Econ 101 Exam 2

monopsony power

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

Positive analysis

Answers the question "What is?" or "What will be?"

derived demand

Business demand that ultimately comes from (derives from) the demand for consumer goods.

monopsony

Market with only one buyer

Extensive Margin of Labor Supply

The entry and exit of workers into labor market in response to changes in real wages.

marginal social benefit

The extra benefit to society of consuming an additional unit of output, including both the private benefit and the external benefits; = marginal private benefits + marginal external benefits

marginal social cost

The extra cost to society of producing an additional unit of output, including both the private cost and the external costs; = marginal private costs + marginal external costs

marginal private costs

The extra costs to producers of producing one more unit of a good.

Intensive margin of labor supply

Workers adjust the number of hours that they work in response to changes in the real wage.

instrinsic motivation

a desire to perform a behavior effectively for its own sake

extrinsinc motivation

a desire to perform a behavior to receive promised rewards or avoid threatened punishment

rival good

a good for which consumption by one person does diminish the quantity or quality of consumption by others

common resource

a good that is rival but not excludable (thinking fishing)

nonrival good

a good whose consumption by one person does not diminish its availability for others

perfectly competitive labor market

a group of many similar jobs hiring from a pool of many workers with similar skills

income effect

a higher income leads you to choose leisure over work (time more scarce than money)

substitution effect for supply curve

a higher wage increases the returns to work relative to leisure, leading you to work more (money more important than time)

efficiency wages

above-equilibrium wages paid by firms to increase worker productivity

signal

an action taken to credibly convey information that is hard for someone else to verify

Normative analysis

analysis concerned with what ought to be

red tape

complex bureaucratic rules and procedures that must be followed to get something done

imports effect on price

decreases to world price

Efficient allocation

economy allocates its resources so that consumers are as well off as possible, requiring each consumer gets the highest possible marginal benefit

compensating differentials

higher wages that compensate workers for unpleasant aspects of a job

rational rule for employers

hire one more employee if the marginal revenue product. is greater than or equal to their wage

opportunity cost of a task =

hours current task takes / hours another task takes

roles of prices

incentive, signal, information for predicting

exports effect on price

increases to world price

non-wage benefits, taxes, and subsidies shift the labor demand curve to the...

left

with the substitution effect, the labor demand curve shifts...

left

unions shift the labor supply curve to the

left (wage higher, demand for employees lower)

taxes lead to more or less imports?

less (and therefore less economic surplus)

Consumer surplus =

marginal benefit - price

labor demand curve is the same as the

marginal product of labor curve

Sources of market failure

market power undistributed, externalities, secrecy, bad choices, government regulations

what shapes a country's comparative advantage?

natural resources/available inputs, history of mastering production/ skills, mass production

if the income effect dominates, the labor supply graph's slope is

negative

club good

non-rival but excludable (think cable tv)

public goods

nonrival goods that are nonexcludable and hence subject to the free-rider problem (people do not pay for benefits) -- ex: law enforcement

exports lead to under or over production?

overproduction

negative externalities lead to over or under production

overproduction (leftward shift)

if substitution effect dominates, the labor supply graph's slope is

positive

producer surplus =

price - marginal cost

Solutions to Externality Problems

private bargaining (Coase theorem), definite ownership, corrective subsidies and taxes, quotas, government help with public goods, and laws

Efficient production

producing a given quantity of output at the lowest possible cost, which requires producing each good at the lowest marginal cost

higher demand for good shifts labor demand curve...

right (leads to higher price and therefore higher marginal revenue product)

Exports cause quantity supplied to rise or fall?

rise

Imports cause quantity demanded to rise or fall?

rise

Signaling vs. Human Capital

signaling allows inferences of a worker's ability, while human capital proves necessary skills

A higher minimum wage leads to a surplus or a shortage of workers?

surplus (wage higher, demand for employees lower)

Comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

absolute advantage

the ability to produce a good using fewer inputs than another producer

marginal product of labor

the change in output from hiring one additional unit of labor

marginal revenue product

the change in revenue from hiring one additional unit of labor (marginal product of labor * price)

external costs

the costs of a market activity paid by bystanders

socially optimal

the outcome that is most efficient for society as a whole, including the interests of buyers, sellers, and bystanders (like equilibrium but when externalities are included)

wage elasticity of labor supply

the percentage change in hours worked divided by the percentage change in wages (usually fairly inelastic because would not work 5 more hours for just one more unit of pay)

deadweight loss

the reduction in economic surplus resulting from a market not being in competitive equilibrium (caused by chances in quantity or $) -- arrowhead towards equilibrium

human capital

the skills and knowledge gained by a worker through education and experience

with the scale effect, the labor demand curve shifts...

to the right

imports lead to under or over production?

underproduction

positive externalities cause over or under production

underproduction (rightward shift)

Knowledge problem

when knowledge needed to make a good decision is not available to the decision-maker

scale effect

when the price of capital declines, you can produce a good more cheaply and therefore create a large quantity of the good (labor and demand are complements)

substitution effect for demand

when the price of capital decreases and humans previously could do that job the same, the company will choose to use the cheap machine (labor and demand are substitutes)

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