Principle of Economics, Chapter 11

Product (goods) market

Where costumers buy wants and needs.

Resource market

Where business buy factors of production (ex. raw material labor, capital, and natural resources)

What is the Marginal Revenue Product (MRP)?

Change in revenue from selling one more unit from adding one more unit.

What is the Marginal Resource cost (MRC)?

Change in total resource cost by adding one more unit.

What are 2 factors that affect labor demand?

Substitution effect and income effect

What is substitution effect?

As wages increase, the opportunity cost of leisure goes up

What is income effect?

As income increases, beyond some point, workers have enough income to meet wants/needs.

As wages increase, at some point people are willing to…

give up more hours of work to enjoy more leisure.

What are the 5 factors that explain wage difference?

Natural ability, Human capital, experience, hazardous drugs, and good/bad luck

Natural ability

Ability and skill that someone possesses, that cannot be earned through training

Human capital

Formal training (ex. the income increases with the more degrees/certification a person holds)

Experience

A professor with 20 yrs old experience will earn a higher income than a professor that just earned their P.hd)

Hazardous drugs

COVID nurses received a $13/hr raise due to the risks of COVID at the time and the amount of cases

Good/bad luck

Helping your roommate create an app that would later be worth a billion dollars and you have a share in that company (Dustin Moskovitz - Mark Zuckerberg’s college roommate) or selling your stock for $800 thinking that said company wouldn’t be successful, only for that company to be the leading tech company in the US, your stock now being worth $35M (Ron Wayne and Apple)

Human Capital Theory

The theory that an employee will be rewarded for their hard work, above average effort, and training. (Work hard then higher income)

Efficiency Wage Theory

The theory that workers will respond to a pay raise by working harder, more effort, and training. (Higher income then hard work)

What is the market for capital?

A finished product used to produce another good.

What is round about production?

When capital requires a large up front cost and company must recap that cost over time (ex. Dental x-ray machine costs $200k and profits $35 per use)

What is time preferences?

People prefer goods/service now rather than later (ex. car loans - average 7 yrs, house loans - average 30 yrs)