microecon

Wants, Resources, and Economics

• Wants: Unlimited

• Resources: Scarce

• Choice: Requires forgoing the satisfaction of other wants.

• Economics: The study of how people use scarce resources to satisfy their unlimited wants.

• Demand: Overall willingness of customers to purchase a good at various prices; represents the relationship between the price of a good and the quantity demanded.

• Quantity Demanded: Specific amount of a good that customers are willing and able to purchase at a given price.

Price Elasticity

• Formula:

  • Price Elasticity of Demand = Percentage Change in Quantity Demanded / Percentage Change in Price

• Inelastic: Absolute value of price elasticity < 1.

• Unit Elastic: Absolute value of price elasticity $= 1.0$.

• Elastic: Absolute value of price elasticity > 1.

• Total Revenue:

  • $TR = p \times q$ (Price times Quantity)

  • If the positive effect of a greater quantity demanded more than offsets the negative effect of a lower price, then total revenue rises.

Cross-Price Elasticity of Demand

• Defined as the percentage change in the demand of one good divided by the percentage change in the price of another good.

• Positive for substitutes.

• Negative for complements.

Utility

• Sense of pleasure that comes from consumption.

• Assumption: Tastes are given/relatively stable.

Total Utility

• Total satisfaction derived from consumption.

• Sum of marginal utilities.

Marginal Utility

• Change in total utility from a one-unit change in consumption.

Law of Diminishing Marginal Utility

• The more of a good consumed, the smaller the increase in total utility, other things constant.

• Marginal utility from each additional unit declines as more is consumed.

Disutility

• Negative marginal utility.

Utility Maximization without Scarcity

• Free Good:

  • Increase consumption as long as marginal utility is positive.

• Two Free Goods:

  • Increase consumption of each good until the marginal utility of each is 0.

• Goods - not free:

  • Tastes, preferences matter.

  • Limited income.

  • Maximize utility to reach equilibrium.

  • Any affordable change will reduce utility.

Consumer Equilibrium

• There is no way to increase utility by reallocating the budget.

• The last $ spent on each good yields the same marginal utility.

• Higher-priced goods must yield more marginal utility than lower-priced goods.

Consumer Surplus

• Marginal Valuation:

  • The dollar value of the marginal utility derived from consuming each additional unit of a good.

• Consumer Surplus:

  • Consumer bonus - value of total utility minus total spending.

  • Area under the demand curve, above the price.

  • In some cases the CS is huge: e.g., a bottle of water when someone is dying of thirst, or a blanket when someone is freezing.

Market Demand & Consumer Surplus

• Market Demand Curve:

  • Horizontal sum of individual demand curves.

  • Total quantity demanded, per period, by all consumers, at various prices.

• Consumer Surplus for the Market:

  • Amount consumers are willing to pay minus the amount they pay.

  • Net benefit for consumers, reflecting economic welfare.

Cost and Profit

Costs

• Explicit Costs:

  • Opportunity cost of resources employed by a firm.

  • Cash payments shown on the accounting statement.

• Implicit Costs:

  • A firm’s opportunity cost of using its own resources or those provided by its owner without a corresponding cash payment.

  • Not on the accounting statement.

Profit

• Accounting Profit:

  • Total revenue minus explicit costs.

• Economic Profit:

  • Total revenue minus all costs (explicit and implicit), reflecting the opportunity cost of all resources.

• Normal Profit:

  • Accounting profit earned when all resources earn their opportunity costs.

  • Accounting Profit = Normal Profit + Economic Profit, Revenue - Implicit

Production in the Short Run

• Variable Resources:

  • Can be varied in the short run to increase or decrease production.

• Fixed Resources:

  • Cannot be varied in the short run.

• Short Run:

  • A period during which at least one of the resources is fixed.

• Long Run:

  • No resources are fixed.

Diminishing Marginal Returns

• Total Product:

  • A firm’s total output.

• Production Function:

  • Relationship between the amount of resources employed and the total product.

• Marginal Product:

  • Change in total product from an additional unit of resource, other things constant.

• Increasing Marginal Returns.

• Diminishing Marginal Returns.

• Law of Diminishing Marginal Returns:

  • As more of a variable resource is added to a given amount of another resource, the marginal product eventually declines (could become negative).

Costs in the Short Run

• Fixed Cost (FC):

  • Any production cost that is independent of the firm’s rate of output.

• Variable Cost (VC):

  • Any production cost that changes as the rate of output changes.

• Total Cost (TC):

  • $TC = FC + VC$

• Marginal Cost (MC):

  • $MC = \Delta TC / \Delta q$

  • Change in total cost resulting from a one-unit change in output.

  • Changes in MC reflect changes in marginal productivity.

  • Increasing Marginal Returns: MC falls.

  • Decreasing Marginal Returns: MC rises.

• Fixed Cost Curve:

  • Straight horizontal line.

• Variable Cost Curve:

  • Starts at the origin.

• Total Cost Curve:

  • Fixed cost curve + variable cost curve.

• Slope of Total Cost Curve:

  • Marginal cost.

Average Cost in the Short Run

• Average Variable Cost (AVC):

  • $AVC = VC / q$

  • Variable cost divided by output/quantity.

• Average Fixed Cost (AFC):

  • $AFC = FC / q$

  • Fixed cost divided by quantity.

• Average Total Cost (ATC):

  • $ATC = TC / q$

  • Total cost divided by output and also $ATC = AFC + AVC$

• Relationship between MC and Average Cost:

  • When MC < average cost, marginal pulls down average.

  • When MC > average cost, marginal pulls up average.

• U-Shape of Average Cost Curves:

  • Law of diminishing returns.

Costs in the Long Run

• Long Run:

  • Planning horizon where all resources can be varied.

• Economies of Scale:

  • Forces that reduce a firm’s average cost as the scale of operations increases in the long run.

• Diseconomies of Scale:

  • Forces that may eventually increase a firm’s average cost as the scale of operation increases in the long run.

• Long-Run Average Cost Curve:

  • Indicates the lowest average cost of production at each rate of output when the scale of the firm varies.

  • Planning Curve, U-Shaped, reflecting economies and diseconomies of scale.

• Constant Long-Run Average Cost:

  • Over some range of output, the long-run average cost neither increases nor decreases with changes in firm size, indicating no economies/diseconomies of scale.

Perfect Competition

Market Structure

• Number of suppliers/demanders.

• Product’s degree of uniformity.

• Ease of entry into the market.

• Forms of competition among firms.

A Firm’s Decision

• How much to produce; what price to charge.

• Depends on the structure of the market.

Perfectly Competitive Market

• Many buyers and sellers (each a tiny fraction of the total).

• Commodity; standardized product.

• Fully informed buyers and sellers (price and availability of resources and product).

• No barriers to entry or exit (like patents, licenses, and high capital costs).

• Individual buyers and sellers have no control over price; they are price takers.

Demand under Perfect Competition

• Market price is determined by supply and demand.

• The demand curve facing one supplier is a horizontal line at the market price, making it perfectly elastic.

• A price taker is a firm that faces a given market price, and its quantity supplied has no effect on that price.

• A perfectly competitive firm that decides to produce must take or accept the market price.

Short-Run Profit Maximization

• Maximize economic profit by producing the quantity at which total revenue exceeds total cost by the greatest amount.

• $Total Revenue = Price \times Quantity$

• $Profit = TR – TC$

• If TR > TC, economic profit.

• If TR < TC, economic loss.

• Marginal Revenue (MR).

• Average Revenue (AR) = Total revenue divided by quantity ($AR = TR / q$).

• $MR = P = AR$ along a perfectly competitive firm’s demand curve.

• Marginal Cost (MC).

• Maximize economic profit by increasing production as long as each additional unit adds more to TR than TC, stopping before MR < MC.

• Golden Rule:

  • Expand Output: MR > MC

  • Stop before MR < MC

Minimizing Short-Run Losses

• Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC).

• Shut down in the short run if you can’t pay fixed costs.

• If TC > TR, economic loss.

• Produce if TR > VC (or P > AVC) because revenue covers variable costs and a portion of fixed cost, so the loss is less than the fixed cost.

• Shut down (short run) if TR < VC (or P < AVC), and the loss equals the fixed cost.

Firm & Industry Short-Run Supply Curves

• Short-Run Firm Supply Curve:

  • How much firms supply in the short run, which is the upward-sloping portion of the firm’s MC curve above the minimum AVC curve.

• Short-Run Industry Supply Curve:

  • Quantity supplied by the industry at each price in the short run, determined by the horizontal sum of all firms’ short-run supply curves.

Perfect Competition in the Long Run

• In the long run:

  • Firms enter/exit the market.

  • Firms adjust the scale of operations until average cost is minimized.

  • All resources are variable.

• Economic Profit in the Short Run:

  • New firms enter the market in the long run.

  • Existing firms expand in the long run, which increases market supply.

  • As supply increases, price decreases, economic profit disappears, and firms break even.

• Economic Loss in the Short Run:

  • Some firms exit the market in the long run.

  • Some firms reduce the scale in the long run, which decreases market supply.

  • As supply decreases, the price increases, economic loss disappears, and firms break even.

Zero Economic Profit in the Long Run

• Firms enter, leave, and change scale.

• Market: Supply shifts, and price changes.

• Firm: The demand curve $d(P=MR=AR)$ shifts.

  • In the Long run equilibrium is achieved when $MR=MC=ATC=LRAC$ resulting in a Normal Profit and a Zero Economic profit

Long-Run Adjustment

• Effects of an Increase in Demand:

  • Short Run: Price increases; demand increases; firms increase quantity supplied; economic profit.

  • Long Run: New firms enter the market, supply increases, price decreases, and the firm’s demand curve decreases until normal profit is achieved.

• Effects of a Decrease in Demand:

  • Short Run: Price decreases; demand decreases; firms decrease quantity supplied; economic loss.

  • Long Run: Firms exit the market, supply decreases, price increases, and the firm’s demand curve increases until normal profit is achieved.

Long-Run Industry Supply Curve

• Short Run: Change quantity supplied along the MC curve.

• Long-Run Industry Supply Curve (S*): After firms fully adjust.

• Constant-Cost Industries: LRAC doesn’t shift with output; long-run S* curve for the industry is a straight horizontal line.

Increasing-Cost Industries

• Average costs increase as output expands.

• Effects of an Increase in Demand:

  • Short Run: Price increases; demand increases; firms increase q; economic profit.

  • Long Run: New firms enter the market; market supply increases, price decreases; the firm's MC and ATC increase; the demand curve decreases; Zero economic profit.

Perfect Competition: Efficiency Considerations

• Productive Efficiency: Each firm produces at the minimum point on its long-run average cost curve.

• Consumer Surplus: Consumers pay less (P) than they are willing to pay (along the D curve).

• Producer Surplus: Producers are willing to accept less (along the S curve and MC) than what they are receiving.

• Gains from Voluntary Exchange: Consumer and producer surplus maximize social welfare.

• Social Welfare: Overall well-being of people in the economy, maximized when the marginal cost of production equals the marginal benefit to customers.

Monopoly

Barriers to Entry

• Monopoly: Sole Supplier of a product with no close substitutes.

• Barrier to Entry: Any impediment that prevents new firms from entering an industry and competing on an equal basis with existing firms:

  • Legal restrictions, economies of scale, control of essential resources.

Legal Restrictions

• Patents and Invention Incentives: Exclusive right to sell a product for 20 years from the date the patent is filed, incentivizing innovation, the process of turning an invention into a marketable product.

• Licenses and Other Restrictions: Government awarding an individual firm the exclusive right to supply a particular good or service (e.g., radio, TV, medical care), requiring a federal and state license.

Economies of Scale

• Natural Monopoly: A monopoly that emerges from the nature of costs (utilities), having a downward-sloping long-run average cost curve, where one firm can supply market demand at a lower average cost per unit than two firms could.

Controls of Essential Resources

• A firm’s control over some resources critical to production (e.g., Alcoa and aluminum; professional sports leagues), supplying something that other producers can’t match, such as unique experiences (e.g., Starbucks).

• Monopolies can be local, national, or international.

• Long-lasting monopolies are rare because economic profit attracts competitors, and technological changes break barriers to entry.

Revenue for the Monopolist

• A monopoly supplies the market demand, facing a downward-sloping demand curve (law of demand), such that to sell more, it must lower the price on all units sold.

• $Total Revenue (TR) = p \times Q$ (where Q is market demand).

• $Average Revenue (AR) = TR / Q$. For a monopolist, $p = AR$, and the demand curve equals the average revenue curve.

• $Marginal Revenue (MR) = \Delta TR / \Delta Q$

  • For a monopolist, MR < p, declines, and can be negative; its curve is downward sloping and below the demand curve (Ave. Rev. Curve).

• The total revenue curve reaches its maximum where $MR = 0$.

• Demand Curve: $p = AR$.

• Where demand is elastic as price falls, total revenue increases, and MR > 0.

• Where demand is inelastic as price falls, total revenue decreases, and MR < 0.

• Where demand is unit elastic, total revenue is maximized, and $MR = 0$.

Costs and Profit Maximization

• A monopolist chooses the price or the quantity and is a ‘Price Maker’.

• Price Maker: A firm with some power to set the price, where the demand curve for its output slopes downward, characteristic of firms with market power.

• Profit Maximization: Profit equals total revenue (TR) minus total cost (TC). Supply the quantity where TR exceeds TC by the greatest amount ($MR = MC$).

Short Run Losses

• If the price exceeds average total cost (p > ATC), there is an economic profit.

• If the price is between average total cost and average variable cost (ATC > p > AVC), there is an economic loss, but production occurs in the short run.

Shutdown Decision

• If the price is below the average variable cost (p < AVC), the average variable cost curve is above the demand curve, resulting in an economic loss and a shutdown in the short run.

Long-Run Profit Maximization

• Short-Run Profit: No guarantee of long-run profit, especially once the patent period is over.

• High Barriers that Block New Entry: Economic profit.

• To Erase a Loss or Increase Profit: Adjust the scale of the firm or advertise to increase demand.

• If unable to erase a loss, leave the market.

Monopoly & Allocation of Resources

• Perfect Competition:

  • Long-run equilibrium in a constant-cost industry implies $Marginal benefit (p) = marginal cost$, resulting in zero economic profit.

  • Allocative Efficiency maximizes social welfare and consumer surplus.

• Monopoly:

  • Marginal benefit ($p$) is greater than marginal cost, restricting quantity below what would maximize social welfare, leading to a smaller consumer surplus but economic profit.

  • This creates a deadweight loss of monopoly (allocative inefficiency).

Deadweight Loss of Monopoly

• A net loss to society occurs when a firm with market power restricts output and increases the price, resulting in a loss to consumers but a gain to nobody.

• Results from the inefficiency of higher price and reduced output.

• Problems estimating the deadweight loss: prices below profit-maximizing level (due to public and political pressure and to avoid attracting new entrants), and more costs to society (rent-seeking, lazy and inefficient, wasteful).

Price Discrimination

• Increasing profit by charging different groups of consumers different prices for the same product.

Conditions for Price Discrimination

• Downward-sloping demand curve, some market power, at least two groups of consumers with different price elasticity of demand, ability to charge different prices at a low cost, and prevention of reselling of the product.

Model of Price Discrimination

• Two groups of consumers, one group (a) with less elastic demand and the other (b) with more elastic demand, maximizing profit by setting $MR = MC$ in each market, resulting in a lower price for group (b).

Perfect Price Discrimination

• A perfectly discriminating monopolist charges a different price for each unit sold (the monopolist’s dream), where the demand curve becomes the MR curve, converting consumer surplus into economic profit with allocative efficiency and no deadweight loss.

Rent-Seeking

• Activities undertaken by individuals or firms to influence public policy in a way that increases their incomes.

Monopolistic Competition and Oligopoly

Monopolistic Competition

• Many producers, low barriers to entry, slightly different products (a firm that raises prices loses some customers to rivals), some control over price (“Price Makers”) with a downward-sloping demand curve, acting independently or interdependently.

Product Differentiation

• Physical Differences (appearance, quality), Location (spatial differentiation), Services, and Product Image (Promotion/Advertising).

Short-Run Profit or Loss

• Curves:

  • Downward Sloping Demand Curve, D because it's More Elastic than Monopolists; less elastic that perfect compet.

    • Marginal Revenue (MR) below the Demand Curve and Slopes Downward.

    • Average Total Cost, ATC.

    • Average Variable Cost, AVC.

    • Marginal Cost,MC

• Maximize Profit at $MR = MC$, with Price on the Demand Curve.

• If p > ATC, Economic Profit.

• If ATC > p > AVC, Economic Loss but Produce in the Short Run.

• If p < AVC, with the AVC curve above the D Curve, Economic Loss results in a Shutdown in the Short Run.

• Short-Run Economic Profit attracts new firms that draw customers away from other firms, reducing demand facing other firms until profit disappears in the long run, resulting in Zero Economic Profit.

• Short-Run Economic Loss causes some firms to exit the market, increasing demand facing the remaining firms until the loss is erased in the long run, resulting in Zero Economic Profit.

Comparison: Monopolistic Competition and Perfect Competition

• Zero Economic Profit in the Long Run, with $MR = MC$ for quantity where the demand curve is tangent to the average total cost curve.

• Perfect Competition: Firm's demand is a horizontal line, and it Produces at the minimum average cost.

• Monopolistic Competition: With a Downward Sloping Demand Curve, there is NO production at the minimum average cost resulting in Excess Capacity.

  • Firms produce less and charge more than a perfect competitor in the long run, spending more to differentiate their products, which could shift up the average cost curve.

Excess Capacity

• The difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost.

• Firms with Excess Capacity Could Reduce Average Cost by Increasing Quantity.

Introduction to Oligopoly

• Few firms, each behaves interdependently.

• The more similar the products, the greater the interdependence.

• Undifferentiated Oligopoly sells a commodity, whereas a Differentiated Oligopoly sells products that differ across suppliers.

Production Differentiation

• Physical Qualities, Sales Location, Services, Product Image.

Barriers to Entry

• Economies of Scale, Legal Restrictions, Brand Names, Control over an essential resource, High cost of entry, Crowding out the competition.

Models of Oligopoly

• Interdependence causes firms to either move towards Cooperation or Fierce competition.

• Collusion.

• Price Leadership.

• Game theory.

Collusion and Cartels

• Collusion: Agreement among firms to increase economic profit by dividing the market and fixing the price.

• Cartel: Group of firms that agree to coordinate their production and pricing decisions to reap monopoly profit (illegal in the U.S.).

• Maximize profit by allocating output among cartel members, ensuring the same MC of the final unit produced by each cartel member.

Difficulties to Maintain a Cartel

• Differentiated product, Differences in average cost, Many firms in the cartel,Low barriers to entry, Cheating (which causes cartel collapses when cheating becomes widespread).

Price Leadership

• Informal, tacit collusion where the Price Leader Sets the prices for the industry, initiates price changes, and is followed by the other firms.

Obstacles

• U.S antitrust laws, Product differentiation, No guarantee others will follow, Barriers to entry, Cheating.

Game Theory

• An approach that analyzes oligopolistic behavior as a series of strategic moves and countermoves by rival firms.

General Approach

• Focus on each player’s incentives to cooperate or compete using the Prisoner's dilemma.

• Strategy: Operational plan pursued by a player.

• Playoff Matrix: Table listing the playoffs that each player can expect from each move, based on the actions of the other player.

• Dominant-strategy equilibrium: Outcome achieved when each player’s choice does not depend on what the other player does.

• Duopoly in a market with only 2 producers.

• Nash Equilibrium: A player chooses the best strategy given the strategies chosen by others, so no participant can improve his or her outcome by changing strategies, even after learning the strategies selected by the other participant.

• One-Shot versus repeated games.

  • One-Shot : A Game played once.

  • Repeated : Games that helps Establish reputation for cooperation by implementing a Tit for tat strategy resulting in the Highest payoff because it Is a Strategy in repeated games Where A player in one round of the game mimics the other player’s behavior in the previous round which results in an Optimal strategy for getting the other player to cooperate

• Coordination game: Game in which a Nash equilibrium occurs when each player chooses the same strategy, so neither player can do better than matching the other player’s strategy.

Comparison

• Oligopoly:

  • If firms collude or operate with excess capacity: Higher price, lower output

    • If price wars: Lower price

• Higher profits in the long run.

Resource Markets

Demand and Supply of Resources

• Resource Demand: Firms demand resources as long as marginal revenue exceeds marginal cost to maximize profit.

• Resource Supply: People supply resources to the highest-paying alternative to maximize utility.

Market Demand for Resources

• Resource Demand: Derived Demand arises from the demand for the product the resource produces.

• Market Demand: the Sum of demands for a resource in all its uses which results in a Downward sloping market.

  • As price falls, producers are more willing to buy because its relatively cheaper and in response they Substitute resources in production, Also with prices decreasing they have a Greater ability to buy by Hiring more at the same total cost on the Assumption prices of other resources are constant

Market Supply

• a The Sum of all individual supply curves which results in an Upward sloping curve

• As price rises, resource suppliers are More willing to sell
  Increased earnings and more goods and services purchased and Also are More able to increase quantity supplied

• Resources Flow to their highest valued use if freely mobile and Adjust across different uses until they earn the same wage with Temporary differences because Market adjustments take time and there's Reallocation of resources

Resource Price Differences

• Permanent differences with No resource mobility.

  • Differences in the inherent quality of the resource.

  • Differences in time and money involved in developing necessary skills.

  • Differences in non Monetary aspects of the job.

Opportunity Cost & Economic Rent

• Opportunity cost: What a resource could earn in its best alternative use.

• Economic rent: Earnings in excess opportunity cost, as a Producer’s surplus earned by the resource supplier or “Pure Gravy”

• The less elastic the resource supply, the greater the economic rent as a proportion of total earnings.

• Perfectly Inelastic Supply:

  • No alternative uses with No opportunity cost but All earnings are economic rent

• Perfectly Elastic Supply:

  • Earns the same in current and best alternative use with All earnings are opportunity cost but with No economic rent

• Upward sloping supply:

  • Earnings consist of both opportunity cost and economic rent where Both demand and supply determine equilibrium price and quantity But Specialized resources that tend to earn a higher proportion of economic rent than do resources with alternative uses

Firm’s Demand for a Resource

• Quantity of resource, L.

• Total product, TP, Q - Amount produced.
  Marginal product of labor, $MP = \Delta TP / \Delta L$, Change in total product form employing one more unit.

  • Diminishing marginal returns to labor
    Marginal Revenue product

  • Marginal Revenue product $MRP = \Delta TR / \Delta L$
    Which Is the Change in total revenue when an additional unit of a resource is employed Other things constant

  • Depends on additional output and the price of output with the $MRP curve = Firm's demand curve for the resource$

  Perfectly competitive Product Market

• $MRP = MP \times product P$
  With the $MRP$ curve Slope Downwards because of the Diminishing marginal returns to resource

Some market power in product market

• The $MRP$ curve slopes Downwards which Is due to Diminishing marginal return to resource because Additional output can be sold only if price falls

Marginal Resource Cost

Marginal resource cost $MRC = \Delta TC / \Delta L$,Change in total cost when hiring one more unit of labor

• $MRC Curve$ Is a Horizontal curve at the equilibrium market wage
  Labor supply curve to the firm

• Maximize Profit by Hiring resources until $MRC=MRP$

Changes in Resource Demand

• Changes in $MRP$ (demand)

• Marginal product of the resource
  Because of the Amount of other resources employed and Because of Technology product’s price
  Which Creates a Change in demand for the product so the Demand for resource now equals derived demand
  Resource Substitutes A Resource that can substitute in production

Changes in resource Demand and market Structure of related products

• An increase in the price of one resource that increases the demand for the other
  Resource Complements Resources that enhance one anothers productivity so if there is A decrease in the price of one resources increases the demand for the other
  changes in technology
  There is Technology that improves which Can boost the productivity of some resources But make other resources more obsolete because the Demand for the final product which Is derived from the demand for the final output which means any change in the demand for output affects resource demand

More than One resource

• For every resource employed If MRP > MRC, A firm can increase profit or reduce a loss by employing more of that resource BUT If $MRP = MRC$, Maximize profit or minimizes loss

Labor Markets and Labor Unions

Labor Supply

• Individual labor supply Consists of both the Willing and able element,

Possible Uses

• There are Many possible usesOver the realistic range of wages. Which Depends on and is Affected by:Abilities, Tastes,Opportunity Cost

Labor Supply & Utility Maximization

Sources of Utility Consumption of goods and servicesFoundation of leisureEnjoyment of Leisure Normal good Diminishing marginal utilityThree uses of time Market work Time sold as labor Nonmarket workTime spent getting an education or on do it yourself production for personal consumptionLeisureTime spent on non-work activitiesMarket and nonmarket
Sources of disutilityIncreasing marginal disutilityNet utility of work Utility of the additional consumption possibilities from earnings - the disutility of the work itselfTime allocation process to maximize utility Expected MU of last unit spent in each activity is identical Because information is costly and the future is uncertain, people sometimes make mistakesImplications The higher your market wage (other things constant) The Higher your opportunity cost of leisure and nonmarket workWages and Individual Labor supply Substitution effect of a higher wage Increased opportunity cost of leisure and nonmarket work Substitute market work for other activities Work moreIncome effect of a higher wageHigher Income Increased demand for normal goods: leisure Work lessIndividual Labor supply Backward bendingIncome effect of higher wage Eventually dominates substitution effectFlexibility of hours workedPart TimeTime and length of vacationHow long to stay in school
When to retireLabor Supply Nonwage determines labor supply Other sources of income Higher income, less incentive to workNon Monetary factors of job Difficulty of job Quality of work environment Status of the positionValue of the job experience Better - the greater the supply of laborTaste for workWorkers seek jobs in a way that tends to minimize the disutility of workMarket supply for work Horizontal sum of all the individual supply curvesWhy wages differ Differences in Training, education, Age Experience Ability RiskGeographic differencesDiscriminationUnion Membership unions and Collective BargainingLabor UnionGroup of workers join to improve terms of employmentCraft Unionskilled workers in an industryStrikeA unions attempt to withhold labor from a firm to halt productionCollective bargainingThe process by which union and management negotiate a labor agreementMediatorAn impartial observer who helps resolve differences between union and management ( sent by government officials)Binding arbitrationNegotiation in which union and management MUST accept an impartial observer’s resolution of a dispute (in critical sectors)Some disputes go directly to StrikeUnion Wages and EmploymentUnion Desires Higher wagesMore benefitsGreater job security Better working conditions unions can increase wages: can inclusive Can Exclusive Unions: reduce union labor or increase supply of unions Inclusive, or industrial UnionsIncreased wage (wage floor)Lower employmentNon–union sector Lower wagesMore competitive product marketsManufacturing and retail trade Unions are less successful at raising wagesNew, nonunion firms can enter, pay market wage, produce the product for less, and get a big market shareLess competitive product markets services and Unions have greater success at raising wagesExclusive, or unions Reduce the labor supply Reduce Union membershipHigher initiation feesForce all employers in the industry to hire only union members Higher wage and lower employmentIncreasing Demand of Union LaborIncrease demand for union made goods Derived demand Forcing employers to hire more union workers than they want or need (dictate wage and quantity) 14: Costs, and economicsRationale for the firm Firms costsmore Firmsthe firm IntegrationIntegration from area of which from product for Firmsfor for given

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