AP Micro - Unit 5

what are factors and what is considered when making decisions to employ them?

• Factors: Resources (land, labor, capital)

• considerations: productivity of the factor, cost of the factor (rent, wages, interest), price of the good/service

labor market supply and demand def.

supply = willing and able workers

demand = many firms with jobs

wage differentials (why people paid more than others)

• Human capital

  • ability

  • education

  • training

• networking

• discrimination

• luck

how minimum wage affects labor market

• overall

  • creates unemployment

  • labor welfare increases

  • stops monopsonies

determinants of factor demand

• derived demand

  • driven by product demand

• productivity of resource (Marg. Product)

  • better resources

  • education / training

  • technology

  • better prod. = more of good made = more workers needed

• price of product (P)

  • P ^ = Qs ^ = Dfactor ^

• related goods

  • changes in the price of complementary resources

determinants of factor supply

• immigration, emigration

• age distribution (mandatory retirement, large old population will decrease supply)

• working conditions (willingness dec., supply dec.)

• education (able dec., supply dec.)

• preferences for leisure

• availability of substitute resource

  • automation, AI

  • harder to replace = S increases

marginal revenue product (MRP)

• change in total revenue / change in resource quantity

marginal resource cost (MRC)

• change in total resource cost / change in resource quantity

what is the optimal amount of a resource?

MRP >= MRC

(in perfect competition only: MP * P = MRP) (b/c price is constant)

labor market graph

optimal combination of resources

• All resources are variable

• last dollar spent on each resource yields the same marginal product

• MP(L) / P(L) = MP (C) / P(C)

  • where L = labor and C = capital

• If MP/P for capital larger, then we will form more capital, fire more labor with lowest MP until MP/Ps are equal

  • diminishing returns, more capital decreases its marginal product, and less labor increases its marginal product

monopsonistic markets

• single buyer for a type of labor

  • “wage maker”

  • ex) The only hospital in a sparse rural area, if you’re a doctor, you can only get a job with that hospital

• pays same wage to all

• has to increase wage to attract more workers

optimal amount of a public good

private costs vs. social costs

• private costs = firm’s costs to produce the good

• social costs = those costs + the effects of making that good (ex: pollution) (thus, tend to be higher)

  • The ideal point (A) has less produced (to reduce the impact of negative effects) with a higher price (to give firm more money to address effect)

information failures

• asymmetric exchange of info between buyer and seller

• Seller side

  • Licensing (yes, you are a dentist)

  • Weights and measures (ensures equal in all firms, no firm is selling less for same price)

• Buyer side

  • Moral Hazard Problem (recklessness bc you have insurance)

  • Adverse Selection (insuring more risky than safe people, example, smokers know they will die so they buy more life insurance and insurance companies allow it)

what creates deadweight loss?

• Per unit taxes

• Binding price controls

• Imperfect competition

• Externalities

• Asymmetric Information

• Insufficient public goods

allocative efficiency

MSB = MSC