ECON chapter 14 the demand and supply of resources

derived demand

the demand for an input used in the production process

substitution effect

(1) the decision by laborers to work more hours at higher wages, substituting labor for leisure; (2) a consumer's substitution of a product that has become relatively less expensive as the result of a price change

How can a firm evaluate if it is using its resources efficiently? Fill in the blanks to complete the passage.

A firm can determine whether or not it is using its resources efficiently by calculating the value of the marginal product for each resource and dividing it by the cost of that resource. This will tell the firm the bang per buck of each factor of production. The firm can then decide to increase or decrease its use of each factor of production. When the revenue per dollar spent is equal for all resources, the firm will be using its resources in the most efficient manner.

What is the status of the labor market leading to the outcomes listed below? Match each situation to the supply of labor that likely exists for that particular industry.

Fast-food restaurants pay minimum wage and do not offer significant raises. Correct label: surplus A university ceases to offer full scholarships for middle school teacher education programs. Correct label: surplus A hospital increases the number of training programs available to new doctors. Correct label: shortage Universities decide to increase the wages offered to math professors. Correct label: shortage

Fill in the blanks to complete the passage about income in the United States.

Income is generated through the production of goods and services. In the United States, two-thirds of all income takes the form of wages and salaries. The remaining one-third goes to those who own the other factors of production, namely land and capital.

Shoshanna owns a hair salon. She starts with one employee and hires a second a week after she opens. Shoshanna notices that after hiring the first and second worker, her total output increases and her marginal profit from each of these two employees is positive. Will it always be beneficial for Shoshanna to continually hire more employees?

No. At some point, adding more employees no longer increases profit.

two primary factors shift labor demand

a change in demand for the product that the firm produces a change in the cost of producing that product

outsourcing of labor

a firm's shifting of jobs to an outside company, usually overseas, where the cost of labor is lower

What is the definition of derived demand?

demand for goods and services that are factors of production for other goods and services

It always makes sense for a firm to invest in new capital.

false New capital is not a good investment if it costs more money than it saves and does not contribute to the marginal product.

In the long run, it hurts the economy when employees lose their jobs because of technology.

false New technology makes certain work more efficient, so companies will benefit from replacing workers with technology. Displaced workers will find new jobs in the long run and will rejoin the workforce in other ways.

When outsourcing happens, the firm that outsources labor benefits while the rest of the economy suffers in the long run.

false Outsourcing lowers costs, which also lowers the price of goods for consumers. Outsourcing is a key component in international trade, and trade creates value. The outsourcing of jobs enhances overall social welfare.

When will there be a labor surplus? Order the industries from most likely to have a surplus to least likely to have one.

industry C, where new regulations have led to expanded employee benefits and high wages industry B, which has more or less regained equilibrium after a period of upheaval industry A, where firms need to quickly bring all jobs back from overseas, after outsourcing led to quality concerns

three primary factors affect the supply curve

other employment opportunities, the changing composition of the workforce, and migration and immigration

income effect

phenomenon occurring when laborers work fewer hours at higher wages, using their additional income to demand more leisure

value of the marginal product (VMP)

the marginal product of an input multiplied by the price of the output it produces

If employees are more productive, their wages will likely be higher.

true If employees produce more, the value of their marginal product will increase and it will drive up wages.

Jobs where the product or service is "non-essential" but is in high demand with a limited pool of qualified workers have higher wages than jobs where the product or service is "essential" but is in low demand and the worker qualifications are minimal.

true For example, athletes can earn very high wages because the supply of talented athletes is relatively low, and the demand for their performance is extremely high.

backward-bending labor supply curve

supply curve occurring when workers value additional leisure more than additional income

marginal product of labor

the change in output associated with adding one additional worker

Select the situations that shift the supply of labor.

Correct Answer(s) A small town sees its population increase drastically. An economic downturn causes a city to lose 3% of its population. Incorrect Answer(s) A bookstore gives its cashiers a raise, and other bookstores in town follow suit. A grocery store needs more employees for a holiday weekend.

Akua's Paint Supply charges $15 per gallon of paint. Akua started with three employees, who together produced 40 gallons of paint a day. He recently hired a fourth worker, and production increased to 48 gallons of paint a day. If Akua pays each worker $50/day, what is his marginal profit for the fourth employee? Ignore the added cost of raw materials.

Akua's fourth worker is responsible for an additional 8 gallons per day, and thus increases profit by (8 × $15) - $50 = $70 per day.

Which of the following scenarios could lower a firm's demand for labor?

Correct Answer(s) James operates a restaurant in a seaside tourist town. It is winter and all the tourists have left. Rex invests in new computer software that will automate his bookkeeping. Amy must pay more money to obtain the wood needed to construct chairs at her factory. Incorrect Answer(s) Katie owns a coffee shop that used to have to compete with a nearby café. The café recently went out of business. Calvin's bookstore is located near a college campus. School has just started and many students are returning to the area.

Sunny wants to rent a beachfront cottage and is trying to decide between a summer date and an off-season date. Which aspects of Sunny's situation can be illustrated with this graph?

Correct Answer(s) The supply of rental units does not depend on the season. Rental rates are higher in the summer than in the off season. Demand is higher in the summer than during the off season. Incorrect Answer(s) It will be difficult for Sunny to find a high-quality cottage in the summer.

Match each term to the situation it describes.

Eddie feels he earns enough money and decides to cut back on his hours. Correct label: income effect After a raise, Carla sees her part-time job as more worthwhile and asks to work more hours. Correct label: substitution effect Steve notices that most of his employees choose not to work overtime. Correct label: income effect Amy decides the opportunity cost of taking time off work is too high for her. Correct label: substitution effect

Keith owns a brick factory and is considering hiring more workers. How will Keith know when to stop adding employees? Fill in the blanks to complete the passage.

Keith will need to compare the value of the marginal product of labor to the wage he pays each employee. If the cost to hire an employee is less than the revenue that employee can produce, Keith should continue hiring employees because he will continue to be profitable.