Unit 6 Study Guide
Monopsony
-One firm hiring workers -Workers are relatively immobile -Firm is wage maker
Wage differential and compensating differential
A difference in wages that arises to offset the nonmonetary characteristics of different jobs Like more dangerous or strenuous
Marginal Product of Labor * Price = Wage
A firm that produces goods and hires labor in competitive markets, should hire workers until
Efficiency wage
A wage that is deliberately set above the market rate to increase worker productivity
Relationship between marginal product of labor and the quantity of labor
Additional labor output per addition of labor
Physical capital
All human-made goods that are used to produce other goods and services; tools and buildings
Opportunity cost of leisure
Benefits forgone of choosing leisure instead of work. (Wage and non-pecuniary benefits)
Derived demand
Business demand that ultimately comes from (derives from) the demand for consumer goods
How do changes in the wage rate change optimal hiring decisions?
Can cause shortages and surpluses in labor New MRC
Causes of increases/decreases in demand for labor
Change in Demand for Product Changes in Productivity of Resource Changes in Price of Other Resources
Calculate marginal cost of production
Change in Total Cost / Change in Inputs
Calculate marginal factor cost of labor in a monopsony
Change in total factor cost / Change in factor quantity
Largest component of factor distribution of income in the US
Compensation of Employees
Perfectly competitive market, demand for labor, value of marginal product of labor, hiring decisions
D=MRP MRPl is increasing as wages decrease MRP=MRC
Examples of compensating differentials
Danger/Pleasantness Talent Human Capital
What will shift a firm's demand curve for labor?
Demand/Price Productivity Substitute Prices
What causes a factor demand curve to shift?
Demand/Price of product Productivity of resource Price of related resources
Calculate the value of the marginal product of labor
Difference between production output with addition of labor
What explains actual wage differentials in labor markets?
Differences in talent Different amounts of human capital Compensating differentials
If W>MRPL, then...
Do not hire
Wage differential and productivity differences
Efficiency wage model Offer higher wage for higher productivity
Business owners employs each factor of production up to the point at which the marginal revenue product of the last unit of the factor employed is equal to that factor's price
Equilibrium Marginal Revenue Product
What assumptions underlie the marginal productivity theory of income distribution?
Every factor of production is paid the equilibrium MRP each factor is paid the value of the output generated by the last unit employed in the factor market as a whole
Marginal productivity theory of income distribution
Every factor of production is paid the equilibrium marginal revenue product
If W<MRPL then...
Firms will hire more labor when the MRPL is greater than the wage rate
Marginal revenue product of labor and demand and hiring decisions
Firms will hire more labor when the marginal revenue product of labor is greater than the wage rate, and stop hiring as soon as the two values are equal. The point at which the MRPL equals the prevailing wage rate is the labor market equilibrium.
When should a firm hire an additional worker?
If MRP > MRC
Use marginal revenue product of labor to determine wage rate
If PC, look across If M, look at S curve after intersecting with MRC
Shifts of the value of marginal product curve
If for instance a cheap industrial robot is installed in the production process for some industrial good, the marginal product of labor could decrease because the robot can replace labor. Most technological change seems to be labor-augmenting - it raises the marginal product of labor
Be able to use wage rates, unit prices, and production functions to determine profit-maximizing hiring decision
In your chart, given Wage and Number of Workers: Find TRC (W x #) Find MRC Find MRP
What will changes in the price of the good produces by an FoP do to the demand for that FoP?
Increase if price increases Decrease if price decreases
Wage differential and union power
Increase wages through ad campaigns to buy union products, lobbying, and increasing price of substitute resources
Relationship between labor demand curve for a perfectly competitive factor market and firms' value of the marginal product curve
Intersect at MRP=MRC Equilibrium
Factors of production
Land, labor, capital, entrepreneurship
Labor supply model, workers decide between what two activities
Leisure and Work
Determine how many workers to hire to maximize profit
MRC=MRP
A profit-maximizing firm will hire workers up to the quantity of labor where _____
MRP=MRC
In the competitive market for capital, firms will employ units of capital to the point where what happens?
MRP=MRC Equal cost and revenue per capital
Profit maximizing decisions for a monopsonist
MRP=MRC Find wage at S Curve
How is the competitive wage/price for labor determined?
MRP=MRC (market) for PC MRP=MRC -> S for M
Compare and contrast monopsonist hiring decisions with those of a firm in a perfectly competitive labor market
MRP=MRC no matter what Monopsony: wage at S curve
If marginal product is _____, marginal revenue product must be _____.
Marginal revenue product (MRP), also known as the marginal value product, is the market value of one additional unit of output. The marginal revenue product is calculated by multiplying the marginal product (MP) by the marginal revenue (MR). Direct relationship
How does changes in the price of a good relate to changes in firms hiring decisions?
More money raises MRP, hiring more people
Relationship between total revenue, total cost, and the use of labor
Multiply labor's output with price for total revenue Multiply labor and wage for total cost
Calculate total factor cost in a monopsony
Multiply quantity of labor times wage
Changes in the supply of workers
Number of qualified workers Government regulation Personal values regarding leisure time and societal roles
Determine the marginal product of labor
Product 2 - Product 1/ Change in inputs
If the _____ of labor is increased, ceteris paribus, eventually the _____ will _____.
Quantity; marginal product of labor; fall
Relationship between the substitution effect and income effect
S>I: increase wage, increase work I>S: increase wage, decrease work
Relationship between demand curve for labor and marginal revenue product of labor curve
Same thing
If W=MRPL then...
Stop hiring as soon as the two values are equal
Wage differentials and human capital
Surgeons paid more than garbage truck people due to the high amounts of human capital
Marginal revenue product
The additional revenue generated by employing one more unit of that factor
Slope of the marginal product curve
The change in output resulting from employing one more unit of a particular input
Relationship between marginal revenue product curve and the firm's labor curve
The demand for labor is a firm's MRP curve
What do we know when a competitive market for labor is in equilibrium?
The equilibrium market wage rate and the equilibrium number of workers employed in every perfectly competitive labor market is determined in the same manner: by equating the market demand for labor with the market supply of labor.
Human capital
The knowledge and skills that workers acquire through education, training, and experience
Formula for marginal revenue product
The marginal revenue product of a worker is equal to the product of the marginal product of labor (MPL) and the marginal revenue (MR) of output, given by MR×MP = MRPL
Marginal revenue product of labor and demand
The marginal revenue product of labor (MRPL) is the additional amount of revenue a firm can generate by hiring one additional employee. It is found by multiplying the marginal product of labor by the price of output. Firms will demand labor until the MRPL equals the wage rate.
In the factor market for land, one will find equilibrium rental prices will be _____ the marginal revenue product of land.
The marginal revenue productivity theory states that a profit maximizing firm will use land up to the point where the marginal revenue product is equal to the rental rate
Calculate economic rent
The payment for the use of any resource over and above its opportunity cost
Determinants of demand for an FoP
The three most important determinants that shift the factor demand curve are: (1) product price, (2) factor productivity, and (3) prices of other factors
Why does a firm's marginal revenue product curve slope downward?
This is because of the law of diminishing marginal returns which states that if a firm increases the amount of one input (in this case labor) while holding the quantity of other inputs constant, the marginal product of the extra input will decline over time
Relationship between total revenue and marginal revenue product
To calculate marginal revenue, divide the change in total revenue by the change in the quantity sold
Calculate profit when adding marginal resources
To determine the profit maximizing input level, we would first compute the marginal revenue product for each input then divide it by the resource price or marginal resource cost
A profit-maximizing firm will base its decision to hire workers on the additional costs and benefits of each worker. If the extra output that is produced by hiring one more unit of labor adds more to _____ than to _____, the firm will increase its profit by increasing the use of labor
Total Revenue; Total Cost
Wage differential and discrimination
Wage discrimination is the discrimination shown in the payment of wages towards minority groups. The targets of wage discrimination are black men and women, and white women. They are faced with decreased wage earning for the same job with the same performance levels and responsibilities as white males.
Be able to use wage rates, unit prices, costs, and production functions to determine profit-maximizing output level
Where MRP=MRC Remember TRC, MRC, and MRP
