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berger
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  1. SCARCITY
    • This occurs when relatively unlimited
    • human wants exceed the ability of limited resources to satisfy those
    • wants.
  2. OPPORTUNITY
    COST
    • The value of the next best alternative given up in order to accomplish a
    • certain goal.
  3. RATIONALITY
    • 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.
  4. VOLUNTARY EXCHANGE
    • 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.
    • NOTE: Exchange is
    • voluntary when both parties consent to the exchange or (b) when either
    • party is free to turn down an offer of exchange.
  5. COERCED 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.
  6. BARGAINING POWER
    • There are two types of
    • bargaining power.

    • (a)
    • 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.
  7. EXPLOITATION
    • 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.
  8. RESIDUAL CLAIMANTS
    • 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
    • claimants.
  9. LAW OF DEMAND FOR LABOR
    • The quantity
    • demanded of labor varies inversely with the wage rate, all other things held
    • constant.
  10. DEMAND PRICE OF LABOR
    • The maximum wage
    • that an employer is willing to pay a given worker, based on an estimate of that
    • worker’s productivity
  11. 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.
  12. SUBSTITUTION EFFECT (As It Relates to
    Production)
    • The change in employment resulting solely from a change in the
    • relative price of labor, output being held constant.
  13. SHIFTS IN THE DEMAND FOR LABOR
    • Changes
    • 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.
  14. DERIVED DEMAND
    • 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.
  15. LAW OF SUPPLY FOR LABOR
    • The quantity supplied
    • of labor varies directly with the wage, all other things held constant.
  16. 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.
  17. 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.
  18. EQUILIBRIUM
    • Occurs when the quantity demanded
    • of labor equals the quantity supplied of labor at a given wage.
  19. DISEQUILIBRIUM
    • There are two cases: (1) Case
    • 1: 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
    • vacant positions.
  20. 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.
  21. WELFARE LOSS (WL)
    • This occurs
    • 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
    • market).
  22. LAW OF DIMINISHING MARGINAL RETURNS (LDMR)
    • The
    • 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.
  23. MARGINAL PRODUCT (MP)
    • The change in output
    • that results from changing labor input by one unit.

    MP = ΔQ/ΔL
  24. MARGINAL REVENUE PRODUCT (MRPL)
    • The
    • change in the total revenue that results from changing labor input by one unit.

    MRPL = ΔTR/ΔL
  25. GROSS SUBSTITUTES
    • 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.
  26. GROSS COMPLEMENTS
    • 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.
  27. OWN-WAGE ELASTICITY OF DEMAND (eD)
    • A measure of the
    • responsiveness of the quantity of labor demanded to a change in the wage rate.



    • eD
    • = - %ΔL/%Δw
  28. 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.



    • eijD
    • = %ΔLi/%ΔPj



    • (a)
    • eijD
    • > 0 inputs i and j are gross substitutes.



    • (b)
    • eijD
    • < 0 inputs I and j are gross
    • complements.
  29. TOTAL WAGE BILL
    • The total wage cost to the
    • firm; the wage rate multiplied by the quantity of labor hours employed.
  30. 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.
  31. DETERMINANTS OF ELASTICITY OF DEMAND FOR LABOR
    • These include: 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.
  32. MINIMUM WAGE
    • A wage floor where a legally established minimum rate of pay is
    • specified for labor employed in covered occupations.

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