Studied by 2 people
four factors of production
land
labor
capital
entrepreneurship
production factor - land
all natural resources that are used to produce goods and services
production factor - labor
any effort a person devotes to a task for which that person is paid
production factor - capital
physical - any human made resource used to create other goods and services
human - any skill or knowledge gained by a worker through education and experience
production factor - entrepreneurship
ambitious leaders that combine the other factors of production to create goods and services
factor prices
payments made for the use of factor production
land → rent
labor → wage
capital → interest
entrepreneurship → profit
demand for labor
different quantities of workers businesses are willing and able to hire at different wages
inverse relationship between wage and quantity demanded
supply for labor
different quantities of individuals that are willing and able to sell their labor at different wages
direct relationship between wage and quantity supplied
higher wages give workers incentives to
leave other industries or give up leisure activities
minimum wage
minimum amount employers are allowed to pay their workers
wage floor above equilibrium price
unemployment on a graph is
surplus of workers
benefits of increasing minimum wage
don’t have poor people living in the street
drawbacks of increasing minimum wage
leads to more unemployment and higher prices
marginal resource cost
additional cost of an additional resource (worker)
marginal resource cost (MRC) formula
change in total cost divided by change in inputs
marginal revenue product
additional revenue generated by an additional worker (resource)
marginal revenue product (MRP) formula
change in total revenue divided by change in inputs
labor market imperfections (reasons for differences in wage)
insufficient/misleading job info → prevents workers from seeking better employment
geographical immobility → people are reluctant or too poor to move and thus accept a lower wage
unions → collective bargaining and threats to strike lead to higher wages
wage discrimination → people are paid different for the same job based on race, gender, etc.
shifters in demand for labor
price of output (price of product increases, worker becomes more valuable)
productivity of the worker (more productive → more valuable)
change in price of other resources
derived demand
demand for resources is determined by the products they produce
shifters in supply of labor
education and training
availability of alternative options
immigration and mobility of workers
cultural expectations
working conditions
preferences for leisure
college leads to higher wages - human capital argument
education makes you more productive by giving you the skills to succeed in the workforce
college leads to higher wages - signaling argument
diplomas signal to employers that you are more likely to be a valuable employee
college leads to higher wages - ability bias argument
students attending college are more intelligent and hard working than non-college bound students and would earn more even if they didn’t go to college
types of labor markets
perfect competition
monopsony
characteristics of perfectly competitive labor markets
many small firms hiring workers (no one firm is large enough to manipulate the market)
many workers with identical skills
wage is constant
workers are wage takers (firms can hire as many workers as they want at a wage set by the industry)
MRC - perfectly competitive labor markets
MRC = wage set by market
MRC is constant
MRP - perfectly competitive labor markets
MRP = marginal product x price
why does MRP eventually fall
diminishing marginal returns
MRP determines ---- for labor
demand
firm is willing and able to pay each worker up to the amount they generate
continue to hire until
MRP = MRC
labor market firm graphs
supply (wage) is set by industry
monopsony characteristics
one firm hiring workers (large enough to manipulate market)
workers are relatively immobile
firm is wage maker
monopsony graph
MRC straight upward
supply of labor straight upward, below MRC
MRP up then down
Note 
Flashcard (20)