# Econ: Chapter 8 (The Labor Market)

Labor supply
is the willingness and ability to work specific amounts of time at alternative wage rates in a given time period, ceteris paribus.
Opportunity cost

-opportunity cost of working is the amount of leisure time that must be given up in the process

is the most desired goods or services that are forgone in order to obtain something else.

-value of this free time represents this

1) Increasing opportunity cost of labor.
2) Decreasing marginal utility of income.
The upward slope of an individual labor supply curve reflects two things:
supply curve for labor
The slopes upward (like a normal supply curve), indicating that as the wage rate increases, the quantity supplied of labor will also increase.
Market supply of labor
is the total quantity of labor that workers are willing and able to supply at alternative wage rates in a given time period, ceteris paribus.

-It represents the labor supply of all workers

demand for labor
shows the quantities of labor employers are willing and able to hire at alternative wage rates in a given time period, ceteris paribus.

– refers to the number of workers hired or employed (or the number of workers in demand at that wage rate).

Derived Demand

-demand for labor is a derived demand

-The demand for labor and other factors of production results (is derived) from the demand for the final goods and services produced by these factors.
the wage rate
The quantity of labor demanded depends on its price
marginal physical product (MPP).
We measure a worker’s value to the firm by his or her____________?
Marginal physical product

-Marginal physical product equals (=) the change in total output divided (/) by the change in the quantity of labor.

-the change in total output associated with one additional unit of an input:

-is the extra or additional output from adding one more unit of a resource or worker.

-In most situations, it declines as more workers are hired

Marginal revenue product (MRP)

-Marginal revenue product equals (=) the change in total revenue divided (/) by the change in the quantity of labor.

is the change in total revenue associated with one additional unit of input.
– is the extra or additional revenue the firm earns by adding one more worker.
-sets an upper limit to the wage rate an employer will pay.
The Law of Diminishing Returns
The marginal physical product of labor eventually declines (or diminishes) as the quantity of labor employed increases.

-Marginal physical product declines because more people must share limited facilities.

The Law of Diminishing Returns
-The marginal physical product (MPP) of a variable factor declines as more of it is employed with a given quantity of other (fixed) inputs.
Diminishing Marginal Revenue Product (MRP)
As MPP diminishes, so does MRP.
MRP = MPP x p
If p is assumed to be constant, then MRP diminishes along with MPP.
Wage rate increases.

-Higher wage rates are needed to attract workers away from other labor markets, household activities, and leisure.

Ceteris paribus, for an upward-sloping labor supply curve, there is an increase in the quantity of labor supplied when the:
Increasing opportunity cost of labor.

-As labor earns more the additional utility of labor declines and so it takes a higher wage rate to induce workers to supply labor.

An upward-sloping supply curve of labor reflects the:
\$26

-The additional cost is \$26 since the total cost when the 7th worker was hired would increase from \$72 (12 x 6) to \$98 (14 x 7).

If a firm can hire six workers at \$12 per hour but in order to hire the 7th worker it must pay all its workers \$14 per hour then the additional cost of that worker is:
we demand what labor produces and not labor itself.

-Derived demand means that we demand what the factor produces and not the factor itself.

The demand for labor is a derived demand because:
Wage rate to the MRP of the worker.

-As each individual worker is hired the MRP declines but so long as it is greater than the wage rate it is profitable for the worker to be hired.

When making the hiring decision, firms should compare the:
Demand for labor increases and the supply of labor is constant.

-If the demand curve for labor increases or shifts to the right, this will drive the price and the quantity of labor up.

The equilibrium wage will definitely rise if:
An increase in the desire for leisure.

-An increase in the desire for leisure by labor would mean that a higher wage rate would need to be officered to induce labor to work. This would be characterized by the labor supply curve shifting upward which would produce a higher equilibrium price of labor.

This would cause the equilibrium price of labor to increase?
Desire for airplane travel

-Derived demand means that we demand what the factor produces and not the factor itself.

If the demand for labor is a derived demand, then the demand for airplane pilots depends on the:
Wage rate.

-The labor demand curve depicts the relationship between the wage rate (price) and the quantity of labor demanded.

The quantity demanded of labor depends on the:
An upward shift of the MRP curve.

-If the MRP curve shifts to the right or up then the MPP curve must have also shifted in the same fashion which indicates that labor is more productive.

An increase in the labor productivity is best illustrated by:
Some workers are better off and some are worse off.

-The workers who are employed will be better off because they will enjoy a higher wage then they might otherwise however not all those who are willing to work at that wage will find work.

If the government decides to raise the minimum wage, ceteris paribus:
An increase in the quantity of labor supplied and a decrease in the quantity of labor demanded.

-Since the minimum wage is above market equilibrium more labor will be supplied than demanded.

A minimum wage impacts the labor market by causing:
-Excluding some workers from the unionized market.
-Increasing the labor supply curve in the nonunion market.
-Attaining above-equilibrium wages for union members.
Unions influence a labor market by doing all of the following (3)
A derived demand.

-Since the demand for land lines is declining then the demand for the resources to make them also declines.

One HEADLINE article in the text, titled “Deutsche Telekom to Cut 19,000 Jobs,” reports that the company will reduce the number of workers in the fixed-line division since people are using cell phones and internet dialing as alternatives to land lines. This article describes a labor market where labor demand is:
Creates unemployment

-Since a minimum wage is set above the market equilibrium rate more people will want to work than firms will want to hire and that will increase unemployment.

One HEADLINE article in the text reports the history of the minimum wage. In economic terms, a minimum wage creates:
True,
-The demand for a secondary good is always depended on the demand for a final good.
True/False:
The concept of derived demand means that, for example, the demand for cotton pickers is determined from the demand for clothing made of cotton.
False
-The marginal revenue product determines the highest wage that a firm is willing to pay its workers.
The marginal revenue product sets a lower limit on the wage rate an employer will pay.
False
-At market equilibrium there is no shortage or surplus of labor.
True/False:
At the equilibrium wage, there is still some unemployment because the wage is so low.
True
-By limiting the available work force a union is able to maintain a wage above the equilibrium wage.
True/False:
In order to maintain an above-equilibrium wage for its members, a union must exclude some workers.
False
-It is very difficult to measure a CEO’s pay because of the elusiveness of the marginal revenue product.
True/False:
If it is difficult to measure the MRP of a CEO, this means that the CEO should not be paid very much because he or she brings little value to the company.
Leisure Time
The opportunity cost of working is the amount of __________ that must be given up.
marginal physical product
The downward slope of the labor demand curve reflects the changing productivity of workers as more are hired. __________ is a measure of worker productivity that establishes an upper limit on employer willingness to pay.
\$3
If an increase in labor by one unit leads to an increase in total revenue of \$3, then the marginal revenue product of the additional unit is:
no more; the same
Each (identical) worker is worth __________ than the marginal revenue product of the last worker hired, and all workers are paid _________ wage rate.
True
True/False:
The intersection of the market supply and demand curves establishes the equilibrium wage.
True
True/False:
If labor productivity (MPP) rises, wages can increase without sacrificing jobs.
employment level and wages do not change
In a given labor market if a minimum wage is established at the current equilibrium wage:
Opportunity Wage
is the highest wage an individual would earn in his or her best alternative job

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