Textbook Chapter 3

Price Ceilings and Floors

Price Ceiling

Max. allowable price for a good/service usually set by a govt.

Price Floor

Lowest legal price for a good/service typically set by a govt. unit of a group of sellers

Derived Demand for Labor

The demand for labor is said to be dependent on, or derived from, the demand for the product being produced

Marginal Revenue Product of Labor

The increase in revenue that accrues to the firm when an additional worker is hired (indicates the value of the worker to the firm)

Marginal Product of Labor

The increase in output due to hiring an additional worker

Marginal Revenue

The increase in revenue from selling an additional unit of the product

Law of Diminishing Returns

As additional units of available input are added to a given amount of a fixed input, the resulting increase in output eventually will decline

Substitution Effect

The change in the hours of work that occurs in response to a wage change (other things being equal)

Income Effect

A measure of the change in the hours of work that occurs when there’s a change in income (other things being equal)

Types of Govt. Intervention

1. Effects - unintended consequences

2. Types - tariffs, quotas, excise taxes, embargoes, price ceilings and floors

3. Importance - alters supply and demand’s equilibrium

Minimum Wage

Causes unemployment and effects unemployment rates

Market Failures

Occur when markets operating on their own don’t lead to a socially optimal allocation of resources