Chapter 10: Wage Determination
Substitution effect
replacing labor with capital when the price of capital falls
inclusive unionism
union practice of including ALL members (skilled or not) employed
Exclusive (Craft) and inclusive (Industrial) Unions
2 Types of Unions
Substitute and complemenatary
2 Types of resources
Substitution output, and net effect
3 Substitution Effects
Labor is the most important resource and satisfies wants indirectly
Describe labor
MRC is above the supply curve and exceed wage rate
Describe the MRC Curve
Slopes upward. This means that firms must give high salaries to attract workers
Describe the supply curve for labor.
MRC=MRP to determine how much people to employ and how much to pay
Does Monopsonists use MC=MR or MRC=MRP?
Ew= % Change in Labor Qty/ % Change in Wage Rate
Elasticity of Labor Demand / wage elasticity of demand formula (Ew)
Inelastic
Ew<1
Unit Elastic
Ew=1
Elastic
Ew>1
Exclusive (Craft) Union
Exclusive unionism and occupational licesnsing
A change in demand for one thing affects another. For example: If people don't want to buy houses, the demand for houses will decrease as well as the demand for construction workers.
Explain how changes in product demand is a factor iin changes in labor demand.
Higher productivity in labor has the same effect on labor demand and vice versa
Explain the changes in productivity
By summing horizontally
How do you find the demand curve for all firms and markets?
Wage maker
In a monopsony, is the employer a wage taker or maker?
Inclusive (Industrial) Union
Inclusive unionism, pressures firms to agree through strikes
Substitution, product demand, ratio of labor cost to total cost. The greater, the more elastic
Labor Demand/ Wage Elasticity depends on 3 factors.
Too much expenses, overpaying workers, lay off some workers
MRP < MRC
Max profit
MRP = MRC
Hire more workers to make more profit
MRP > MRC
MRC=Change in total cost/ Change in Qty
Marginal resource cost (MRC)
MRP=Change in TR/ Change in Qty
Marginal revenue product (MRP) Formula
mental and physical abilities and in their levels of education and training, and therefore, they receive different compensation.
Members of noncompeting groups differ in
exclusive unionism
Restricts number of workers to increase wages
Labor Supply and demand curves
Wage differences occurs on which 2 curves?
Product demand, productivity, and changes in the price of resources
What 3 things change labor demand?
Intersection of labor supply and demand
What determines the wage rate?
Qty of resources, technology, and quality of labor
What does productivity depend on?
Market supply and demand
What establishes the wage rate?
MRP is labor and MRC is the cost of that labor, for example, salary and wages
What is MRP and MRC?
The employer
Who are wage takers?
Upsloping. It's the same because the monopsonist is the only employer
Why is a monopsonist's supply curve the same as its market supply curve? What shape is it?
MRP Schedule
constitutes the firm's demand for labor because each point on this schedule (or curve) indicates the quantity of labor units the firm would hire at each possible wage rate.
derived demand
demand for a resource that results from the demand for the product it helps produce
Wage differentials
differences between the wages of different groups of workers
occupational licensing
government laws that require a worker to meet certain requirements before working
market demand for labor
horizontal summation of all the individual firm demand curves for labor
Output Effect
increase in labor when price of capital falls and when the firm increases its output because of lower production costs
Monopsony
market structure in which there is only a single buyer
Elasticity of Labor Demand (Ew) aka wage elasticity of demand
measure of the responsiveness of employers to a change in the wage rate
MRP=MRC Rule
to maximize profit, a firm should max employment until MRP (labor) equals MRC (cost of labor)
Union Models
workers sell their labor collectively and work to raise wages for members
