Unit 9 + 10 Flashcards
Characteristics of a PC labor market
- market consists of many firms and many substitutible workers
- firms are wage takers
- no barriers to entry
- firms are DEMANDERS
- households are SUPPLIERS
- firms produce goods in PC product markets
Differences between PC product and PC labor market
PC labor market:
- many firms, no barriers to entry
- firms are wage takers
- firms are DEMANDERS
PC product market:
- many firms, no barriers to entry
- firms are price takers
- firms are suppliers
Profit maximizing rule in PC labor market
MC=MR
If MR>MC: produce more
If MR
Marginal product
The increase in production as one input is added
Marginal product of labor
The increase in production (output) when one more unit of labor is added
Marginal revenue product of labor
MRP=
Value of marginal product of labor, revenue gained from hiring one more worker (is it worth it?)
MRP=MPL(marginal product of labor) x price of good
The firms demand curve and the market demand for laborers
What wage do they hire?
Market demand for laborers is equal to all other firms in the markets demand for labor
Hire at a wage that does not exceed their marginal revenue product of labor
Factors that shift labor demand curve
And change from MP or P
MP: anything that changes marginal product of labor (ex. Technology, supply of other factors of production)
P: anything that changes price (ex. Shifts in product market)
Technology
Shifts in demand for labor in labor markets and firms deriving from PRICE
Price increases: demand for labor shifts RIGHT
Price decreases: demand for labor shifts LEFT
Shifts in demand for labor in labor markets and firms deriving from MPL
MPL increases: demand for labor shifts RIGHT
MPL decreases: demand for labor shifts LEFT
Supply in PC labor market-what does it represent?
A higher wage=
Labor supply curve represents trade off between work time and leisure time
Higher wage=greater OC of leisure
Equilibrium in PC Labor markets
Wage=
Equilibrium wage adjusts to balance supply and demand of labor
Wage=Marginal revenue product of labor
Factors that shift PC labor supply curve
- change in taste (willingness to work)
- change in opportunities (substitute jobs)
- Q of workers available (due to immigration and emigration)
Marginal factor cost
The cost of each additional factor employed by a firm
The wage in PC labor
Eq=
Eq wage in PC labor market sets wage for PC firm
Eq=MFC=supply of firm
A firm in a PC labor market D=
Where do you maximize profit?
D=MRP
Maximize profits where MFC=MRP and hire workers until MFC=MRP
In a PC labor market, hire workers until
Marginal revenue product=Marginal factor cost
Diminishing marginal product
Marginal product of an input declines as the quantity of an input increases
Value of marginal product
Marginal product of input X price of output
The workers contribution to revenue
Equilibrium in labor market
-wage adjusts to balance supply and demand for labor
-wage=value of MPL
When a firm is in equilibrium, each firm has bought as much labor as it finds profitable
Rule for profit maximization in labor market equilibrium
Firms hires workers until value of marginal product of labor=wage
Any change in supply and demand for labor changes…
The equilibrium wage and value of marginal product by the same amount, because they must always be equal
When labor supply increases, equilibrium wage…
Falls. At the lower wage, firms hire more labor so employment rises,and with more workers, the added output from an extra worker is smaller
When labor demand increases, equilibrium wage…
Rises. Change in wage reflects change in value of marginal product of labor, and with a higher output price, the added output from and extra worker is more valuable
Minimum wage in PC labor market
Acts as a binding price floor
Average product
Total output/total variable input
Marginal product curve
Eventually decreases because of DMR
Intersects average product curve at its maximum
Economic rent
the positive difference between the actual payment made for a factor of production (such as land labor or capital) to its owner and the payment level expected by the owner due to its exclusively or scarcity
Land labor and capital earn…
The value if their marginal contribution to the production process
When the supply of a factor falls, what happens to equilibrium factor price?
It rises
Externality
The uncompensated impact of one person’s actions on a bystander
Positive vs. negative externality
Positive: external benefit
Negative: external cost
Marginal private cost
Cost of producing a good to private producers
Marginal private benefit
Demand without externalities
Marginal social cost
Affects SUPPLY
The cost to society of producing one more good
Marginal social benefit
Affects DEMAND
Utility of all consumers when receiving a good
Negative externalities increase…to a society
Positive externalities increase…to a society
Costs: affects supply
Benefits: affects demand
Negative externality vs socially optimum
Eq. Q is above socially optimum
Can be corrected with a tax on producers
Positive externality vs socially optimum
Eq. Q is below socially optimum
Can be corrected with a subsidy for consumers
Negative vs. positive externalities which creates shortages, which crested surpluses?
Negative: create surplus
Positive: created shortage
Internalizing the externality
Altering incentives so people take into account the external effects of their actions
The Lorenz curve shows
The distribution of personal income
Monopsony
Firm that is the only buyer in the market
