AP Microeconomics: Unit 5

Perfectly Competitive Labor Market Characteristics

-Many small firms hiring workers

-Many workers with identical skills

-Wage is constant

-Workers are wage takers

Derived Demand

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

Perfectly Competitive Labor Market Characteristics

-Many small firms hiring workers

-Many workers with identical skills

-Wage is constant

-Workers are wage takers

Derived Demand

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

Marginal Resource Cost (MRC)

The additional cost of an additional resource (worker)

-MRC=wage set by market and is constant in perfectly competitive labor markets

-MRC=Change in Total Cost/Change in Inputs

Marginal Revenue Product

The additional revenue generated by an additional worker (resource)

-MRP=MP of the resource times the price of the product in perfectly competitive product markets

-MRP=Change in Total Revenue/Change in Inputs

How do you know how many resources (workers) to employ?

MRP=MRC

Demand for Labor

Demand is the different quantity 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

Supply is the different quantity of individuals that are willing and able to sell their labor at different wages

Law of Supply for Labor

There is a DIRECT/positive relationship between wage and quantity of labor supplied

Who demands labor?

FIRMS

-Demand for labor shows the quantities of workers that firms will hire at different wage rates

-downward sloping

Market Demand for Labor

sum of each firm's marginal (additional) revenue product

Who supplies labor?

INDIVIDUALS

-higher wages give workers incentives to leave other industries

-upward sloping

-as wage increases, Qs increases, as wage decreases, Qs decreases

Equilibrium

Wage (price of labpr) is set by the market

Why is Demand Curve (Demand=MRP) for Resources downward sloping?

Law of diminishing marginal returns, each additional resource is less productive and therefore worth less than the previous one

-inverse relationship between wage and quantity of resources demand

3 Shifters of Resource Demand

1) Changes in the Demand for the Product

-Price increase of the product increases MRP and demand for the resource

2) Changes in productivity

-Technical advances increase MP and therefore MRP/Demand

3) Changes in Price of Other Resources

-Substitute and Complementary Resources

Resource Supply Shifters for Labor

1) Number of qualified workers

-Education and training required

2) Government regulation/licensing

3) Personal values regarding leisure time and societal roles

Labor Market Imperfections

1) Insufficient/misleading job information

-Prevents workers from seeking better employment

2) Geographical Immobility

-Many people are reluctant or too poor to move so they accept a lower wage

3) Unions

-Collective bargaining to lead to higher wages

4) Wage Discrimination (illegal)

Why is increasing the minimum wage GOOD?

We don't want poor people living on the streets, so we should make sure they have enough to live on

Why is increasing the minimum wage BAD?

Increasing minimum wage too much leads to more unemployment and higher prices

Maximizing Output

MPx/Px=MPy/Py

Imperfect Competition: Monopsony - Characteristics

-One firm hiring workers

-Workers relatively immobile

-Firm is a wage maker (to hire additional workers the firm must increase wages)

-MRC doesn't equal wage

Where is MRC in a monopsony if the firm can't wage discriminate?

Above Supply of labor

How do unions increase wages?

1) Convince consumers to buy only union products

Ex: Advertising quality of union/domestic products

2) Lobbying government officials to increase demand

Ex: Teachers' union petitions governor to increase spending

3) Increase the price of substitute resources

Ex: Unions support increases in minimum wage so employers are less likely to seek non-union workers

Globalization

the result of firms seeking lowest costs

Why is globalization happening?

Firms are seeking greater profits. Parts are made in China because labor is significantly cheaper.

Outsourcing

when firms send jobs overseas

What types of jobs are outsourced?

For many years it was only unskilled labor, but now other skilled jobs are being sent overseas

Advantages of outsourcing

-Lowers prices for nearly all goods and services

-Decreases world unemployment

-Improves quality of life and decreases poverty in less-developed countries

Disadvantages of outsourcing

-Increases U.S. unemployment

-Less U.S. tax revenue generated from workers and corporations means less public benefits

-Foreign workers don't receive same protections as U.S. workers