Ch17- Markets

Economic discrimination

Paying a person a lower wage or excluding a person from an occupation on the basis of an irrelevant characteristic such as race or gender. Most economists believe that only a small amount of the gap between the wages of white males and the wages of other groups is due to discrimination. Instead, most of the gap is explained by three main factors: Differences in education Differences in experience Differing preferences for jobs

Marginal revenue product of labor (MRP)

The change in a firm's revenue as a result of hiring one more worker.

Factors That Shift the Market Demand Curve for Labor

1. Increases in human capital. More educated workers are more productive, thereby increasing the demand for their services and causing the labor demand curve to shift to the right. Human capital The accumulated training and skills that workers possess. 2. Changes in technology. Better machinery and equipment increases the productivity of labor. This causes the labor demand curve to shift to the right over time. 3. Changes in the price of the product. A higher price increases the marginal revenue product and shifts the labor demand curve to the right. A lower price shifts the labor demand curve to the left. 4. Changes in the quantity of other inputs. Over time, workers in the United States have had increasing amounts of other inputs available to them, and that has increased their productivity and caused the demand for labor to shift to the right. 5. Changes in the number of firms in the market. If new firms enter the market, the demand for labor will shift to the right. If firms exit the market, the demand for labor will shift to the left.

Factors That Shift the Market Supply Curve of Labor

1. Increases in population. As the population grows, the supply curve of labor shifts to the right. 2. Changing demographics. Demographics refers to the composition of the population. An increase in the labor force and the working-age population, including women in the labor force, increases the labor force participation rate and the supply of labor. 3. Changing alternatives. Opportunities available in other labor markets, and generous unemployment benefits can cause changes in the supply of labor in particular markets

Labor union

An organization of employees that has a legal right to bargain with employers about wages and working conditions. If a union is unable to reach an agreement with a company, it has the legal right to call a strike until a agreement has been reached.

Other Considerations in Setting Compensation Systems

Firms may choose a salary system for several good reasons: • Difficulty measuring output. Often it is difficult to attribute output to any particular worker. Projects may involve teams of workers whose individual contributions are difficult to distinguish. On assembly lines, the amount produced by each worker is determined by the speed of the line. Managers at many firms perform such a wide variety of tasks that measuring their output would be costly, if it could be done at all. • Concerns about quality. If workers are paid on the basis of the number of units produced, they may become less concerned about quality. • Worker dislike of risk. Piece-rate or commission systems of compensation increase the risk to workers because sometimes output declines for reasons not connected to the worker's effort. Owners of firms are typically better able to bear risk than are workers. As a result, some firms may find that workers who would earn more under a commission system will prefer to receive a salary to reduce their risk.

Compensating differentials

Higher wages that compensate workers for unpleasant aspects of a job

Marginal product of labor

The additional output a firm produces as a result of hiring one more worker. Because of the law of diminishing returns, the marginal product of labor declines as a firm hires more workers.

Personnel economics

The application of economic analysis to human resources issues. One issue personnel economics addresses is when workers should receive straight-time pay—a certain wage per hour or salary per week or month—and when they should receive commission or piece-rate pay—a wage based on how much output they produce.

Derived demand

The demand for a factor of production; it depends on the demand for the good the factor produces.

The Market for Capital

The marginal revenue product of capital is the change in the firm's revenue as a result of employing one more unit of capital, such as a machine.

The Market for Natural Resources

The marginal revenue product of natural resources is the change in a firm's revenue as a result of employing one more unit of natural resources, such as a barrel of oil. Although the total quantity of most natural resources is ultimately fixed, in many cases, the quantity supplied still responds to the price, during a particular period. In some cases, however, the quantity of a natural resource that will be supplied is fixed and will not change as the price changes.

The Market Demand Curve for Labor

The market demand curve for labor is determined by adding up the quantity of labor demanded by each firm at each wage, holding constant all other variables that might affect the willingness of firms to hire workers.

The Market Supply Curve of Labor

The market supply curve of labor is determined by adding up the quantity of labor supplied by each worker at each wage, holding constant all other variables that might affect the willingness of workers to supply labor.

Economic rent (or pure rent)

The price of a factor of production that is in fixed supply. In the case of a factor of production that is in fixed supply, the price of the factor is determined only by demand. For example, if a new highway diverts much of the traffic from a previously busy intersection, the demand for the land will decline, and the price of the land will fall, but the quantity of the land will not change.

Monopsony

The sole buyer of a factor of production. In Chapter 15, we analyzed the case of monopoly, where a firm is the sole seller of a good or service. The case in which the firm is the sole buyer of a factor of production is comparatively rare. For example, a firm may be the sole employer of labor in a particular location. A firm that has a monopsony in a factor market would employ a strategy similar to that of the monopoly: It would restrict the quantity of the factor demanded to force down the price of the factor and increase profits. A firm with a monopsony in a labor market will hire fewer workers and pay lower wages than would be the case in a competitive market. This results in a deadweight loss and a reduction in economic efficiency compared with a competitive market. In some cases, monopsony in labor markets is offset by worker membership in a labor union. A notable example of this is professional sports.

Marginal productivity theory of income distribution

The theory that the distribution of income is determined by the marginal productivity of the factors of production that individuals own. Marginal revenue product represents the value of a factor's marginal contribution to producing goods and services. The more factors of production an individual owns and the more productive those factors are, the higher the individual's income will be. The theory was developed by John Bates Clark, who taught at Columbia University in the late nineteenth and early twentieth centuries.