econ unit 5

MP vs MC

MP - how much product from adding one more resource

MC - how much cost from producing one more output

law of diminishing marginal returns

as a variable input (resource) is added to fixed resources, at a certain point, TP will increase at a decreasing rate

axes for tp, AP, mp

x axis is labor quantity

y axis is amount produced of final product

derived demand definition

the demand for a resource ie based on the demand for the final product

importance of resource pricing (4)

• determines HH income

• alloc eff

• prod eff

• ethical questions

determinants of resource demand (3)

1. price of resource

2. demand for good

3. productivity of resource

4. price of other resources

determinants of resource elasticity of demand

1. how easily a resource can be substituted with another

2. the elasticity of demand for the final G/S

3. how much the resource cost makes up of total costs of the G/S

formula for elasticity

absolute of delta q res % over absolute delta p res % times 100

remember for a firm, since Preston = mrp, we have allocative efficiency

ok sir

criticisms to marginal prod theory of income

1. disabled people would get no money

2. assumes all markets are pc

why US wages are high (5)

high demand for labor relative to supply:

1. large amounts of natural resources

2. large amounts of capital

3. advanced technology

4. high quantity of labor

5. specialization, large domestic market, meritocracy

determine graphically the total labor cost and the total other costs when a firm in LR

it’s the quadrilateral looking ah thing. the lower rectangle is labor costs and the upper triangle is cost of land, capital, and entrepreneurial ability.

monopsony definition

single buyer of a resource

pay for performance

pay isn’t as simple as an hourly rate, it differs because of different workplace benefits or some people get paid differently based on performance and most people are paid yearly

principal agent problem

principal (employer) and agent (employee) don’t have the same goals in mind all the time and employee will try to slack off. the fix is an incentive pay plan that rewards good behavior like working a lot.

future value and present value formulas (only need to know one)

FV = PV(1+i)^t

determinants of supply and demand of LF

supply:

1. thriftiness of population : how much people are willing to put aside

2. how risky they feel

demand:

1. demand for final G/S

2. innovation + tech

3. business taxes (as taxes go up, demand goes down)

why many different interest rates (5)

1. risk

2. maturity (more time to maturity, higher rate)

3. loan size (smaller loan, higher rate)

4. taxability

welfare and types of income redistribution

MC and AVC formula

MC = delta TC over delta TP

AVC = TC/TP

MRP definition

A unit of a given resource is only as valuable as the amount of money it adds to firm’s TR

remember MRC is horizontal line for firm

ok

whats weird abt monopsony graph

MRC is higher than S so you find where MRC equals MRP then go down to S for quantity hired

effect of unions

less people hired at a higher wage

effect of monopsony

less people hired at a lower wage

effect of bilateral monopoly

hire more and pay more

what do union and bilat monop graphs have

supply curve that’s a straight line until it hits like fake supply curve and then goes up with it

problems measuring income inequality

1. HH’s don’t remain in same quintile forever

2. wealth isn’t considered

3. over time, size of immigrant families have decreased so less adults contribute to HH income

causes of income inequality

1. mental / physical ability differences

2. differences in education/training

3. discrimination

4. worker’s preferences / level of risk

5. unequal distribution of wealth

6. market power

7. luck, connections, and misfortune

definition of interest

price paid for borrowing money

LF graph

looks like a fing sword

what do econ profits do

help allocate entr abil throughout economy

sources of econ profit

new G/S, new tech, monopoly power (tech, patents, econs of scale, govt protection)

definition of rent

price paid for the use of land or other natural resources that are fixed in supply

even though land is homogenous, rent demand curves differ because

1. price of G/S produced on land

2. productivity of land in producing a G/S over another

3. prices of other resources to combine with land

definition of econ rent / surplus payment

payment above what is necessary to make a resource available for use

what does increasing returns to labor mean

MP is increasing

MC and AVC deal with output, MP and AP deal with resources

what to do if one MP/P is greater than the other

hire MORE of the one which is GREATER

as related to ineffiecny, rank monopsonist, union, and bilat monop

monopsonist is God awful

union is ok

bilateral monopoly is just perfect and beautiful

pros and cons of minimum wage

min wage bad because

• less workers hired

• people are better off working for $6 than finding no work for $7

• people who benefit are teens

min wage good because

• less people would quit

• they’d be more productive

what are noncompeting groups

groups that don’t compete because they have dif skills or education

compensating differences

differences in wages because jobs are different not that they have different abilities like the same person could work for both given what they currently are able to do

labor vs capital

labor is wages/salaries and proprietor’s income whereas capital is rent, interest, and profit

what is an economic resource

something that can be used to produce a G/S

what is rate of return

the ratio of profits to cost how much extra you make from buying something divided by how much it costs

when is it profitable to invest in a loan in order to buy something (rate of return, interest rate)

if rate of return is greater than interest rate

y axis of LF graph

real interest rate

social insurance programs

replace earnings that have been lost due to retirement, disability, or TEMPORARY unemployment

public assistance programs (aka welfare)

provide benefits to people who are unable to earn income because of permanent disability conditions or just have hella low income

do govt programs significantly reduce inequality

yes

where does most of govt redistribution come from

transfers