What does supply represent in the loanable funds market?
household savings
In a monopsony, MRC is above supply because
in order to hire more workers the monopsonist must raise the wage of all workers
Economic rent
price paid for the use of land and other natural resources that are fixed in supply or perfectly inelastic
What is the determinant of rent
demand
Incentive function
a high price provides an incentive to offer more of the resource where as a low price prompts resource suppliers to offer less
Rent serves
no incentive function
Land rents are
surplus payments
Single tax movement
only tax landlords because it helps find the best allocation of the land
-now it is called inadequate, impractical and unfair
Is money a resource?
NO
Interest rate determinants
1) risk
2) length of loan
3) size of loan
4) taxability
Pure interest rate
*
Equilibrium interest rate in the loanable funds market is determined by
the demand and supply for loanable funds
Compound interest
total interest that cumulates over time on money in an interest making account
usury law
maximum interest rate that can be made
effects:
1) deny credit to low income people (nonmarket rationing)
2) subsidize high income borrowers and penalize lenders (gainers and losers)
c) diminish efficiency
Pure economic profit
what remains after all explicit and implicit costs are subtracted from total revenue
Entrepreneurs receive
accounting profit unless their accounting profit exceeds the normal profit that they could earn elsewhere in which case they make economic profit
Three sources of economic profit
- bearing of uninsurable risk
- uncertainty of innovation
- monopoly power
Profit and profit expectations affect the
- levels of investment
- total spending
- domestic output
