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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

    Can be used for any factors of demand

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