Ch. 4 Labor and Financial Markets
A Usury Law established the highest interest rate a lender can what?
charge and is therefore a price ceiling. -if this interest rate is higher than the equilibrium interest rate, it is non-binding. -when it set lower than the equilibrium, it is binding.
What laws are laws that set a wage minimum in the labor market?
minimum wage laws. minimum wage laws are created so that workers cannot be paid below a certain wage rate.
According to the law of demand: higher rate of return (higher price or higher interest) =
consumers reducing the quantity they borrown
What type of laws are laws that set a price maximum in the financial capital markets?
usury laws usury laws are created to set a max for the amount of interest an entity can charge a borrower
DEMAND AND SUPPLY IN FINANCIAL MARKETS
WHO DEMANDS AND WHO SUPPLIES IN FINANCIAL MARKETS?
What happens when the wage rate goes up?
employers hire fewer workers. the labor demanded will decrease. there will be movement upward along the demand curve.
What happens with the wage rate goes down?
employers hire more workers. the labor demanded will increase. there will be movement downward along the demand curve.
What happens when there is a surplus of salary in the labor market with many applicants for every job opening?
employers will have an incentive to offer lower wages. workers salary will move down toward equilibrium.
What happens when there is a shortage of salary in the labor market with few applicants for every job opening?
employers will want to hire more, but less workers will want to work at that salary. employers will have to match the higher pay to keep their own employees.
At equilibrium, the quantity supplied and the quantity demanded are __________
equal
What results at below equilibrium salary?
excess demand or shortage of workers.
What results at above equilibrium salary?
excess supply or surplus
The US minimum wage is a price floor that is set either very close to the equilibrium wage or even slightly below it.
for workers w/low skills and little experience, like those w/out a high school diploma or teenagers, the minimum wage is quite important.
What are Usury Laws?
governing the amount of interest that can be charged on a loan. usury laws specifically target the practice of charging excessively high rates on loans by setting caps on the max amount of interest that can be levied. these laws are designed to protect consumers.
The Law of Supply in labor markets this way: a higher price for labor
leads to a higher quantity of labor supplied
What is Minimum Wage?
lowest legal wage that can be paid to most workers. the government sets this, a price floor that makes it illegal for an employer to pay employees less than a certain hourly rate.
A change in salary will lead to a
movement along labor demand or labor supply curves, but it will not shift those curves.
What is supplying financial capital?
savings those who save money (or make financial investments, which is the same thing) are on the supply side of the financial market.
What is an Interest Rate?
simplest example of a rate of return. when you supply money into a savings account at a bank, you receive interest on your deposit. when you borrow for a loan, you will pay interest on the money you borrow.
Supporters of the living wage argue
that full-time workers should be assured a high enough wage so that they can afford the essentials of life: food, clothing, shelter, and healthcare.
The demand for labor is based on what?
the demand for a good or service. example - more new cars consumers demand, the more automakers will be needed to be hired - this is called "derived demand".
When is it a binding ceiling?
the equilibrium interest rate is higher than the law permits. it acts as a binding price ceiling in the financial capital markets when the equilibrium interest rate is higher than the amount established by the law
When is it a nonbinding floor?
the equilibrium wage rate is above the minimum wage rate it acts as a nonbinding price floor in the labor market when the equilibrium wage rate for the job is above the wage rate established by the law.
Vertical axis shows the different measures of prices:
the price of a good or service the wage in the labor market the rate of return (interest rate) in the financial market
What does the demand curve show for labor?
the quantity of labor employers wish to hire at any given salary or wage range, under ceteris paribus.
At equilibrium wage, every employer who want to hire at this equilibrium wage can find __________ __________, and every worker who want to work at this equilibrium can find a __________.
willing worker job
The horizontal axis shows the different measures of quanity:
a quantity of a good or service a quantity of labor for a given job a quantity of financial capital
Prices exist in markets for _____ and _____, _____, and for _____ _____.
goods and services labor financial capital
A change in the wage or salary will result in
a change in the quantity demanded of labor.
Quantity of workers hired (how many) is shown on which axis?
horizontal
Where is Quantity located on a graph?
horizontal axis
Markets for ___________ have demand and supply curves, just like markets for goods and services.
labor.
The labor market presents some prominent examples of price floors, which are?
an attempt to increase the wages of low-paid workers.
What factors will cause the supply to increase or decrease (shift) (3)
# of workers - increased # of workers cause the curve to shift right/decreased # of workers cause the curve to shift left. required education - the more required education, the lower the supply/the less required education, the higher the supply. Government policies.
The Law of Demand applies in labor markets this way: a higher salary or wage
= a higher price in the labor market leads to a decrease in the quantity of labor demanded by employers.
What factors does demand increase or decrease (shift)? (6)
Demand for output Education and training Technology # of companies Government regulations Price and availability of other inputs
Are price ceilings rare in labor markets?
Yes.
If the interest rate (remember, this measures the "price" in the financial market) is above the equilibrium level, then
a surplus of financial capital will arise in the market. Some credit card firms will lower the interest rates they charge to attract ore business and will push the interest rate down toward the equilibriu.
What is Living Wage?
a wage that is high enough to maintain a normal standard of living. local political movements in a number of US cities have pushed for higher minimum wage.
Which of the following is not a reason why negative consequences can result from efforts to control prices? a. prices reflect the amount of profit that producers want to gain for providing goods, services, labor, or financial capital to the market. b. controlling prices interferes with the forces of supply and demand. c. market equilibrium indicates the optimal or efficient amount of goods, services, labor, or financial capital. d. manipulating price does not change the fundamental characteristics of supply and demand. e. prices of goods, services, labor, and financial capital link different markets together; controlling one market can affect the nature of other markets.
a. prices reflect the amount of profit that producers want to gain for providing goods, services, labor, or financial capital to the market. Prices reflect the amount a producer seeks in exchange for a good or service. This may or may not involve profit. By agreeing to a price, consumers signal their willingness to pay for a good or service. Price controls can impact the amount of profit, if any, producers gain and it can reduce the availability of a good or service to consumers.
Borrowing money w/credit cards
allows you to borrow money from the card's issuer, and pay back the borrowed amount plus interest, although most allow you a period of time to repay.
Which is true of the minimum wage in the US? a. the living wage rate is set by the federal government while the minimum wage rate is set voluntarily by certain cities. b. only about 1% of the US population receives the minimum wage rate c. the minimum wage acts as a binding price floor in the labor market in most cities d. most countries have a lower minimum wage rate than the US, relative to overall wage rates for that country.
b. only about 1% of the US population receives the minimum wage rate. very few workers in the US are affected by the minimum wage rate b/c most workers earn more than that rate. -it acts as a NONBINDING price floor in most labor markets -the living wage rate is voluntarily set by certain cities and only impacts employees of those cities. -the federal government establishes the minimum wage rate for the country, but this rate tends to be lower relative to overall wages than the minimum wage rate in other countries.
Why do people save for retirement?
b/c present income is greater than their needs, while the opposite will be true once they retire. So they save today and supply financial markets to benefit from it in the future when they retire. or borrowing for college today due to having a low income bu then getting a good paying job in the future and paying off their loans.
What is demanding financial capital?
borrowing those who borrow money are on the demand side of the financial market.
Derived Demand
business demand that ultimately comes from (derives from) the demand for consumer goods. as the demand for the good or services goes up, the demand for labor will go up - shift right. as the demand for goods and services goes down, the demand for labor will go down - shift left.
How is labor measured?
by # of workers or by # of hours worked
Which has been shown to be true in the US about changes in the minimum wage rate? a. changes in the minimum wage always have had some effect on employment. b. b/c a large percentage of the US population receives the minimum wage rate, changes in the rate tend to greatly impact the demand for low-skilled workers. c. changes in the minimum wage have historically had a small impact on employment. d. changes in the rate tend to greatly impact the demand for high-skilled workers
c. changes in the minimum wage have historically had a small impact on employment -it has been shown that, b/c a small percentage of the population earns just the minimum wage, small changes have little impact on the employment rate, but these changes depend on the time and region of interest. -some studies have shown that changes in the minimum wage exhibit no effect at all on the employment rate in certain circumstances (although there is some controversy surround them). these changes also tend to impact only low-skilled or low-salaried employees, not high-skilled or high-salaried employees who already earn far more than the minimum wage.
What is an example that would make the supply of financial capital shift to the left?
foreign investors viewing the US economy as a less desirable place to put their money b/c of fears about the growth of the US public debt.
According to the law of supply: higher price increases the quantity supplied =
higher the interest rate more firms will be eager to issue credit cards and to encourage customers to use them
What two broad decisions do those who supply financial capital face?
how much to save how to divide up their savings among different forms of financial investments.
How does an increase in the budget deficit of Georgia affect it equilibrium interest rate?
increases, since the demand curve for financial capital shifts to the right. -following the demand and supply model of financial capital, if the budget deficit in GA increases, government borrowing increases as well. accordingly, the demand curve for financial capital shifts to the right, and the equilibrium interest rate increases.
The Law of Supply in labor markets this way: a lower price for labor
leads to a lower quantity supplied
The Law of Demand applies in labor markets this way: a lower salary or wage
leads to an increase in the quantity of labor demanded.
What is Intertemporal Decision Making?
participants in financial markets must decide when they prefer to consume goods: now or in the future b/c it involves decisions across time, sometimes a long time.
Price for labor (how much a person gets paid) is shows on which axis?
vertical
Where is the interest rate located on a graph?
vertical axis
