Econ200 Study Guide Unit 3 Chapters 18 19 20 21 22 3 9 CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION Factors of Production the inputs used to produce goods and services Labor Land and Capital Purchase price or rental price wage rented THE PRODUCTION FUNCTION AND THE MARGINAL PRODUCT OF LABOR Production function the relationship between the quantity of inputs used to make a good and the quantity of output of that good Marginal product of labor the increase in amount of output from an additional unit of labor Diminishing marginal product the property whereby the marginal product of an input declines as the quantity of the input increases Output of each additional worker decreases AS workers increase As number of workers rises production function becomes flatter Profit of additional worker worker s contribution to revenue wage Need to marginal product of labor into value of marginal product w price Value of marginal product marginal product of input X Price of output Marginal revenue product The extra revenue the firm gets from hiring an additional unit of a factor of production TO MAXIMIZE PROFIT Hire workers at point where MP of labor wage Labor demand curve shows quantity of labor a firm demands at a given wage Value of marginal product curve LD curve for competitive profit max firm WHAT CAUSES THE LABOR DEMAND CURVE TO SHIFT 1 THE OUTPUT PRICE Price of good increases Value of MP of each worker increases and labor demand increases shift to right o Decrease in price decreases value of marginal product and decreases labor demand shifts to left 2 TECHNOLOGICAL CHANGE technological advance typically raises marginal product of labor increasing demand for labor shift to the right o Above is labor augmenting most common o Or labor saving technological change robots machines 3 THE SUPPLY OF OTHER FACTORS Quantity available of one factor of production can affect the marginal product of other factors THE SUPPLY OF LABOR Labor supply curve reflects how workers decisions about the labor leisure trade off respond to a change in opportunity cost Opportunity cost of an hour of leisure is your hourly wage earnings Upward sloping labor they supply increase in wage induces workers to increase quantity of Backward sloping labor supply curve occurs when the increase in wage makes people take more leisure time less hours working for more WHAT CAUSES THE LABOR SUPPLY CURVE TO SHIFT 1 CHANGES IN TASTES more women working now so increase in labor supply 2 CHANGES IN ALTERNATIVE OPPORTUNITIES supply of labor in any one 3 labor market depends on opportunities available in other labor markets IMMIGRATION The country the people immigrate to gets an increase in labor supplied while their home country labor supply falls Econ200 Study Guide Unit 3 Chapters 18 19 20 21 22 3 9 EQUILIBRIUM IN THE LABOR MARKET Wage adjusts to balance the supply and demand for labor Wage Value of Marginal Product of Labor CHAPTER 19 EARNINGS AND DISCRIMINATION EQUILBRIUM WAGES DETERMINANTS Compensating differential A difference in wages that arises to offset the nonmonetary characteristics of different jobs Good jobs tend to have lower equilibrium wages than bad jobs Human capital the accumulation of investments in people such as education and on the job training Education expenditure of resources at a time to raise productivity in future Workers with more human capital earn more than those with less on average Firms labor demanders are willing to pay more for highly education workers bc they have higher marginal products OR signal they do Difference in wages between highly and less education considered compensating differential for cost of becoming educated Natural ability effort and chance also influence wages Signaling theory of education When people earn a college degree they are not necessarily more productive but signal their high ability to employers Says that schooling has no real productivity benefit but the worker signals innate productivity to employers by willingness to spend years in school DIFFERENCES Human capital view says that increasing educational levels for all workers would raise all workers productivity and thereby their wages o Signaling view says education doesn t enhance productivity so raising educational levels would not affect wages ABOVE EQUILIBRIUM WAGES Wages above equilibrium level bc of minimum wage laws unions and efficiency wages Pushing a wage above the equilibrium level raises quantity of labor supplied and reduces quantity of labor demanded surplus of labor unemployment Minimum wage laws lead some wages to be above optimum level Least skilled and experienced earn more than they would in unregulated market Union A workers association that bargains with employers over wages and working conditions Strike The organized withdrawal of labor from a firm by a union Efficiency wages Above equilibrium wages paid by firms to increase worker productivity May decrease turnover increase effort and raise quality of applicants CHAPTER 20 INCOME INEQUALITY AND POVERTY Poverty rate The percentage of the population whose family income falls below an absolute level called the poverty line Commonly used gauge of income distribution is poverty rate Poverty line set by federal government at roughly 3 times the cost of providing an adequate diet Econ200 Study Guide Unit 3 Chapters 18 19 20 21 22 3 9 o The poverty line is an absolute rather than relative standard Poverty effects all groups within population but doesn t affect groups evenly correlated with race age and family consumption single vs married Measurements of the distribution of income and the poverty rate are based on families money income THREE OTHER FACTORS OF INEQUALITY 1 In kind transfers Transfers to the poor given in the form of goods and services rather than cash IKT are received mostly by poorest members of society and failure to include them as part of income affects measurement of poverty rate 2 Economic Life cycle regular pattern of income variation over person s life Causes inequality in the distribution of annual income but it does not Standard of living in any year depends more on lifetime income than year s necessarily represent true inequality in living standards 3 Transitory vs Permanent Income Transitory income More short term and or temporary income less important Permanent income A person s normal or average income family s ability to borrow and lend goods services largely depends on this ECONOMIC MOBILITY Economic mobility
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