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  • What is a product market?

    Markets in which firms sell goods and services to households or other firms.

    What is a factor market?

    Markets in which resources-- labor, capital, land and natural recourses, and entrepreneurship-- are sold to firms. Because recourses are sometimes called factors of production, the markets in which they are traded are called factor markets.

    Firms demand recourses such as labor, land, or capital, and they are supplied by the households who own these resources in ________ markets.

    Factor Markets

    What is the demand for a resource-- such as labor? That is, it arrises from, and will vary with, the demand for the firm's output.

    Derived Demand

    What is the price called in a labor market?

    Wage rate

    How is hourly wage rate calculated?

    Total earnings over the week, month, or year divided by the number of hours worked during that period. For example, if someone earns 80,000 in commissions during the yearend works 2,000 hours that year, the hourly wage rate would be 80,000/2,000= $40.

    A perfectly competitive labor market has the following four characteristics:

    Many buyers and sellers, standardized labor quality (all workers are equally productive), easy entry and exit, and well informed buyers and sellers.

    We can call a firm in a competitive labor market a _____________.

    Wage taker

    When we refer to labor demand in a market, we mean the demand by all firms for the type of labor being traded in that market.


    What is the curve indicating the total number of workers all firms in a labor market want to employ at each wage rate?

    The Labor Demand Curve

    Why does the labor demand curve slope downward?

    Because, all else equal, firms want to employ fewer workers from a labor market when the wage rate is higher.

    What is the output effect?

    A change in the wage rate alters the profit maximizing output level and therefore changes the quantity of labor demanded.

    Over most time horizons, labor is considered a ________ input used to calculate a firm's ___________.

    variable, marginal cost

    When the wage rate rises, a firms marginal cost curve shifts __________.


    The upward shift in the marginal cost curve decreases the firm's __________.

    Profit maximizing output level

    Demand for recourses is a derived demand: as the firm's rate of production falls, so will the quantity of labor it wants to employ. This is the _____________ of a wage change.

    output effect

    A higher wage raet raises the price of that labor relative to the price of other inputs.


    All else equal, a rise in the wage rate shifts up a firm's ______________ and therefore lowers its profit maximizing output level. Because it is producing less output, the firm will want to employ fewer workers.

    marginal cost curve

    What is the input substitution effect?

    A change in the wage rate alters the price of labor relative to the cost of other inputs and therefore changes the quantity of labor demanded.

    Why does the labor demand curve slope downward? Because the rise in the wage rate has two effects:

    It increases firms' marginal cost, causing them to decrease production and employ fewer workers (the output effect) and it increases the ratline cost of labor from that market causing firms to substitute other inputs such s capital or other types of labor (the input substitution effect)

    A change in the market wage rate moves us _______ a labor demand curve.


    What is a complementary input?

    An input that is used by a particular type of labor making it more productive. Used BY the labor we're analyzing, making it more productive and therefore more profitable for the firm to employ.

    When firms in a labor market want to employ more labor at any given wage rate, the demand curve shifts _______________.


    When a technological advance creates an entirely new complementary input or when an existing one becomes cheaper, the demand curve for labor that uses the input will shift ____________.


    What is a substitute input?

    An input that can be used instead of a particular type of labor. usually due to a technological change. or when existing one becomes cheaper.

    The labor supply curve slopes upward because...

    all else equal (including the number of people quantified for that job) more people will want to work in that market when the wage rate rises

    What causes shifts in the labor supply curve?

    Changes in the number of qualified people, changes in other labor markets, changes in taste

    The more people want to work in a labor market at any given wage rate, the supply curve shifts rightward


    An increase in labor demand raises both the equilibrium wage rate and the equilibrium level of employment.


    What is a compensating wage differential?

    The difference in wage rats that makes two jobs equally attractive to workers.

    Nonwage job characteristic

    any aspect of a job-- other than the wage-- that matters to a potential or current employee. Danger is an example of a nonage job characteristic

    Differences in human capital requirements give rise to compensating differentials. Jobs that require more costly training will tend to pay higher wages. Sooo...

    jobs that require more costly training will tend to pay higher wages. Doctors attorneys (especially high costs for qualifying for these positions).

    Why do wages differ?

    Compensating differentials, differences in ability, barriers to entry, discrimination

    Wages differ because of differences in ability...

    abilities differ in the real world and these differences in ability can create wage differences in two ways: differences in ability to become qualified and differences in ability among those qualified.

    In labor markets for talented professionals, in which there is mass-distribution of their product and substantial agreement about rankings, small differences in ability can lead to disproportionate differences in pay.


    "economics of superstars" the stakes are high and small differences in perceived ability can lead to high differences in the expected outcome.


    The growth of increasingly global reach of corporations have contributed to the rapidly rising earning of top business executives, corporate attorneys, and asset managers.

    At the same time, technological changes have increase the earning of top musicians actors, comedies, writers, and sports figures as entertainment produce are distributed to ever larger global audiences.

    What are some examples of barriers to entry?

    Occupational licensing, union wage setting

    In a competitive labor market, a union- by raising the wage firms must pay-- this decreases total employment in the union sector.

    This, in turn, cause wages in the nonunion sector to drop. The combined result is a wage differential between union and nonunion wages.

    By bargaining for higher wage rates, union members capture some of the dollars that would otherwise become part of corporate profits.

    IN some cases, higher than normal profit due to monody or oligopoly markets.

    Unions can raise worker morale, reduce labor turnover, and possibly increase worker productivity. This could actually increase the demand for labor by unionizing firms.

    :) yay unions!

    Economists generally consider employee prejudice one of the least important sources of labor market discrimination.


    Because biased employers must pay higher wages to employ men, they will have higher average costs than unbiased employees.


    When prejudice protonates with employees, competitive labor markets work to...

    discourage discrimination and reduce or eliminate any wage gap between the favored and the disfavored group.

    When prejudice originates with the firms employees or its customers, market forces...

    may encourage, rather than discourage, discrimination and can lead to a permanent wage gap between the favored and disfavored groups.

    What is statistical discrimination?

    So called because individuals are excluded based on the statistical probability of behavior in their group, rather than their own personal traits-- is a case of discrimination without prejudice.

    The observe red differences in education, geographic location, and ability may be the result of

    job market discrimination.

    What is premarket discrimination?

    Unequal treatment in education and housing-- that occurs before an individual enters the labor market.

    The simple wage gap between two groups tends to overstate the impact of job-market discrimination on earnings, because it fails to account for differences in worker skill, experience, and job choice.

    However, controlling for these characteristics may understate the impact of discrimination, since these characteristics may in part result from discrimination.

    In the United States, about ______ percent of the labor force is covered by the minimum wage law.


    A higher minimum wage rate raises ______________ costs in industries that employ minimum wage labor.

    average and marginal costs

    The cost of the higher minimum wage is paid by both _________ and __________.

    firms and consumers

    Many who benefit from a higher minimum wage are economically better off than those who pay for it.

    This makes higher minimum wage a questionable policy for reducing inequality.

    See page 378

    The vicious cycle of discrimination

    The minimum wage, just like any ______, creates excess _______ in the market.

    Price floor, supply

    Part of the excess supply coms from the decrease in quantity of labor demanded.

    The other part comes from an increase in the quantity of labor supplied.

    A higher minimum wage benefits those unskilled workers who maintain their jobs and are paid more. IT also benefits skilled workers by raising their equilibrium wages.

    But that harms those unskilled workers who cannot find work and those who work in the uncovered sector, where wages decrease.

    What is the EITC Alternative?

    Earned Income Tax Credit, which begun in 1975 and expanded several times. The EITC supplements the incomes of low-income working people, especially those with children.

    Economist favor substantially _________ the EITC.


    The minim wage applies to any unskilled worker in the covered sector regardless of family income or economic need.

    The EITC, by contrast, is only available to low-income households and provides greater benefits to those supporting children.

    The costs of the minim wage are spread among households rather haphazardly with no regard to income.

    The funds for the EITC come from a progressive federal tax system, making it genuinely redistributive from higher income to lower income households.

    The minimum wages is likely to reduce employment, but the EITC...

    tends to increase employment.

    Surveys of economist show that majorities favor at least some increase in the minimum wage. There are several reasons for this:

    1. the employment effects of an increase of minim wage are viewed by some as modest.
    2. Another reason is political. Funds expanding the EITC, which would come out of general government revenues, are constrained by federal budget discipline.

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