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