Econ Midterm 2

Why does labor demand slope down?

-Diminishing Marginal Product -Declining Output Prices -Labor-Capital Substitution

Labor-capital substitution

-Higher wages make machines cheaper, relative to labor -when wages are $10 per hour, have humans do everything at McDonalds, when wages increase to $30 per hour, have machines take over some tasks

What are the costs of redistribution?

-administrative cots -taxes reduce the incentive to work -excessively risky behavior -fraud -lobbying

Who is in poverty?

-all groups experience poverty -higher among: singe parents, racial/ethnic minorities -children are most likely to experience poverty -elderly are unlikely to experience poverty: social security -full-time workers are unlikely to experience poverty

Law of Demand

-applied to buying worker time -demand for workers slopes down

Law of Supply

-applied to workers selling their time -supply for workers slopes up

Demand higher wages for

-back breaking work -income uncertainty working night shifts -risk of death and injury

Accept low wages for

-chance of promotion -long vacations -satisfying work

What are the 3 factors that explain the differences in wages?

-demand -supply -insitutions

Falling machinery prices will cause

-falling wages for low-skill labor -rising wages for high-skill labor

How are firms affected by increased globalization?

-greater competition: limits firms' ability to increase prices -outsourcing: re-allocating tasks overseas -larger global market: crating a larger market for specialized products, increasing the variety of goods available to consumers -Interdependence Increases: benefit from economic growth in other countries

Why are CEO's paid so much?

-hiring the best CEO instead of the 250th best raises the value of company by 0.016% -as firms get larger, the value of a top CEO rises

Signaling

-how can employers identify hard workers? -hard workers are more likely to complete College -Solution: hire college grads

The Demand for Superstars

-huge audience -each of whom is willing to pay a little more for "the best" -yields a huge payoff for being best -technology can make a potential audience larger

What are the cases for limiting International trade?

-national security -infant industry -unfair competition -domestic regulations -saving jobs

market power is determined by

-number of competitors product differentiation/uniqueness

Incentive

-opportunity to make yourself better off -something that induces a person to act -people respond to incentives by acting to make themselves better off

effects of minimum wage

-raise a lot of peoples wages -small disemployment effects -poorly targeted social policy

Demand and determining wages

-what kind of workers do employers want? employers demand human capital

what happens when you raise prices in a monopoly?

-won't lose customers to competitors because there are no competitors -will lose them to other products

Sources of Comparative Advantage in int. trade

1. Relatively Abundant Inputs 2. Specialized skills 3. Mass Production

What shifts labor demand?

1. Shifts in demand for your output: increase in demand so more people are hiring. wages increase because its highly demanded and quantity increases because its highly demanded 2. Changes in the capital stock: machinery is a substitute for low skill labor and machinery is a complement for high skill labor. 3. Management techniques and technological progress: new technologies and better management lead firms to do more with less. Giving more technologies to a worker helps them do more. Increases in the marginal product of labor

What are the labor supply shifters?

1. Wages in other jobs -If wages in other jobs rise then decrease supply of workers -If wages in other jobs galls than increase supply of workers 2. Income and Payroll taxes -labor supply decisions depend on after-tax wage -taxes on workers shift the labor supply curve 3. Income support programs -The opportunity cost of work is unemployment. 4. Value of leisure -high value of leisure is a disincentive to work

Occupational Licensing

A credential that is required to work in an occupation, increasing the wage -limits supply of workers in occupation, increasing the wage

Monopoly

A market in which there are many buyers but only one seller.

Oligopoly

A market structure in which a few large firms dominate a market. - a few large sellers -"strategic interaction" between firms

Oligopoly

A market structure in which a few large firms dominate a market. Small number of firms

payoff matrix

A table showing the potential outcomes arising from the choices made by decision makers

Hawk/Dove Games

A type of anti-coordination game where in each equilibrium there is a "winner" and a "loser"

Compensating differential

A wage premium that compensates workers for adverse attributes of a job. -encourage people to take unpleasant jobs like funeral directors, trash collectors, and coal miners

Human Capital

Accumulated knowledge and skills that make a worker more productive Ex: Each year of College raises your long-term earnings by about 8% -increases your productivity

Unions

An association of workers, formed to bargain for better working conditions and higher wages. Negotiate with employers -increases bargaining power -increases wages by 10-20% -restrict the supply of labor and increase wages

declining output prices

Apple could hire more designers and sell updated versions of the iPhone more frequently, but they will have to cut their prices to get people to upgrade often.

permanent income

Average lifetime income -less inequality in permanent income than income at given point in time

What is NOT a characteristic of social insurance programs?

Benefits are available only to the poor

Mass Production

Benefits of Mass Production: -specialized production lines -bargaining power for buying inputs

In a labor market the demanders are

Business looking to hire (buyers)

Trade

Buy what you're relatively bad at...exchange of goods and services. - about maximizing opportunity cost -economic surplus is maximized when each task is done by the person with the lowest opportunity cost... everyone has the lowers opportunity cost in something so this is why we trade

How do companies maximize profits?

By increasing their market power

What are the cost and benefit of hiring workers to a company?

Cost: the amount you pay that worker Benefit: make and sell more stuff

Global Market

Determines the world price Take world price as a given

Consumer Surplus

Everything BELOW the demand curve and ABOVE the price -Demand Curve: How much you're willing to pay -Price: How much you have to pay

Producer Surplus

Everything above the supply curve and below the price -supply curve: minimum price you're willing to accept Price: how much you're actually paid Producer surplus=profit

True or False, When sellers exit an industry, market power sill fall for the remaining sellers

FALSE

True or False: poverty does not recur

False, most people who escape poverty will return

True or false: the US has less income inequality than other advanced democracies

False... the US has GREATER income inequality

Rational Rule for Employers

Hire more workers if their marginal revenue product is greater than or equal to the wage. Want to get more money than they are paying the worker. "Increase worker hours" instead of paying them more

Best Response

In game theory, the strategy that will give a player the highest payoff, given the strategies that the other players select. Conditional on another player's action, what us your best action? Ex: in rock-paper-scissors, the best to scissors is rock

Globalization

Increase in international trade over the past few decades driven by falling trade costs: -reduced trade barriers -growth of internet -faster and more reliable way of transporting goods

The demand for a worker with low wages

Increase in quantity demanded: -increase production -stay open longer -open new branches -use workers instead of machines

How can a company's research and development expenditures create a barrier to entry into its market?

It can result in new production technologies that reduce the cost of production

Example of Monopolistic Competition

Jeans: your pair of jeans is a little different than other pairs in the market. Have their own brand, logo, style

What is the opportunity cost of work?

Leisure -not being paid for it=leisure

Different product attributes yields

Market power. Customers differ in how much they are willing to pay for your product attributes

A company is the only one producing its type of product. The company's owner is able to set price at the most profitable level. This company is in what type of market?

Monopoly

The strong incentive of sellers to deter the entry of new sellers is a major reason that:

Most markets are imperfectly competitive

Why is a "Nash equilibrium" called an equilibrium?

No players can do better by changing his or her own choice alone, so the situation is relatively stable

Autarky

Price with no international trade. A situation in which a country does not trade with other countries

how do you calculate total cost?

Quantity times marginal cost

Most of the largest tech companies in the world are based in Silicon Valley, even though it is very expensive to live and work there. That is best explained by:

Relatively Abundant Inputs

relatively abundant inputs

Sell what you have a lot of, buy what you don't have much of Ex: Canada has abundant forests so they export wood

Game Theory

Study of strategic interaction -my decision affects you payoff -your decision affects my payoff

Marginal Product of Labor

The additional amount produced by hiring one more worker. Measured in units.

Marginal Revenue Product

The additional revenue generated by hiring one more worker. Measured in dollars

what does the marginal revenue product curve represent?

The demand for labor. Usually slopes down

What changes in a labor market graph if the workers of a company form a union?

The labor market supply curve shifts to the left

What happens in the labor market for biologists when wages in other occupations fall?

There is a rightward shift of the supply curve

How do we set prices to maximize profits?

There is a trade-off between price and quantity - the higher the price, the higher the profit on each item -the higher the price, the fewer items you sell

True or False the marginal cost of labor is the market wage

True

True or False: international trade is driven by greedy customers who want good products at low prices

True

True or False: wages are mostly determined by productivity

True

True or False: Globalization has increased inequality in the US

True: exports high skilled goods and imports low skilled goods

Are goods with low trade costs likely to be traded?

Yes

In prefect competition, any increase in price results in

a 100% decrease in quantity sold - perfectly elastic this usually isn't realistic -there is usually some way for firms to distinguish themselves

Monopsony Power

a business using its bargaining power as a major buyer of labor to pay lower prices, including lower wages

Redistribution

a form of exchange in which accumulated wealth is collected from the members of the group and reallocated in a different pattern. -take money from the rich, who get little marginal benefit from it and give it to the poor who get a large marginal benefit

prefect competition

a market structure in which a large number of firms all produce the same product. -lost of sellers -standardized product: milk, bleach, grain... nor product uniqueness... all products are identical -firms have to charge the market price "price takers" -no market power

monopolistic competition

a market structure in which many companies sell products that are similar but not identical. - many sellers -competing against all other companies that sell jeans compete in terms of price and product attributes

monopolistic competition

a market structure in which many companies sell products that are similar but not identical. Lots of firms

imperfect competition

a market structure that fails to meet the conditions of perfect competition

Prisoner's Dilemma

a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial. The category of games in which players have a dominant strategy to "cheat" preventing beneficial cooperation from occurring -cheat=turning someone else in

Nash Equilibrium

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen. Most games do not have a player with a dominant strategy. - a way of predicting what will happen in a game -strategy not an outcome

equlibrium

a situation where nobody has an incentive to do something different

dominant strategy

a strategy that is best for a player in a game regardless of the strategies chosen by the other players. A strategy that is always best regardless of what the player does

The basic logic behind the Rational Rule for Sellers is that company owner should increase output as long as the extra output

adds more revenue than it adds to costs

An interaction between two or more persons is considered a strategic interaction when:

an individual's best choice may depend on what the others choose, and others' best choice may depend on what the individual chooses

What is not true regarding discrimination in labor markets?

any differences in wages between members of different racial or age groups is due to discrimination

Educational level positively correlates with

average annual income

What is the dominant factor determining market price in the long run?

average costs

Marginal Revenue lies below or above the demand curve?

below

Rational Rule for Buyers

buy more of an item if its marginal benefit is greater than (or equal to) the price. Keep buying until Price=Marginal Benefit -"keep eating until you are unsatisfied and it is not worth the cost" -Keep hiring until marginal revenue product equals wage/cost

benefits from social safety net programs may come in the forms of:

cash assistance, tax breaks, or in-kind transfers

What matters in all industries?

competition -number of competitors -uniqueness of product

switching costs

costs that make customers reluctant to switch to another product or service

Ari owns a hair salon in a small city. Which of the following is NOT an effect that the opening of new hair salons in her city will have on her salon? a. Its profit will decrease. b. It will have less market power c. The quantity it sells will decrease d. Its cost curves will shift upward

d

Market power determines the shape of a firm's

demand curve

The labor demand curve in a labor market slopes....

downward

Diminishing Marginal Benefit

each additional unit is less beneficial than the previous one

what do the consequences of minimum wage depend on?

elasticity

Sellers in a labor market

employees

Buyers in a labor market are..

employers

Policy debates invoke ethical debates informed by different notions of fairness:

equality of opportunity, equality of outcomes, fair process (same rules apply to everyone), what each person "deserves"..earned success rather than luck

Coordination Games

everybody benefits if the problem is solved, so the trick is to get everyone common knowledge about the situation and its solution. The category in which multiple Nash equilibria exist, each corresponding to each player doing what the other players are doing. Ex: Union Strikes, Cheating, Peer Pressure, Bank Runs

market demand curve equals

firm demand curve

social insurance

government programs intended to protect against economic hardship. -usually intended to benefit people with low incomes Insurance: a payoff that occurs when bad things happen to protect against economic hardship Social: provided by the government

compensating differentials

higher wages that compensate workers for unpleasant aspects of a job

In perfect Competition, the demand curve is

horizontal

The demand for a worker with high wages

increase in quantity supplied -more people want to work -prefer to work as a "barista" rather than another job -existing "baristas" want to work longer hours to make more money

When a seller raises the switching costs of its customers:

its customers find it difficult or costly to switch to a different seller of the product

rational rule for sellers with market power

keep selling until marginal revenue = marginal cost

If labor demand is elastic there is a ___ decline in employment

large

Typically, when a firm increases its prices, quantity decreases, but not all the way to zero. Why?

law of demand

The___wage resulting from an employer with monopsony power can be offset through____

low; minimum wage laws

specialization

make what you're relatively good at

sell one more unit if

marginal benefit greater than or equal to marginal cost

you should keep doing something until the marginal benefit equals

marginal cost

cost of redistribution

moving the money is costly

Nash Equilibrium

occurs when both payoffs are underlined

In a labor market, suppliers are

people who want a job (sellers)

why is market power bad for society?

production quantities are too small

How do you calculate marginal revenue?

quantity of units sold * price =total revenue

Benefit of redistribution

redistribution moves money away to those who benefit more from it

When an Increase in demand for sand-up paddle boards rises, then the demand for skilled paddle board shapers___, and their marginal revenue product_____

rises; rises

When earnings reflect compensating differentials, workers with___human capital earn___salaries because____

similar; different; their jobs differ in things like risk or enjoyment

In Market power/compeition the demand curve

slopes down -increase price, lose some customers but not all

Examples of Social Insurance

social security, medicare, unemployment insurance, disability insurance, workers' compensation

What are the 2 effects of a higher wage on labor supply?

substitution effect: -higher wage makes more attractive relative to leisure -work longer hours Income Effect: -you don't have to work as long to buy the same amount of stuff -work fewer hours -what is the point of making so much money if you don't have time to relax and spend it

Market Power

the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices. Ability ti have power of the market - power=ability to increase your price -ability to raise prices without losing many sales to competing sellers -determines your best pricing strategy

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer. The ability of an individual or group to carry out a particular economic activity more efficiently than another activity. - lower opportunity cost -drives trade

Trade Costs

the extra costs incurred as a result of buying or selling overseas, rather than domestically Ex: shipping costs, taxes paid on imports or exports, language barriers, time zones - when trade costs are high, goods are not imported or exported

gains from trade

the improvement in outcomes that occurs when producers specialize and exchange goods and services....you produce more together than apart

wages and unemployment are determined by what?

the labor market

minimum wage

the lowest hourly wage that employers are allowed to pay

diminishing marginal product

the marginal product of an input declines as the quantity of the input increases. Ex: When Mark Zuckerberg hired his first coder, that benefitted Facebook a lot because it freed him up to grow the business. Hiring one more coder now will not have a large impact

Labor Demand

the marginal revenue product curve -keep hiring until wage=MRP Marginal Product X price of output

What does the fries demand curve summarize?

the quantity buyers demand from your firm as price changes

Specialized Skills

the unique knowledge and abilities needed for specific occupations. Even when land, labor, and capital are all similar, better production techniques will lower your opportunity costs Ex: US makes best movies...best film makers want to move to Hollywood

Labor Supply

the willingness and ability to work specific amounts of time at alternative wage rates in a given time period. The time you spend working in the market -all about opportunity costs -keep working until wage/cost=marginal benefit of leisure

Multiple equilibria exist when:

there is more than one equilibrium

If labor demand is inelastic there is a ___ decline in employment

tiny

Discount Effect:

to sell one more unit, you have to lower the price on all units sold. - this is unique to firms with market power

How do you calculate profit?

total revenue-total cost

Price is equal to:

total revenue/quantity sold

True or False: few people are in poverty

true

True or False: income inequality has been rising

true

True or False: most spells of poverty are brief but most poor people are in long-term poverty

true

True or false: many people experience poverty at some point

true

Ture or false, monopoly has the most market power?

true, because there are "no" competitors because they have a completely unique product

Supply and Determining Wages

what do employees want?

The opportunity Cost of working is

what you would have done during the time if you were not working

Cartels

when 2 firms come together and agree to charge a high price

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. -Keep working until wage=marginal benefit of leisure

Does the labor demand=marginal revenue product curve

yes

Anti-Coordination Games

your best response is to take a different action to the other player. Games with multiple Nash equilibria, each of which over when the players don't choose the same strategy