Card Set Information
This occurs when relatively unlimited
human wants exceed the ability of limited resources to satisfy those
The value of the next best alternative given up in order to accomplish a
Individuals weigh the
benefits and costs of their actions all other things held constant and act when
benefits exceed cost but refrain from acting when costs exceed benefits.
Provided that a seller of a
good or service owns whatever is to be exchanged and the two parties to a
potential exchange can bargain over the exchange price (a) exchange will occur if
both parties benefit from the exchange, or (b) exchange will not occur if one
party does not benefit from the exchange.
: Exchange is
voluntary when both parties consent to the exchange or (b) when either
party is free to turn down an offer of exchange.
When one party to a potential
exchange can force an exchange using the force of law as long as such
an exchange is beneficial to him. The other party will typically lose
from the exchange, and so would not have consented to the exchange if
given the freedom to refuse the offer. Such exchanges generally generate
negative unintended consequences.
There are two types of
Competitive bargaining power occurs when exchange is voluntary while the division of the gains from trade depend on the bargaining
experience of each party. (b) Monopolistic bargaining power occurs when an
exchange can be forced conferring all the gains from trade on one party and all
the losses on the non-consenting party.
In labor markets, this
occurs when buyers can force sellers to accept a wage below their productivity
or sellers can force buyers to pay a wage above their productivity.
The party in a firm
which has the right to the stream of revenues which remain after all fixed
claims (such as labor and raw materials suppliers) on the firm’s revenues have
been paid. Since the size of the residual revenue stream depends on how
productive the fixed claimants are in generating revenues for the firm the
residual claimant has a strong incentive to monitor the behavior of the fixed
LAW OF DEMAND FOR LABOR
demanded of labor varies inversely with the wage rate, all other things held
DEMAND PRICE OF LABOR
The maximum wage
that an employer is willing to pay a given worker, based on an estimate of that
OUTPUT (SCALE) EFFECT:
The change in employment
which occurs because of a change in the firm’s output. This change in output is
caused by a change in the wage rate which causes the firm’s cost of production
and the desired level of output to change.
SUBSTITUTION EFFECT (As It Relates to
The change in employment resulting solely from a change in the
relative price of labor, output being held constant.
SHIFTS IN THE DEMAND FOR LABOR
in the factors that are held constant will cause a shift in the demand curve as
opposed to a movement along the demand curve. These changes include changes in
the product demand, prices of other inputs (substitutes or complements),
productivity, and the number of employers.
The notion that the demand
curves for labor and other productive services are derived from the demand for
the product they are used to produce.
LAW OF SUPPLY FOR LABOR
The quantity supplied
of labor varies directly with the wage, all other things held constant.
SUPPLY PRICE OF LABOR
The lowest wage at which
a given worker is willing to supply labor to a particular market. This wage is
determined by the opportunity cost to that worker of supplying his labor
services to that market instead of his next best alternative.
SHIFTS IN THE SUPPLY OF LABOR
Changes in the
things held constant will cause shifts in the labor supply curve, as opposed to
a movement along the curve. These changes include (a) other wage rates, (b)
non-wage income, (c) preferences for work versus leisure, (d)
non-wage aspects of jobs, and (e) the number of qualified labor suppliers.
Occurs when the quantity demanded
of labor equals the quantity supplied of labor at a given wage.
There are two cases
: (1) Case
: Excess Supply (ES) occurs when w > we, ES = LS
– LD > 0, and wages have a tendency to fall as unemployed
workers lower their wage offers in order become employed. (2) Case 2:
Excess Demand (ED) occurs when w < we, ED = LD – LS
> 0, and wages have a tendency to rise as employers try to fill their
SOCIAL WELFARE MAXIMUM (SWM)
This occurs when
the sum of the gains from trade for workers and employers is a maximum. In the
absence of any market failures this occurs at the market equilibrium.
WELFARE LOSS (WL)
because either (a) too few workers are employed relative to the number of
workers employed at the social welfare maximum (with workers being diverted to
other markets where they have lower valued uses) or (b) too many workers are
employed relative to the number of workers employed at the social welfare
maximum (with workers being employed in a lower valued use in the given
LAW OF DIMINISHING MARGINAL RETURNS (LDMR)
principle that if technology is unchanged, as more units of a variable resource
are combined with one or more fixed resources, the marginal product of the
variable resource must eventually decline.
MARGINAL PRODUCT (MP)
The change in output
that results from changing labor input by one unit.
MP = ΔQ/ΔL
MARGINAL REVENUE PRODUCT (MRPL)
change in the total revenue that results from changing labor input by one unit.
MRPL = ΔTR/ΔL
Inputs such that when the
price of one changes, the demand for the other changes in the same direction
because the substitution effect exceeds the output effect.
Inputs such that when the
price of one changes, the demand for the other changes in the opposite
direction because the output effect exceeds the substitution effect.
OWN-WAGE ELASTICITY OF DEMAND (eD)
A measure of the
responsiveness of the quantity of labor demanded to a change in the wage rate.
= - %ΔL/%Δw
CROSS ELASTICITY OF DEMAND
A measure of the
responsiveness of the quantity demanded of input i to
the change in the price of input j.
> 0 inputs i and j are gross substitutes.
< 0 inputs I and j are gross
TOTAL WAGE BILL
The total wage cost to the
firm; the wage rate multiplied by the quantity of labor hours employed.
TOTAL WAGE BILL RULES
Rules for determining
the elasticity of labor demand. Labor demand is elastic if a change in the wage
rate causes the total wage bill to move in the opposite direction. Labor demand
is inelastic if a change in the wage rate causes the total wage bill to move in
the same direction.
DETERMINANTS OF ELASTICITY OF DEMAND FOR LABOR
: product demand, ease of substituting other inputs, the
elasticity of supply of other inputs, and the share of labor cost in the total
costs of the firm.
A wage floor where a legally established minimum rate of pay is
specified for labor employed in covered occupations.