Econ: Chapter 8 (The Labor Market) – Flashcards
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Labor supply
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is the willingness and ability to work specific amounts of time at alternative wage rates in a given time period, ceteris paribus.
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Opportunity cost -opportunity cost of working is the amount of leisure time that must be given up in the process
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is the most desired goods or services that are forgone in order to obtain something else. -value of this free time represents this
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1) Increasing opportunity cost of labor. 2) Decreasing marginal utility of income.
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The upward slope of an individual labor supply curve reflects two things:
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supply curve for labor
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The slopes upward (like a normal supply curve), indicating that as the wage rate increases, the quantity supplied of labor will also increase.
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Market supply of labor
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is the total quantity of labor that workers are willing and able to supply at alternative wage rates in a given time period, ceteris paribus. -It represents the labor supply of all workers
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demand for labor
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shows the quantities of labor employers are willing and able to hire at alternative wage rates in a given time period, ceteris paribus. - refers to the number of workers hired or employed (or the number of workers in demand at that wage rate).
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Derived Demand -demand for labor is a derived demand
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-The demand for labor and other factors of production results (is derived) from the demand for the final goods and services produced by these factors.
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the wage rate
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The quantity of labor demanded depends on its price
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marginal physical product (MPP).
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We measure a worker's value to the firm by his or her____________?
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Marginal physical product -Marginal physical product equals (=) the change in total output divided (/) by the change in the quantity of labor.
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-the change in total output associated with one additional unit of an input: -is the extra or additional output from adding one more unit of a resource or worker. -In most situations, it declines as more workers are hired
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Marginal revenue product (MRP) -Marginal revenue product equals (=) the change in total revenue divided (/) by the change in the quantity of labor.
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is the change in total revenue associated with one additional unit of input. - is the extra or additional revenue the firm earns by adding one more worker. -sets an upper limit to the wage rate an employer will pay.
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The Law of Diminishing Returns
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The marginal physical product of labor eventually declines (or diminishes) as the quantity of labor employed increases. -Marginal physical product declines because more people must share limited facilities.
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The Law of Diminishing Returns
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-The marginal physical product (MPP) of a variable factor declines as more of it is employed with a given quantity of other (fixed) inputs.
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Diminishing Marginal Revenue Product (MRP)
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As MPP diminishes, so does MRP. MRP = MPP x p If p is assumed to be constant, then MRP diminishes along with MPP.
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Wage rate increases. -Higher wage rates are needed to attract workers away from other labor markets, household activities, and leisure.
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Ceteris paribus, for an upward-sloping labor supply curve, there is an increase in the quantity of labor supplied when the:
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Increasing opportunity cost of labor. -As labor earns more the additional utility of labor declines and so it takes a higher wage rate to induce workers to supply labor.
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An upward-sloping supply curve of labor reflects the:
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$26 -The additional cost is $26 since the total cost when the 7th worker was hired would increase from $72 (12 x 6) to $98 (14 x 7).
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If a firm can hire six workers at $12 per hour but in order to hire the 7th worker it must pay all its workers $14 per hour then the additional cost of that worker is:
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we demand what labor produces and not labor itself. -Derived demand means that we demand what the factor produces and not the factor itself.
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The demand for labor is a derived demand because:
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Wage rate to the MRP of the worker. -As each individual worker is hired the MRP declines but so long as it is greater than the wage rate it is profitable for the worker to be hired.
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When making the hiring decision, firms should compare the:
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Demand for labor increases and the supply of labor is constant. -If the demand curve for labor increases or shifts to the right, this will drive the price and the quantity of labor up.
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The equilibrium wage will definitely rise if:
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An increase in the desire for leisure. -An increase in the desire for leisure by labor would mean that a higher wage rate would need to be officered to induce labor to work. This would be characterized by the labor supply curve shifting upward which would produce a higher equilibrium price of labor.
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This would cause the equilibrium price of labor to increase?
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Desire for airplane travel -Derived demand means that we demand what the factor produces and not the factor itself.
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If the demand for labor is a derived demand, then the demand for airplane pilots depends on the:
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Wage rate. -The labor demand curve depicts the relationship between the wage rate (price) and the quantity of labor demanded.
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The quantity demanded of labor depends on the:
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An upward shift of the MRP curve. -If the MRP curve shifts to the right or up then the MPP curve must have also shifted in the same fashion which indicates that labor is more productive.
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An increase in the labor productivity is best illustrated by:
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Some workers are better off and some are worse off. -The workers who are employed will be better off because they will enjoy a higher wage then they might otherwise however not all those who are willing to work at that wage will find work.
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If the government decides to raise the minimum wage, ceteris paribus:
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An increase in the quantity of labor supplied and a decrease in the quantity of labor demanded. -Since the minimum wage is above market equilibrium more labor will be supplied than demanded.
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A minimum wage impacts the labor market by causing:
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-Excluding some workers from the unionized market. -Increasing the labor supply curve in the nonunion market. -Attaining above-equilibrium wages for union members.
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Unions influence a labor market by doing all of the following (3)
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A derived demand. -Since the demand for land lines is declining then the demand for the resources to make them also declines.
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One HEADLINE article in the text, titled "Deutsche Telekom to Cut 19,000 Jobs," reports that the company will reduce the number of workers in the fixed-line division since people are using cell phones and internet dialing as alternatives to land lines. This article describes a labor market where labor demand is:
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Creates unemployment -Since a minimum wage is set above the market equilibrium rate more people will want to work than firms will want to hire and that will increase unemployment.
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One HEADLINE article in the text reports the history of the minimum wage. In economic terms, a minimum wage creates:
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True, -The demand for a secondary good is always depended on the demand for a final good.
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True/False: The concept of derived demand means that, for example, the demand for cotton pickers is determined from the demand for clothing made of cotton.
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False -The marginal revenue product determines the highest wage that a firm is willing to pay its workers.
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The marginal revenue product sets a lower limit on the wage rate an employer will pay.
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False -At market equilibrium there is no shortage or surplus of labor.
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True/False: At the equilibrium wage, there is still some unemployment because the wage is so low.
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True -By limiting the available work force a union is able to maintain a wage above the equilibrium wage.
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True/False: In order to maintain an above-equilibrium wage for its members, a union must exclude some workers.
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False -It is very difficult to measure a CEO's pay because of the elusiveness of the marginal revenue product.
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True/False: If it is difficult to measure the MRP of a CEO, this means that the CEO should not be paid very much because he or she brings little value to the company.
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Leisure Time
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The opportunity cost of working is the amount of __________ that must be given up.
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marginal physical product
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The downward slope of the labor demand curve reflects the changing productivity of workers as more are hired. __________ is a measure of worker productivity that establishes an upper limit on employer willingness to pay.
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$3
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If an increase in labor by one unit leads to an increase in total revenue of $3, then the marginal revenue product of the additional unit is:
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no more; the same
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Each (identical) worker is worth __________ than the marginal revenue product of the last worker hired, and all workers are paid _________ wage rate.
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True
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True/False: The intersection of the market supply and demand curves establishes the equilibrium wage.
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True
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True/False: If labor productivity (MPP) rises, wages can increase without sacrificing jobs.
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employment level and wages do not change
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In a given labor market if a minimum wage is established at the current equilibrium wage:
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Opportunity Wage
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is the highest wage an individual would earn in his or her best alternative job
