Chapter 12 & 13 AP Economics

Marginal Productivity Theory of Income Distribution

Income is distributed according to contribution to society's output Criticisms to this theory: inequality and market imperfections

Noncompeting Groups

Occur on the supply side as a result of heterogeneous work force with different mental faculties and physical capabilities

Nominal Wage

The amount of money received per hour, day, year, etc.

Wage Rate

The price paid per unit of labor services

Occupational Licensing

A group of workers in a given occupation pressure Federal, state, or municipal government to pass a law that says some occupational group can practice their trade only if they meet certain requirements

Monopsony

A market in which a single employer of labor has substantial buying (hiring) power Only a single buyer of a particular type of labor Type of labor is relatively immobile, either geographically or because workers would have to acquire new skills Firm is a "wage-maker" because wage rate it must pay varies directly with the number of workers it employs

Bilateral Monopoly Model

A strong industrial union formed in a monopolist labor market, creating a combination of the monopsony model and the inclusive unionism model

Marginal Product (MP)

Additional output resulting from using each additional unit of labor

Marginal Resource Cost (MRC)

Amount that each additional unit of a resource adds to the firm's total resource cost Change in total (resource) cost over change in unit resource quantity

Inclusive Unionism

An industrial union that includes virtually all available workers in their membership can put firms under great pressure to agree to its wage demands

Output Effect

Because the price of machinery has fallen, the costs of producing various outputs must also decline, increases the demand for labor

Substitution Effect

Decline in the price of machinery prompts the firm to substitute machinery for labor, decreases the demand for labor

Plentiful capital Access to abundant natural resources Advanced technology Labor quality Efficiency and flexibility of management A business, social, and political environment that emphasizes production and productivity The vast size of the domestic market The increased specialization of production enabled by free-trade agreements

Demand for Labor in the US is Large Because Labor is Highly Productive Because:

Demand for the product produced by that labor decreases Productivity of labor decreases Price of a substitute input increases, provided output effect exceeds substitution effect Price of a substitute increases, provided substitution effect exceeds output effect Price of a complementary input increases

Demand for Labor will DECREASE When:

Demand for the product produced by that labor increases Productivity of labor increases Price of a substitute input decreases, provided output effect exceeds substitution effect Price of a substitute increases, provided substitution effect exceeds output effect Price of a complementary input decreases

Demand for Labor will INCREASE When:

Derived Demand

Demand for a good or factor of production resulting from demand for an intermediate good or service

Tastes and preferences Related goods Income of consumers Number of buyers Expectations for the future

Determinants of Demand

Ease of resource substitutability Elasticity of product demand Ratio of resource cost to total cost

Determinants of Elasticity of Resource Demand

Costs of resources used Other goods Technology Taxes and subsidies Expectations of the future Number of sellers/natural disasters

Determinants of Supply

Wage Differentials

Hourly wage rates and annual salaries that differ greatly among occupations

Purely Competitive Labor Market

Numerous firms compete with one another in hiring a specific type of labor, each of many qualified workers with identical skills supplies, that type of labor, individual firms and individual workers are "wage takers"

Exclusive Unionism

Restricting labor supply by hiring workers only in their union, resulting in higher wage rates

MRP=MRC Rule

Similar to MR=MC profit-maximizing rule, but the point of reference is now INPUTS of a resource, not OUTPUTS of a product

Marginal Revenue Product (MRP)

The change in total revenue resulting from the use of each additional unit of a resource Change in total revenue over change in units of resource

Minimum Wage

The lowest wage, or "wage flour" that will help less-skilled workers earn enough income to escape poverty

Human Capital

The personal stock of knowledge, know-how, and skills that enable a person to be productive and earn an income

Wage

The price that employers pay for labor

Real Wage

The quantity of goods and services a worker can obtain with normal wages Depends on your nominal wage and the prices of the goods and services you purchase

Elasticity of Resource Demand

The sensitivity of resource quantity to changes in resource price Percentage change in resource over percentage change in resource price If elasticity of resource demand is greater than 1, resource demand is elastic If elasticity of resource demand is equal to 1, resource demand is unit elastic If elasticity of resource demand is less than 1, resource demand is inelastic

Incentive Pay Plan

The worker compensation more closely to worker output or performance Piece rates, compensations and royalties, bonuses, stock options, and profit sharing, and efficiency wages

Marginal Revenue Productivity

Theory stating that wages are paid at a level equal to the MRP of labor Higher demand + higher productivity -> high salaries

Compensating Differences

Wage differences that occur because they must be paid to compensate for nonmonetary differences in various jobs

Profit-Maximizing Combination of Resources

When each resource is employed to the point at which its marginal revenue product equals its resource price Marginal revenue product of labor over price of labor is equal to marginal revenue product of capital over price of capital is equal to 1

Least-Cost Combination of Resources

When the last dollar spent on each resource yields the same marginal product Marginal product of labor over price of labor is equal to the marginal product of capital over price of capital