Week 10 - Labour markets +lt2 Flashcards
What is the circular flow diagram?
Market for goods and services -> goods and services -> Households
Households -> money -> Market for goods and services
Market for goods and services -> money -> Firms
Firms -> goods and services -> Market for goods and services
Market for factors of production -> money -> Households
Households -> factors of production -> Market for factors of production
Market for factors of production -> Factors of production -> Firms
Firms -> Money -> Market for factors of production
What is labour supply?
how we as workers make decisions on how much to work
What are two options with how we spend or time (applying an economic model to the decision on how much labour to supply)?
- Spend time earning money (working)
- Spend time enjoying leisure
How to draw a labour supply diagram to do with wage determination?
Consider a worker whose utility is defined as a function of leisure and
weekly income. An indifference map and budget line (the slope of which
is determined by the hourly wage) may be drawn:
x axis leisure
y axis income (weekly)
downward sloping line budget line
different indifference curves
What does the point of tangency between the budget line and the highest attainable indifference curve determine?
hours of leisure demanded and labour supplied
What does a decline in the wage lead to a change in the diagram?
an increase in leisure demanded, and a fall in labour supply due to income decreasing, causing the budget line to decrease too
Is the substitution effect positive or negative?
The substitution effect of a wage change on labour supply is always positive
(i.e. the substitution effect of a rise in the wage always tends to increase labour supply, and the substitution effect of a fall in the wage always tends to reduce labour supply
it depends on the indifference curve as a decline in wage may increase leisure demanded, can also increase labour supply)
Is the income effect positive or negative?
The income effect of a wage change on labour supply may be positive or negative
When could the income effect dominate the substitution effect?
at high wages which could lead to a backward bending supply of labour
What approach is there to increase working hours?
a two tier salary, paying more when you work eg weekends
this introduces a kink in the budget line, and ensures that workers will wish to supply more labour
What approach is there to reduce working hours in the country?
charge income tax, payable only over a certain threshold, also makes the budget line kinky
might encourage workers not to go beyond the kink
What is labour demand?
the amount of labour that employers seek to hire during a given time period at a particular wage rate
What is the marginal product of labour?
the additional output a firm gets by employing one additional unit of labour
What does the law of diminishing marginal product show?
shows how, eventually, the
addition to output generated by the last unit of a factor (e.g. labour) employed declines
What does multiplying the marginal product of labour (MPL) by output price give?
the marginal value product of labour (MVPL)
