Econ 101 Exam 2
monopsony power
A business using its bargaining power as a major buyer of labor to pay lower prices, including lower wages
Positive analysis
Answers the question "What is?" or "What will be?"
derived demand
Business demand that ultimately comes from (derives from) the demand for consumer goods.
monopsony
Market with only one buyer
Extensive Margin of Labor Supply
The entry and exit of workers into labor market in response to changes in real wages.
marginal social benefit
The extra benefit to society of consuming an additional unit of output, including both the private benefit and the external benefits; = marginal private benefits + marginal external benefits
marginal social cost
The extra cost to society of producing an additional unit of output, including both the private cost and the external costs; = marginal private costs + marginal external costs
marginal private costs
The extra costs to producers of producing one more unit of a good.
Intensive margin of labor supply
Workers adjust the number of hours that they work in response to changes in the real wage.
instrinsic motivation
a desire to perform a behavior effectively for its own sake
extrinsinc motivation
a desire to perform a behavior to receive promised rewards or avoid threatened punishment
rival good
a good for which consumption by one person does diminish the quantity or quality of consumption by others
common resource
a good that is rival but not excludable (thinking fishing)
nonrival good
a good whose consumption by one person does not diminish its availability for others
perfectly competitive labor market
a group of many similar jobs hiring from a pool of many workers with similar skills
income effect
a higher income leads you to choose leisure over work (time more scarce than money)
substitution effect for supply curve
a higher wage increases the returns to work relative to leisure, leading you to work more (money more important than time)
efficiency wages
above-equilibrium wages paid by firms to increase worker productivity
signal
an action taken to credibly convey information that is hard for someone else to verify
Normative analysis
analysis concerned with what ought to be
red tape
complex bureaucratic rules and procedures that must be followed to get something done
imports effect on price
decreases to world price
Efficient allocation
economy allocates its resources so that consumers are as well off as possible, requiring each consumer gets the highest possible marginal benefit
compensating differentials
higher wages that compensate workers for unpleasant aspects of a job
rational rule for employers
hire one more employee if the marginal revenue product. is greater than or equal to their wage
opportunity cost of a task =
hours current task takes / hours another task takes
roles of prices
incentive, signal, information for predicting
exports effect on price
increases to world price
non-wage benefits, taxes, and subsidies shift the labor demand curve to the...
left
with the substitution effect, the labor demand curve shifts...
left
unions shift the labor supply curve to the
left (wage higher, demand for employees lower)
taxes lead to more or less imports?
less (and therefore less economic surplus)
Consumer surplus =
marginal benefit - price
labor demand curve is the same as the
marginal product of labor curve
Sources of market failure
market power undistributed, externalities, secrecy, bad choices, government regulations
what shapes a country's comparative advantage?
natural resources/available inputs, history of mastering production/ skills, mass production
if the income effect dominates, the labor supply graph's slope is
negative
club good
non-rival but excludable (think cable tv)
public goods
nonrival goods that are nonexcludable and hence subject to the free-rider problem (people do not pay for benefits) -- ex: law enforcement
exports lead to under or over production?
overproduction
negative externalities lead to over or under production
overproduction (leftward shift)
if substitution effect dominates, the labor supply graph's slope is
positive
producer surplus =
price - marginal cost
Solutions to Externality Problems
private bargaining (Coase theorem), definite ownership, corrective subsidies and taxes, quotas, government help with public goods, and laws
Efficient production
producing a given quantity of output at the lowest possible cost, which requires producing each good at the lowest marginal cost
higher demand for good shifts labor demand curve...
right (leads to higher price and therefore higher marginal revenue product)
Exports cause quantity supplied to rise or fall?
rise
Imports cause quantity demanded to rise or fall?
rise
Signaling vs. Human Capital
signaling allows inferences of a worker's ability, while human capital proves necessary skills
A higher minimum wage leads to a surplus or a shortage of workers?
surplus (wage higher, demand for employees lower)
Comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
absolute advantage
the ability to produce a good using fewer inputs than another producer
marginal product of labor
the change in output from hiring one additional unit of labor
marginal revenue product
the change in revenue from hiring one additional unit of labor (marginal product of labor * price)
external costs
the costs of a market activity paid by bystanders
socially optimal
the outcome that is most efficient for society as a whole, including the interests of buyers, sellers, and bystanders (like equilibrium but when externalities are included)
wage elasticity of labor supply
the percentage change in hours worked divided by the percentage change in wages (usually fairly inelastic because would not work 5 more hours for just one more unit of pay)
deadweight loss
the reduction in economic surplus resulting from a market not being in competitive equilibrium (caused by chances in quantity or $) -- arrowhead towards equilibrium
human capital
the skills and knowledge gained by a worker through education and experience
with the scale effect, the labor demand curve shifts...
to the right
imports lead to under or over production?
underproduction
positive externalities cause over or under production
underproduction (rightward shift)
Knowledge problem
when knowledge needed to make a good decision is not available to the decision-maker
scale effect
when the price of capital declines, you can produce a good more cheaply and therefore create a large quantity of the good (labor and demand are complements)
substitution effect for demand
when the price of capital decreases and humans previously could do that job the same, the company will choose to use the cheap machine (labor and demand are substitutes)
rational rule for workers
work one more hour as long as the wage is at least as large as the marginal benefit of another hour of leisure