AP Microeconomics Unit 5 Review

perfectly competitive labor market

many small firms are hiring workers

- no one firm is large enough to manipulate the market

- many workers with identical skills

- wage is constant (at equilbirum)

- workers are wage takers

demand for labor

the different quantities of workers that businesses are willing and able to hire at different wages

law of demand for labor

there is an inverse relationship between wage and quantity of labor demanded

supply for labor

the different quantities of individuals that are willing and able to sell their labor at different wages

law of supply for labor

there is a direct relationship between wage and quantity of labor supplied

derived demand

the demand for resources is determined (derived) by the products they help produce

- demand in product market causes demand for resoruces in labor market to fulfill needs in the product market

changes in demand for the product (shifters of resource demand)

price increase of the product increases the demand for the resource

changes in productivity of the resource (shifters of resource demand)

technological advances in resources make the resource more profitable

changes in price of other resources (shifters of resource deamand)

substitute resources - direct relationship

complementary resources - inverse relationship

number of qualified workers (supply shifters of labor)

changes the number of workers supplied in the labor market

government regulation/licensing (supply shifters of labor)

if different professions had to have qualifications to work in that field, that changes the number of workers (ex. waiters, surgeons)

personal values regarding leisure time/societal roles (supply shifters of labor)

personal values and beliefs concerning who works and if they should work changes the supply of labor

minimum wage

the minimum amount employers are allowed to pay their workers

- wage floor

marginal resource cost (MRC)

the additional cost of an additional resource in a perfectly competitive labor market

- equals the wage set by the market and is constant

marginal revenue product (MRP)

the additional revenue generated by an additional resource in a perfectly competitive labor market

- determines demand for labor

- each worker is worth the amount of money they generate

MRP declining (why does it do this?)

diminishing marginal returns

- fixed resources prohibit growth at a certain point

labor maximization rule

MRP = MRC

- continue to produce until MRP = MRC

- aim to keep MRP > MRC because you want more revenue than costs to make a profit

perfectly competitive labor market and firm graph

unskilled workers vs. skilled workers

- no change in qualities or action when solving problems

- however, the starting point for demand the supply curves are higher on the axises for skilled labor

least cost rule

need marginal product per dollar for each resource at each output quantity

profit maximizing rule for combining resources

the firm is hiring where MRP = MRC for each resources

- MRPx/MRCx = MRPy/MRCy = 1

monopsony

one firm hiring workers

- firm is large enough to manipulate the market

- workers are relatively immobile

- firm is wage maker (to hire additional workers, the firm must increase the wage)

- cannot price discriminate, so must pay workers the same wage

monopsony graph

- hire where MRC = MRP

- pays workers to the extent of the supply curve, not the MRC curve because the monopsony is the wage maker

labor union goals

1. convince consumers to buy only union products

2. lobbying officials to increase deamnd

3. increase the price of substitute resources (non-unionzed workers)

- increase wages