Chapter 9: Factor Markets, Market Failure, and the Role of the Government

9.1 Factor Markets

• Marginal revenue of product labor: revenue generated by one additional unit of labor

  

9.2 Changes in Factor Demand and Factor Supply

• How does the demand curve shift?
  • Tastes (preferences) of costumers
  • Prices of related goods
  • Income of buyers
  • Number of buyers
  • Expectations for the future
  • Acronym: TRIBE
• Marginal utility: utility gained from consuming one more unit of a good
• Total utility: sum of all marginal utility values gained from each unit consumed
• Consumer surplus: value a buyer receives from the purchase of a good in excess of what the customer pays for it
• Product surplus: price a seller receives for a good - minimum price they would be wiling to supply a quantity of the good

9.3 Profit-Maximizing Behavior in Perfectly Competitive Factor Markets

• Important antitrust legislation
  • Sherman Act
  • Clayton Act
  • Robinson-Patman Act
  • Celler-Kefauer Act
• Vertical merger: merger of firms during steps in the production process
• Conglomerate merger: merger of firms from unrelated industries
• Horizontal merger: merger of direct competitors

9.4 Monoponistic Markets

• Monopsony: when one firm is the only purchaser of labor
• Marginal factor cost (MFC): additional cost of one more unit of labor

9.5 Socially Efficient and Inefficient Market Outcomes

• Social efficiency: faire and optimized allocation of economic resources in a society
  • Opposite → causes ineffective market incomes
• Natural monopolies: created when fixed costs are so high → second firm cannot enter the market

9.6 Externalities

• Market failure: when resources are not allocated in an optimal manner
• When do market failures occur?
  • Imperfect competition
  • Externalities: costs/benefits felt beyond those causing the effects
  • Negative externalities → overconsumption
  • Positive externalities → underconsumption
  • Public goods: goods that many individuals benefit from at the same time
  • Imperfect information: buyers/sellers do not have complete knowledge about available markets, prices, products, costumers, suppliers

Marginal private cost (MPC): cost paid by the customer for a unit of good

Marginal external cost: cost paid by other people (aside from the buyer) for a unit of good

9.7 Public and Private Goods

Nonrival good: consumption of that good does not affect consumption by others

Nonexcludable goods: cannot be held back from those who want it

Free rider: attempts to benefit from public good without paying for it

9.8 Income and Wealth Inequality

• Labor unions attempt to:
  • Increase demand for labor
  • Decrease supply of labor
  • Negotiate higher wages
• Gini coefficient: uses Lorenz curve to calculate income equality
• Poverty line: official benchmark for poverty
  • Set at 3x minimum food budget by Department of Agriculture

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