Chapter 10: Wage Determination

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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


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