Test 3: Chapters 16-17 (Resource Pricing and Labor Market Dynamics)

Why is resource pricing important?

It determines household income, represents costs for firms, aids in resource allocation among industries, and informs policy issues like CEO pay and minimum wage.

What does derived demand mean in the context of resource demand?

Refers to the demand for a resource that is based on the demand for the products that the resource helps to produce.

What is marginal product (MP)?

The additional output produced when one additional unit of a resource is employed, calculated as the change in total product divided by the change in the quantity of the resource.

What factors influence the strength of resource demand?

Depends on the productivity of the resource (marginal product) and the market value or price of the good or service it helps to produce.

How is marginal revenue product (MRP) calculated?

Calculated as the change in total revenue divided by the unit change in resource quantity.

How is marginal resource cost (MRC) calculated?

Calculated as the change in total resource cost divided by the unit change in resource quantity.

What is the MRP = MRC rule?

A firm maximizes profits when marginal revenue product equals marginal resource cost.

What does MRC equal in a purely competitive labor market?

In a purely competitive labor market, marginal resource cost (MRC) equals the market wage rate.

What does the MRP = MRC rule imply for hiring in a competitive market?

The firm will hire workers until the market wage rate (MRC) equals its marginal revenue product (MRP), continuing to hire as long as MRC is less than MRP.

What is a wage-taker?

A firm that hires workers in a purely competitive resource market, where it cannot influence the wage rate.

How does the MRP schedule relate to resource demand?

Schedule is the same as the firm's resource demand schedule; for example, the MRP curve for labor is the firm's labor demand curve.

What characterizes product price under pure competition?

Under pure competition, product price is constant.

What type of demand curve does a firm face in a purely competitive market?

A perfectly elastic demand curve at the market price.

What does it mean for a firm to be a price-taker in a competitive market?

The firm can sell as much or as little as it wants at the constant market price.

How does a firm in an imperfectly competitive market differ in terms of its demand curve?

It faces a downward sloping product demand curve, meaning the product price declines if the firm wishes to sell more.

What is the relationship between the demand curves for inputs in purely competitive and imperfectly competitive markets?

In an imperfectly competitive market, it slopes downward due to falling marginal product and product price as output rises, whereas a purely competitive seller can sell added output at a constant price.

What is the relationship between wage rate changes and labor demand in both market types?

There is an inverse relationship between the wage rate and the quantity of labor demanded in both markets.

What are the determinants of resource demand?

(a) Changes in product demand, (b) changes in productivity, and (c) changes in the price of another resource.

How does an increase in product demand affect the demand for resources?

It increases the demand for the resource used in its production.

What impact does productivity have on resource demand?

An increase in productivity will increase the demand for the resource, while a decrease in productivity will reduce it.

What factors can lead to changes in productivity?

Changes in (a) quantities of other resources, (b) technological advances, or (c) the quality of the variable resources.

What is the substitution effect in resource demand?

A firm will purchase more of an input whose relative price has declined and less of an input whose relative price has increased.

What is the output effect in resource demand?

A firm will purchase more of one particular input when the price of another input falls and less when the price of the other input rises.

How do the substitution and output effects interact when the price of an input changes?

They work in opposite directions; for example, a decline in the price of capital decreases the demand for labor (substitution effect) while increasing it (output effect).

What determines the net change in labor demand when the price of an input changes?

Depends on the relative sizes of the substitution effect and the output effect.

What happens to the demand for labor if the substitution effect outweighs the output effect when the price of capital decreases?

The demand for labor decreases.

What occurs to the demand for labor if the output effect exceeds the substitution effect when the price of capital decreases?

The demand for labor increases.

What is the net effect on labor demand when capital and labor are substitutes and the price of capital increases?

Increases if the substitution effect exceeds the output effect; it decreases if the output effect exceeds the substitution effect.

How do complementary resources affect the demand for labor and capital when the price of capital increases?

The demand for both labor and capital decreases together.

What is the elasticity of resource demand?

It measures the sensitivity of resource quantity to changes in resource prices, calculated as the percentage change in resource quantity divided by the percentage change in resource price.

What does it indicate when the elasticity of resource demand is greater than 1?

Resource demand is elastic.

What does it indicate when the elasticity of resource demand is less than 1?

Resource demand is inelastic.

What does it indicate when the elasticity of resource demand is equal to 1?

Resource demand is unit-elastic.

What are the determinants of elasticity of resource demand?

1. Ease of resource substitutability; 2. Elasticity of product demand; 3. Ratio of resource cost to total cost.

What is the least-cost rule formula?

(MPL / Price of Labor) = (MPC / Price of Capital) where MPL is Marginal Product of Labor and MPC is Marginal Product of Capital.

What should a firm do if the least-cost rule does not hold, given MPL = $10, Price of Labor = $1, MPC = 5, and Price of Capital = $1?

The firm must use more labor and less capital.

What is the profit-maximizing rule formula?

(MRPL / Price of Labor) = (MRPC / Price of Capital) = 1 where MRPL is Marginal Revenue Product of Labor and MRPC is Marginal Revenue Product of Capital.

What is the substitution effect when the price of capital increases?

Labor would be substituted for capital.

What happens to production costs and output when the price of capital increases?

Production costs go up, output decreases, and less of both capital and labor is used.

What is the net effect on labor demand when capital and labor are complements and the price of capital increases?

Demand for labor decreases.

How does the availability of substitutes affect the elasticity of resource demand?

Leads to higher elasticity; fewer substitutes lead to lower elasticity.

How does the price elasticity of product demand influence the elasticity of resource demand?

Results in greater elasticity of resource demand.

How does the ratio of resource cost to total cost affect the elasticity of demand for that resource?

A larger proportion of total production costs accounted for by a resource leads to greater elasticity of demand.

What is the relationship between the output effect and the substitution effect when the price of capital increases?

If the substitution effect exceeds the output effect, demand for labor increases; otherwise, it decreases.

What is the impact on resource demand when production costs rise due to an increase in the price of capital?

Resource demand generally decreases.

What does a firm aim to achieve by altering the combination of resources according to the least-cost rule?

To increase output and move toward a position of equilibrium.

What is the significance of the profit-maximizing rule in resource allocation?

It ensures that the marginal revenue product per dollar spent on each resource is equal.

What are wages?

The price that employers pay for labor, including direct payments like hourly pay, salaries, bonuses, and fringe benefits such as health insurance and pensions.

What is the difference between nominal wage and real wage?

The amount of money received per hour, day, or year, while a real wage reflects the purchasing power of nominal wages, indicating how many goods and services can be obtained.

How do we calculate real wage?

Calculated by adjusting the nominal wage for changes in the price level. For example, if the nominal wage increases by 5% and the price level increases by 3%, the real wage increases by 2%.

What do real earnings of workers depend on over the long run?

Depend on the demand for labor, which is influenced by labor productivity; higher productivity generally leads to higher demand and wages.

What are the reasons for high productivity in advanced economies?

Attributed to abundant capital, access to natural resources, advanced technology, quality labor, a supportive social and political environment, a large domestic market, and increased specialization from free trade.

What has contributed to the increase in real wage in the United States over the long run?

It's attributed to the growth in demand for labor exceeding the growth in supply.

What is marginal revenue product of labor?

The change in a firm's total revenue resulting from employing one additional unit of labor, while keeping other resources constant.

What is marginal resource cost?

The increase in total cost when a firm employs one additional unit of a resource, holding other resources constant.

What does the resource supply curve look like in a purely competitive resource market?

It slopes upward, indicating higher wage rates are needed to attract more workers, while an individual firm's supply curve is perfectly elastic at the market wage rate.

What rule should a firm follow to maximize profits in a purely competitive market?

A firm should hire resources until the marginal revenue product of labor equals the marginal resource cost.

What condition must be met for a firm to maximize profits when hiring resources in a purely competitive market?

A firm maximizes profits by hiring resources until the marginal revenue product (MRP) equals the marginal resource cost (MRC).

What happens to employment when the marginal revenue product of labor exceeds the marginal resource cost?

The firm will expand employment.

What happens to employment when the marginal revenue product of labor is less than the marginal resource cost?

The firm will contract employment.

In a purely competitive market, what is the marginal resource cost equivalent to?

The market wage rate.

How can you determine if a firm is selling output in a purely competitive market?

If the market price of the output is constant.

How does the labor supply curve facing a purely competitive employer differ from that facing a monopsonist?

It is perfectly elastic (horizontal), while the monopsonist's is upwardly sloped.

Why does a monopsonist face an upwardly sloping labor supply curve?

Because a monopsonist is the only buyer in the market, thus it must raise wages to attract more workers.

What happens to the wage rate when a monopsonist wants to hire more workers?

The wage rate increases because the monopsonist must raise wages for all employees to attract additional workers.

Is the marginal resource cost (MRC) the same as the wage rate for a monopsonist? Why or why not?

No, the MRC is higher than the wage rate because it includes the wage increases paid to all current employees.

How does the level of employment and wage rate in a monopsonistic labor market compare to a purely competitive labor market?

The monopsonist employs fewer workers and pays a lower wage than in a competitive market.

Do the monopsonist and purely competitive employer follow different rules for employing resources?

No, both follow the same rule for employing resources.

What is the effect on society when a monopsonist operates in the labor market?

Society obtains a smaller output and workers receive a wage rate less than their marginal revenue product.

What is the relationship between marginal resource cost and wage rate in a monopsonistic market?

The marginal resource cost is higher than the wage rate due to the need to raise wages for all workers.

What is the implication of a monopsonist's wage cost when hiring additional workers?

The wage cost includes the additional worker's wage plus wage increases for all existing workers.

What does it mean for the labor supply curve to be perfectly elastic?

It means that the wage rate remains constant regardless of the quantity of labor supplied.

What is the primary reason a monopsonist must increase wages to hire more workers?

To maintain labor morale and prevent unrest among current employees.

How does the monopsonist's hiring behavior affect overall employment levels?

The monopsonist tends to hire fewer workers compared to a competitive market.

What is the significance of the market wage rate in a competitive labor market?

It serves as the benchmark for the marginal resource cost in hiring decisions.

What does the term 'marginal revenue product' refer to in the context of labor hiring?

It refers to the additional revenue generated from hiring one more unit of labor.

What is the consequence of a monopsonist paying a wage lower than the marginal revenue product?

Workers receive less compensation than the value they contribute, leading to inefficiencies in the labor market.

What is the condition for employing resources in labor markets?

Resources are employed where the Marginal Resource Cost (MRC) equals the Marginal Revenue Product (MRP).

How does the MRC for a monopsonist compare to the wage rate?

For a monopsonist, the MRC is higher than the wage rate.

What are the three union models?

(a) demand-enhancement model, (b) exclusive or craft union model, and (c) inclusive or industrial union model.

What is the demand-enhancement model?

Allows unions to increase the demand for their labor by boosting the demand for the goods and services they produce, often through political lobbying or supporting government policies.

How do unions benefit from increasing demand for their labor?

As unions increase the demand for union labor, they can achieve higher wage rates.

What is the craft union model?

Involves unions restricting the supply of labor to affect wage rates, often through legislation that limits immigration and enforces membership requirements.

How do craft unions control the supply of labor?

By requiring workers to join the union to obtain certain jobs and maintaining restrictive membership policies.

What is the impact of craft unions on wage rates and employment?

Can increase wage rates by decreasing the supply of labor, but this also results in a decrease in the number of workers employed.

What is the industrial union model?

Seeks to organize all available workers in an industry, including unskilled, semiskilled, and skilled workers.

How do industrial unions exert pressure on firms?

By organizing a large number of workers, it pressures firms to agree to wage demands, especially due to their legal right to strike.

What is the effect of industrial unions on wage rates and employment?

Can create a higher wage rate but may also reduce the number of workers employed.

What is a bilateral monopoly model?

Occurs in a monopsonist labor market with a strong industrial union, where there is a single buyer and seller of labor.

What determines the wage rate in a bilateral monopoly?

The wage rate is indeterminate and depends on which party has greater bargaining power.

What is the potential economic outcome of a bilateral monopoly compared to pure competition?

May lead to a higher wage rate than pure competition while employing more workers than under monopsonistic conditions.

What are the cases for the minimum wage?

Arguments often include reducing poverty, ensuring a living wage, and stimulating economic activity.

What are the cases against the minimum wage?

Arguments typically include potential job loss, increased unemployment, and negative impacts on small businesses.

What do critics of minimum wage laws argue about its effects on employment?

Critics contend that an above-equilibrium minimum wage will cause employers to hire fewer workers.

Why do critics believe minimum wage is poorly targeted to reduce poverty?

They argue that much of the benefit of minimum wage goes to workers, including teenagers, who do not live in impoverished households.

What is the argument made by advocates of minimum wage regarding monopsonistic power?

They argue that in low-pay labor markets, employers exercise monopsonistic power, and a required minimum wage can increase wage rates without causing significant unemployment.

What are wage differentials?

They are wage differences created by various forces and can arise from either the supply or demand side of the labor market.

How can wage differentials occur within the same occupation?

For example, a surgeon starting out earns much less than an experienced surgeon due to differences in experience.

What factors influence wage differentials on the demand side?

Varies among occupations based on how much different occupational groups contribute to employer revenue.

What is human capital?

The personal stock of knowledge, skills, and know-how that enables a person to be productive and earn income.