315 Exam

Wage rate

The price of labor per working hour

If the hourly wage is $50 and the price of output is $25, then, in the short run,

the firm should add workers if they add 2 or more units to output.

Output is produced with capital and labor. If the price of capital goes up,

the firm will use more labor per unit of output produced.

In the long run, a profit-maximizing firm will select capital and labor so that

the wage divided by the marginal product of labor equals the rental cost of a unit of capital divided by the marginal product of capital.

Pecuniary factors

Working condition that are as important as price: location, career growth opportunity, amount of work

Non-Pecuniary factors

Working conditions that are not relative to money

If the salaries of accountants increase and other conditions remain the same, then

a firm will move to the left along its labor demand curve for accountants

For two substitutes in production, if the substitution effect dominates,

then the inputs are gross substitutes.

If a union negotiates an industry-wide agreement to set wages above the equilibrium level,

there will be a surplus of labor in the industry.

Diminishing returns

a level of production in which the marginal product of labor decreases as the number of workers increases

Unemployment occurs when

a person is actively searching for employment or unable to find work

Total wage bill

amount of money that a company or organization pays to its employees.

Which of the following events will cause the labor demand curve to shift up and to the right?

an increase in product demand

Gross substitutes

an increase in the price of one commodity causes people to want strictly more of the other commodity

Objections to MRP theory

argument: firms cant differentiate between workers; you should be paid for what you produce but we cant really calculate that

Moving from the upper to the lower portion of a straight labor demand curve, the elasticity

changes from elastic to inelastic.

Along a straight-line demand curve for labor

demand becomes more elastic as the wage rises.

A worker's income is equal to his

earnings plus employee benefits plus unearned income

When the price of capital increases, a firm will

employ more, less, or the same amount of labor.

The labor market does NOT

ensure that all workers are hired

Pay determinants

experience, longevity, merit, education

Substitutes in production

goods that are CO-PRODUCED

Complements in production

goods that are the BY-PRODUCTS in production

Scale effect

holds input ration constant, higher wages -> higher costs for firm -> higher price of the product -> reduce employment & output; firm costs decrease ->firm wants to produce more -> firm hires more labor at any wage rate

Substitution effect

holds output constant, higher wages -> companies switch to cheaper capital -> firms want less labor @ high wages and more labor at less wages ; capital is relatively cheaper than labor -> so the firm will use more capital and less labor in production

If an increase in the minimum wage leads to higher aggregate earnings by the workers affected, then the own-wage elasticity of demand is

inelastic

Total product of labor

is defined as the total quantity of output produced by a firm in the given inputs.

Cross-wage elasticity of demand

measures the responsiveness of the quantity demanded for a good to a change in the price of another good

Own-wage elasticity of demand

refers to the responsibilities or sensitivity of employment to a change in the wage rate.

Marginal product of labor

the change in output from hiring one additional unit of labor

If a firm hires another unit of labor, output goes up by 12 units. The wage rate for the unit of labor is $6. What is the firm's cost of producing another unit of output using labor?

$0.50

Positive economics

Consists of two assumptions: Scarcity and Rationality

Derived demand

Demand for resources; The demand for a resource is derived from the demand for the products that the resource helps to produce.

Labor force

Employed + Unemployed

Efficiency vs equity

Equity: More equitable but less efficient Efficiency: More efficient but less equitable

Shifts vs. movements in supply

If any wages change then supply changes,

Gross complements

If the increase in the price of one input shifts the demand for another input to the left, the scale effect has dominated the substitution effect

Pros and cons of minimum wage

If we raise minimum wage then some employers will be forced to let go of employees causing unemployment to rise

Short-run vs. long run labor demand

LRLD curve has flatter slope because a wage change has both an output(scale) effect and substitution effect

Labor force participation rate

Labor Force/ Working age population

Profit maximization conditions (S/R & L/R)

Long run: states that the added cost of producing one more unit of output using labor is the same as using capital; get the most "bang for your buck" Short run:

Normative economics

Made up of two types of transactions: Voluntary and Mandatory

Reservation wage

The minimum amount of money you would need to work a job

Payroll taxes and wage subsidies

***Calculations***

What happens to demand of labor when wages increase

A change in the quantity demanded

Not included in labor force

Active daily military, stay at home parents, full time students, retired, discouraged workers, disables workers

Hicks-Marshall laws of derived demand

Aka Determinants of Elasticity: 1. Elasticity of product demand (a larger product elasticity of demand means higher demand elasticity) 2. Ratio of labor costs to total costs (the larger the share of labor costs, the greater the elasticity of labor demand.

Own-wage elasticities of demand are

Always negative

Economic Rent

Any amount of $ earned above their reservation wage

Nominal vs. real wage

Nominal: what workers get paid/hr in current $ Real: Nominal/ Consumer Price Index x 100

Rationality

People respond positively to benefits & negatively to costs

Market failures

Price distortion (aka minimum wage)

Marginal analysis

The rule for maximizing profit or minimizing losses is that the most profitable output or smallest loss is where marginal revenue (MR)=marginal costs (MC)

Scarcity

There are limited resources for unlimited wants

Unemployment rate

Unemployment/ Labor Force

Wages, earnings, compensation, and income

WAGE rate x hours worked = EARNING + employee benefits = Total COMPENSATION + unearned income(interest, dividends, etc.) = INCOME