Labor Market Economics for Small Business Owners

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Complementary service

A service that enhances the value of another service or product

Nonwage benefits

Additional benefits received by workers from their employer, such as health insurance and retirement benefits

Marginal Principle

Breaking the decision of how many workers to hire into smaller marginal choices.

Opportunity Cost Principle

Comparing the marginal cost and benefit of another worker to the baseline of keeping costs and production at current levels.

Taxes

Compulsory financial contributions imposed by the government

Labor demand curve

Curve showing the quantity of labor that firms want to hire at each wage level

Labor Demand Shifter 2: Changes in Price of Capital

Decrease in capital price can lead to either increase or decrease in labor demand

Total Costs

Expenses from hiring hair stylists, calculated as $500 times number hired

Gabriela

Experienced hair stylist and small business owner.

Labor demand shifter

Factors that cause the labor demand curve to shift, such as nonwage benefits, subsidies, and taxes

Subsidies

Financial aid or support extended to an economic sector

Profit Maximization

Following the Rational Rule for Employers to maximize profits.

Rational Rule for Employers

Hire an additional worker if their marginal revenue product is greater than (or equal to) the wage.

Diminishing Marginal Product

Hiring additional workers yields smaller and smaller increases in output.

Labor Demand Curve

Illustrates quantity of labor demanded at different wages

Labor Demand Shifter 3: Better Management and Productivity Gains

Improved management and technology increase labor productivity

Total Revenue

Income from selling haircuts, calculated as $20 times number sold

Labor Demand Shifter 1: Changes in Demand for Product

Increase in product demand leads to higher labor demand

Productivity gains

Increases in the output per unit of input

Derived Demand

Labor demand is derived from demand for the end product

Perfectly Competitive Labor Market

Many employers competing to hire from a large pool of workers with similar skills.

Elasticity

Measure of the responsiveness of one economic variable to another

Price elasticity of demand

Measure of the responsiveness of the quantity demanded of a good to a change in its price

Management techniques

Methods employed to effectively manage and improve productivity

Marginal Revenue Product Calculation

Multiplying the marginal product of labor by the price of the output.

Employer

One who buys the time and effort of workers.

Ubiquitous

Present, appearing, or found everywhere

Law of Demand

Quantity of labor demanded decreases as wage increases

Downward-sloping Labor Demand Curve

Reflects diminishing marginal product and law of demand

Robot-proof skills

Skills that are less susceptible to being replaced by automation or technology

Marginal revenue product

The additional revenue generated by employing one more unit of a factor of production

Marginal product

The change in output from employing one more unit of a factor of production

Price of capital

The cost of obtaining or investing in capital goods

Marginal Product of Labor

The extra output produced from hiring an additional worker.

Marginal Benefit

The extra revenue earned from hiring one more worker.

Marginal Revenue Product

The extra revenue produced by hiring an additional worker.

Marginal Cost

The increase in business costs due to hiring one more worker.

Market Wage

The prevailing wage that employers need to pay to hire workers in a competitive labor market.

Data analysis

The process of inspecting, cleansing, transforming, and modeling data to discover useful information

Head Area

The salon owned by Gabriela.

Profit

Total revenue minus total costs

Marginal Revenue Product of Labor

Value of each additional worker to total revenue


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