Labor Market Economics for Small Business Owners
Complementary service
A service that enhances the value of another service or product
Nonwage benefits
Additional benefits received by workers from their employer, such as health insurance and retirement benefits
Marginal Principle
Breaking the decision of how many workers to hire into smaller marginal choices.
Opportunity Cost Principle
Comparing the marginal cost and benefit of another worker to the baseline of keeping costs and production at current levels.
Taxes
Compulsory financial contributions imposed by the government
Labor demand curve
Curve showing the quantity of labor that firms want to hire at each wage level
Labor Demand Shifter 2: Changes in Price of Capital
Decrease in capital price can lead to either increase or decrease in labor demand
Total Costs
Expenses from hiring hair stylists, calculated as $500 times number hired
Gabriela
Experienced hair stylist and small business owner.
Labor demand shifter
Factors that cause the labor demand curve to shift, such as nonwage benefits, subsidies, and taxes
Subsidies
Financial aid or support extended to an economic sector
Profit Maximization
Following the Rational Rule for Employers to maximize profits.
Rational Rule for Employers
Hire an additional worker if their marginal revenue product is greater than (or equal to) the wage.
Diminishing Marginal Product
Hiring additional workers yields smaller and smaller increases in output.
Labor Demand Curve
Illustrates quantity of labor demanded at different wages
Labor Demand Shifter 3: Better Management and Productivity Gains
Improved management and technology increase labor productivity
Total Revenue
Income from selling haircuts, calculated as $20 times number sold
Labor Demand Shifter 1: Changes in Demand for Product
Increase in product demand leads to higher labor demand
Productivity gains
Increases in the output per unit of input
Derived Demand
Labor demand is derived from demand for the end product
Perfectly Competitive Labor Market
Many employers competing to hire from a large pool of workers with similar skills.
Elasticity
Measure of the responsiveness of one economic variable to another
Price elasticity of demand
Measure of the responsiveness of the quantity demanded of a good to a change in its price
Management techniques
Methods employed to effectively manage and improve productivity
Marginal Revenue Product Calculation
Multiplying the marginal product of labor by the price of the output.
Employer
One who buys the time and effort of workers.
Ubiquitous
Present, appearing, or found everywhere
Law of Demand
Quantity of labor demanded decreases as wage increases
Downward-sloping Labor Demand Curve
Reflects diminishing marginal product and law of demand
Robot-proof skills
Skills that are less susceptible to being replaced by automation or technology
Marginal revenue product
The additional revenue generated by employing one more unit of a factor of production
Marginal product
The change in output from employing one more unit of a factor of production
Price of capital
The cost of obtaining or investing in capital goods
Marginal Product of Labor
The extra output produced from hiring an additional worker.
Marginal Benefit
The extra revenue earned from hiring one more worker.
Marginal Revenue Product
The extra revenue produced by hiring an additional worker.
Marginal Cost
The increase in business costs due to hiring one more worker.
Market Wage
The prevailing wage that employers need to pay to hire workers in a competitive labor market.
Data analysis
The process of inspecting, cleansing, transforming, and modeling data to discover useful information
Head Area
The salon owned by Gabriela.
Profit
Total revenue minus total costs
Marginal Revenue Product of Labor
Value of each additional worker to total revenue
