Week 5 -Applications of Supply and Demand: Labour Markets and International Trade

Question 1

Define World Price?

Answer 1

the price of a good that prevails in the world market for that good.

Question 2

Define Tariff?

Answer 2

a tax on goods produced abroad and sold domestically.

Question 3

Name 5 economic benefits from trade?

Answer 3

1. Increased variety of goods
2. Lower costs through economies of scale
3. Increased competition
4. Increased productivity
5. Enhanced flow of ideas

Question 4

Define Unilateral approach when it comes to trade?

Answer 4

a country removing its trade restrictions on its own

Question 5

Define Multilateral approach when it comes to trade?

Answer 5

a country reducing its trade restrictions in concert with other countries.

Question 6

What is ‘Marginal product of labour’?

Answer 6

the increase in the amount of output from an additional unit of labour.

Question 7

What is the ‘Value of the marginal product’?

Answer 7

the marginal product of an input times the price of the output

Question 8

Define ‘Income effect’?

Answer 8

reflects the response of hours worked due to a change in a person’s level of economic wellbeing

Question 9

Define ‘Substitution effect’?

Answer 9

reflects the response of hours worked due to a change in the opportunity cost of leisure.

Question 10

Name 2 facts about how wages are determined in competitive labour markets?

Answer 10

1. The wage adjusts to balance the supply and demand for labour.
2. The wage equals the value of the marginal product of labour.

Question 11

Define the term ‘Capital’?

Answer 11

the equipment and structures used to produce goods and services.

Question 12

What arethe 3 assumptions that we make when analysing the labour market?

Answer 12

1. The firms hiring workers sell their goods in a competitive market.
2. The labour market has lots of buyers (firms) and sellers (workers).
3. The firm is profit maximising.

Question 13

What is the equation for the Marginal product of labour?

Answer 13

MPL = ΔQ/ΔL

Question 14

What is the equation for the Value of the marginal product?

Answer 14

VMPL = MPL x P

Question 15

Define ‘Output price’ in terms of trade?

Answer 15

an increase in the price raises the value of the marginal product of each worker, and increases the quantity of labour demanded at every wage.

Question 16

Define ‘Technological change’ in terms of trade?

Answer 16

technological advances raise the marginal product of labour, which in turn increases the demand for labour and shifts the labour demanded curve to the right.

Question 17

Name 4 factors that cause shifts in labour supply?

Answer 17

1. Increases in population
2. Changing demographics.
3. Expansion or contraction of particular industries.
4. Availability and level of unemployment benefits and other government transfers

Question 18

Name 4 sources of comparative advantage?

Answer 18

1. Climate and natural resources;
2. Relative abundance of labour and capital;
3. Technology;
4. External economies.

Question 19

Name the effects of tariffs on consumers, producers, the government and overall?

Answer 19

Consumer surplus decreases.

Producer surplus increases.

The government collects tariff revenue.

Overall, the total surplus decreases.

Question 20

Define the term ‘Quota’?

Answer 20

a limit on the amount of imports. Quota license is usually given to domestic importers. The importer gains the difference between import price and domestic price, called quota rent.

Question 21

What is the objective of a quota?

Answer 21

The objective is protection for domestic producers.