Economics Unit 5 Test Test Questions – Flashcards
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Factor Market
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-most are PC -MC an employer pays for a worker=the worker's wage rate -the demand is known as derived demand -factor markets are where most people get the largest shares of their income
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Factor of Production
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any resource that is used by firms to produce goods and services, items that are consumed by households
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Physical Capital (Capital)
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consists of manufactured productive resources such as equipment, buildings, tools, and machines
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Human Capital
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The improvement in labor created by education and knowledge that is embodied in the workforce.
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Supply Curve of the Labor Market
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-Consumers represent the supply curve -They supple the labor to firms -Upward sloping to the right
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Demand Curve of the Labor Market
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-Businesses represent the demand curve -They demand labor -Downward sloping to the right
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MPL = MPP
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"Marginal Product of Labor" = "Marginal Physical Product"
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Derived Demand
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-The demand for labor is derived from the demand for the product that the business sells -the demand in a factor market
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Factor Distribution of Income
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-the division of total income among land, labor, capital, and entrepreneurship -determined by factor prices
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Value of the Marginal Product of Labor
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VMPL = MPL x P -The value that hiring the next worker would bring to the firm in terms of how many products the laborer can produce
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Marginal Revenue Product
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MRP = MPP x P -The value that hiring the next worker would bring to the firm in terms of the value that selling each of those products would bring to the firm
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VMPL = MRP
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-"Value of the Marginal Product of Labor" = "Marginal Revenue Product" -should hire another worker is if the value of the extra output is more than the cost of the additional worker—that is, if VMPL ; W
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Shift Factors of MRP (VMPL)
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-Since MRP = MPP x P, and MRP also represent's the firm's demand for labor, when productivity or price increases (or decreases), the MRP curve will also increase (or decrease) -If the demand for TV's increases in the product market, creating a higher equilibrium price, then the MRP curve in the labor market will also shift to the right (increase)
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Perfectly Competitive Labor Market
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1) # of firms hiring labor is many and firms are small 2) firms are "wage-takers"; there's an unlimited supply of labor available, so wages are constant 3) supply curve of labor (for the firm) is perfectly elastic
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Profit Maximizing Condition in a Perfectly Competitive Labor Market
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MRP = MRC
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MRP Equation
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MRP = MPP x P
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MRP
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-Marginal Revenue Product -The revenue generated from hiring an additional worker -the demand curve of the firm in a Perfectly Competitive Labor Market
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MRC
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-Marginal Resource Cost -The cost of hiring an additional worker -the supply curve of the firm in a Perfectly Competitive Labor Market -curve is constant in a Perfectly Competitive Labor Market because hiring an additional worker is always the same cost
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Imperfectly Competitive Labor Market
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1) There is only one firm hiring labor, and the firm is very large 2) The supply of labor is limited, so wages increase as more laborers are hired 3) Supply curve is upward sloping; MRC ; SL are not equal like they were in a PC Labor Market
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Profit Maximizing Condition in an Imperfectly Competitive Labor Market (Monopsony)
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Q: MRC = MRP W: The point on the SL curve that corresponds with the point where MRC = MRP
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Optimal Inputs
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they evaluate the cost of each combination and select the one that minimizes the cost of production
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Cost Minimization Rule
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Max/Px = MPy/y -only minimizing costs when the MP/S of two resources are equal -costs and productivity are inversely related, so a firm has to employ the resource with a higher productivity level until they become equal, to minimize costs
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Poverty Threshold
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the annual income below which a family is officially considered poor.
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Poverty Rate
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-the percentage of the population with incomes below the poverty threshold. -not been adjusted upward over time to reflect the long-term rise in the standard of living of the average American family
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Effects of Working part Time
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lacks benefits such as health plans, paid vacation days, and retirement benefits, and it also usually pays a lower hourly wage than comparable full-time work
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Income Groups (Quintiles)
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Bottom: 0-20% Second: 20-40% Third: 40-60% Fourth: 60-80% Top: 80-100%
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Mean household income
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-the average income across all households. -strongly affected by the incomes of a relatively small number of very-high-income Americans, who are not representative of the population as a whole
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Median household income
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-the income of the household lying in the middle of the income distribution. -
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A means-tested program
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available only to individuals or families whose incomes fall below a certain level
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in-kind benefit
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a benefit given in the form of goods or services.
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Lorenz Curve
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measures income distribution
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Gini Coefficient
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-a number that summarizes a country's level of income inequality based on how unequally income is distributed across the quintiles - A country with a perfectly equal distribution of income has a coefficient of 0 -the highest possible value for the Gini coefficient is 1—the level it would attain if all of a country's income went to just one person
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Gini Index
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-Represented by the area above the Lorenz curve to the line of equal income distribution -G = A/A+B -The larger the area, the more unequal the distribution is
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Marginal Social Cost of Pollution
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-the additional cost imposed on society as a whole by an additional unit of pollution.
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Marginal Social Benefit of Pollution
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-the additional gain to society as a whole from an additional unit of pollution.
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The Socially Optimal Qty of Pollution
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the quantity of pollution that society would choose if all the costs and benefits of pollution were fully accounted for
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Marginal Social Cost Curve (MCC)
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-upward sloping to the right (S)
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Marginal Social Benefit Curve (MBC)
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-downward sloping to the right (D)
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Why a Market Economy Produces Too Much Pollution
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in the absence of government intervention, those who derive the benefit from pollution—the owners of polluting firms—don't have to compensate those who bear the cost.
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Externalities
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-occur when the actions of two individuals have an effect on a "third" party
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Positive Externalities (Beneficial Spillover)
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-have positive effects on third parties ex: education, innovation, and installing smoke detectors in a house, external benefit
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Negative externalities (Costly Spillover)
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-have unwanted effects on third parties ex: second-hand smoke, pollution, or a person that answers a cell phone in a church , external cost
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External Benefit
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a benefit that an individual or firm confers on others without receiving compensation. -a PE
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Eterm-33xternal Cost
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-an uncompensated cost that an individual or firm imposes on others. -a NE
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Solutions for Externalities
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1. Taxation - tax producers to discourage actions. Costly to monitor 2. Regulation - First, use technology specific methods. (Monitoring costs are low, but it reduces incentives for innovation.) Second, restrict way of goods or pollution produced. (Monitoring costs are high, but it increases incentives for innovation.) 3. Property Rights (Coase) -well defined -divisible -defendable
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Ronald Coase Theorem
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-the problem of externalities can be solved without government intervention through: 1. Clearly defined property rights 2. Small number of parties involved 3. Low transaction costs
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Transaction Costs
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the costs to individuals of making a deal
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Emissions Tax
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a tax that depends on the amount of pollution a firm produces
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Pigouvian taxes
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Taxes designed to reduce external costs
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Tradable Emissions Permits
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-licenses to emit limited quantities of pollutants that can be bought and sold by polluters. -those that find it easier to reduce pollution will sell some of their permits to those that find it more difficult -firms will use transactions in permits to reallocate pollution reduction among themselves -those with the lowest cost will reduce their pollution the most and those with the highest cost will reduce their pollution the least
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Internalize the Externalities
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When individuals take external costs or benefits into account
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Marginal Benefit Curve (MBC)
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-downward sloping to the right (D)
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Marginal Cost Curve (MCC)
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-upward sloping to the right (S)
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Socially Optimum Outcome
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MSB = MSC -NEs: occurs at a lower qty than the equilibrium qty -PEs: occurs at a higher qty than the equilibrium qty
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Corrective Measures for Externalities
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NEs: Tax PEs: Subsidy
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Public Good
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-non excludable (no way to prevent others from using it for free) -non rivalrous (other people can't prevent you from using the good)
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Deadweight Loss for Externalities
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-represents the inefficiency of a market when the equilibrium quantity of an externality is not at the socially optimal outcome (where MSB = MSC) -f a market can operate where MSB = MSC, then there would be no deadweight loss, as this is society's most "efficient" output. -NEs: overproduction -PEs: underproduction
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Private Good
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-excludable (can prevent others from using it for free) -rivalrous (other people can prevent you from using the good)
