Labor Market and Monopoly Concepts

Flashcards covering key vocabulary and concepts from the lecture on labor markets, monopolies, and related economic principles.

Factors of Production

Labor, Physical Capital, Land.

Derived Demand

Labor demand depends on demand for the goods/services workers produce.

Marginal Product of Labor (MPL)

Extra output from one additional worker.

Value of Marginal Product of Labor (VMPL)

VMPL = MPL × Price of Output.

Hiring Rule for Firms

Continue hiring until VMPL = wage.

Diminishing Marginal Returns

MPL eventually falls due to this concept.

Labor Demand Curve

Downward-sloping because VMPL decreases as workers increase.

Shifts in Labor Demand

Triggered by output price changes, technology, and productivity changes.

Shifts in Labor Supply

Caused by population changes, work/leisure preferences, and outside opportunities.

Labor Demand Shift (Graph)

Labor demand shifts right when output prices rise.

Labor Supply Shift (Graph)

Labor supply shifts right when more workers enter the labor force, lowering wages.

Equilibrium Wage

Determined by the intersection of labor supply and labor demand.

Wage at Equilibrium

At equilibrium, Wage = VMPL.

Worker’s Decision Rule

Work until MB(leisure) = wage.

Substitution Effect of Wage Increase

Leisure becomes more expensive, leading to increased work.

Income Effect of Wage Increase

Person feels richer, leading to decreased work.

Worker Response to Raise

Works fewer hours when income effect > substitution effect.

Causes of Wage Inequality

Human capital differences, compensating differentials, discrimination.

Taste-based Discrimination

Bias from personal prejudice.

Statistical Discrimination

Using group averages to judge individuals.

Value of Marginal Product of Capital (VMPK)

VMPK = MPK × Price of output.

Hiring Rule for Capital

Rent capital until VMPK = rental rate.

Monopoly Definition

One seller, price-maker, high entry barriers.

Monopolist Demand Curve

Downward-sloping because it is the entire market supply.

Marginal Revenue for Monopolist

MR < Price because lowering price applies to all units.

Profit Maximization Rule for Monopolies

MR = MC.

Finding Price after Q* is Found

Go up to the demand curve after finding where MR = MC.

Profit Equation

Profit = Q × (P – ATC).

MR = 0

Total revenue is maximized.

Finding Deadweight Loss on Monopoly Graph

Triangle between demand and MC between Qmonopoly and Qcompetitive.

Competitive vs. Monopoly Output Graph

Qcomp = where P = MC. Qmon = where MR = MC.

First-degree Price Discrimination

Charge each buyer their willingness to pay.

Second-degree Price Discrimination

Prices change based on quantity or version (bulk discounts).

Third-degree Price Discrimination

Different prices for different groups (students, seniors, etc.).

Natural Monopoly Characterization

Declining ATC over the relevant output range.

Formation of Natural Monopolies

Large fixed costs lead to economies of scale.

Socially Optimal Price

P = MC.

Fair-return Price

P = ATC.

Antitrust Laws

Prevent anti-competitive behavior (e.g., Sherman Act).

Marginal Revenue Formula from Data

MR = ΔTR / ΔQ.

Total Revenue Change Example

If price drops from $5 to $4 and quantity rises from 250 to 325, TR increases from 1250 to 1300 → +50.

Quantity Effect

Selling more units increases revenue.

Price Effect

Lowering price reduces revenue on all units previously sold.

Impact of Output Price Increase on VMPL

VMPL increases causing labor demand to shift right.

Effect of New Immigrants on Labor Market

Labor supply increases, leading to a fall in wage.

Impact of Technology on Labor Demand

Labor demand shifts left if technology replaces workers.

Shape of MPL Curve

Rises at first, then falls due to diminishing returns.

Shape of VMPL Curve

Downward sloping, mirrors MPL.

Shape of MR Curve for Monopoly

Below the demand curve, downward sloping.

Location of Deadweight Loss on Graph

Between demand and MC between Qmon and Qcomp.

Perfect Competition Efficiency Condition

P = MC.

Monopoly Inefficiency Condition

P > MC leading to deadweight loss.

Economies of Scale in Natural Monopolies

Natural monopolies benefit from economies of scale.

Monopolists Restriction of Output Reason

Producing more requires lowering price on all units.