Term
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Definition
| the inputs used to produce goods and services, namely land, labor, and capital |
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Definition
| the equipment and structures used to produce goods and services |
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Term
| Prices and quantities of the factors of production are determined by... |
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Definition
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| one key difference between markets for the factors of production and the markets for goods & services |
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Definition
| demand for a factor of production is derived demand |
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Definition
| derived from a firm’s decision to supply a good in another market |
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| 2 assumptions we make about the market |
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Definition
1: all markets are competitive
2: firms care only about maximizing profit |
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Term
| markets in which a competitive firm is a price taker |
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Definition
-in the market for the product it produces
-in the labor market |
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Term
| Each firm’s supply of output and demand for inputs are derived from |
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Definition
| the goal to maximize profits |
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Term
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Definition
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Term
| marginal product of labor (MPL) |
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Definition
| the increase in the amount of output from an additional unit of labor |
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Term
| equation for marginal product of labor |
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Definition
MPL=(∆Q/∆L)
∆Q = change in output
∆L = change in labor |
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Term
| value of the marginal product |
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Definition
| the marginal product of an input times the price of the output |
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Term
| equation for value of the marginal product of labor |
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Definition
VMPL = P x MPL
P=price (in this case, wage) |
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Term
| diminishing marginal product |
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Definition
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Term
| why the VMPL curve is often downward sloping |
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Definition
| diminishing marginal product |
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Definition
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Definition
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| this will increase VMPL and shift the labor demand curve upward |
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Definition
| Anything that increases P or MPL at each L |
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Term
| Anything that increases P or MPL at each L will... |
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Definition
| increase VMPL and shift the labor demand curve upward |
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Term
| Things that Shift the Labor Demand Curve |
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Definition
-Changes in the output price, P
-Technological change (affects MPL)
-The supply of other factors (affects MPL) |
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Term
| example of something other than technological change and change in output prices that can shift the labor demand curve |
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Definition
| If firm gets more equipment (capital), then workers will be more productive; MPL and VMPL rise, labor demand shifts upward. |
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Term
| If firm gets more equipment (capital),... |
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Definition
-workers will be more productive
- MPL and VMPL rise
-labor demand shifts upward. |
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Term
| the trade-off between work and leisure |
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Definition
| The more time you spend working, the less time you have for leisure. |
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Term
| the opportunity cost of leisure |
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Definition
| the wage you can get from working |
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Definition
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Term
| Things that Shift the Labor Supply Curve |
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Definition
-Changes in tastes or attitudes regarding the labor–leisure trade-off
-Opportunities for workers in other labor markets
-Immigration |
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Term
| Equilibrium in the Labor Market |
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Definition
| where supply intersects demand |
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Term
| The wage adjusts to ______ such that ______. |
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Definition
balance supply and demand for labor
the wage = VMPL |
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Term
| effect of retirement on the labor market |
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Definition
-shifts supply leftward
-W rises and L falls |
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Term
| effect of car buyers’ preferences shift toward imported autos on the labor market |
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Definition
-this is a fall in the demand for U.S. autos
-reduces P
-At each L, VMPL falls.
-Labor demand curve shifts down.
-W and L both fall. |
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Term
| the effect of technological progress boosting productivity in the auto manufacturing industry. |
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Definition
-At each L, MPL rises due to tech. progress.
-VMPL rises and labor demand curve shifts upward.
-W and L increase. |
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Term
| In competitive markets, the wages workers earn equal... |
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Definition
| the value of their marginal products. |
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Term
| factors that affect productivity and wages |
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Definition
-compensating differential
-ability
-effort
-chance |
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Term
| compensating differential |
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Definition
| a difference in wages that arises to offset the nonmonetary characteristics of different jobs, such as unpleasantness, difficulty, and safety |
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Term
| example of wages affected by chance |
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Definition
| new discoveries no one could have predicted make some occupations obsolete, increase demand in others |
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Term
| why the variations in pay caused by ability, effort, and chance are probably important |
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Definition
| because easily measurable characteristics (education, age, etc.) account for less than half of the variation in wages in our economy |
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Term
| the apparent effect of appearance on how much someone gets paid |
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Definition
-People deemed more attractive than average earn 5% more than people of average looks.
-Average-looking people earn 5–10% more than below-average looking people. |
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Term
| hypotheses on why appearance might affect how much someone gets paid |
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Definition
1. Good looks matter for productivity
-In jobs where appearance is important, attractive workers are more valuable to the firm, command higher pay.
2. Good looks indirectly related to ability
-People who make an effort to project an attractive appearance may be smarter or more competent in other ways.
3. Discrimination |
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Term
| examples of the superstar phenomenon |
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Definition
| Superstars like Johnny Depp, Beyoncé earn many times more than average in their fields, but the best plumbers or carpenters do not. |
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Term
| the 2 characteristics of superstars that arise in markets |
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Definition
-Every customer in the market wants to enjoy the good supplied by the best producer.
-The good is produced with a technology that allows the best producer to supply every customer at a low cost. |
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Term
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Definition
the accumulation of investments in people, such as education and on-the-job training
Human capital affects productivity, and thus labor demand and wages. |
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Term
| The earnings gap between college-educated and non-college-educated workers has done this in recent decades. |
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Definition
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Term
| 2 hypotheses pertaining to the increasing value of skills |
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Definition
1: international trade
2: skill-biased technological change |
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Term
| international trade hypothesis about increasing value of skills |
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Definition
| Rising exports of goods made with skilled labor, rising imports of goods made with unskilled labor. |
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Term
| Skill-biased technological change hypothesis about the increasing value of skills |
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Definition
| New technologies have increased demand for skilled workers, reduced demand for unskilled workers. |
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Term
| The Signaling Theory of Education |
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Definition
An alternative view of education:
-Firms use education level to sort between high-ability and low-ability workers.
-The difficulty of earning a college degree demonstrates to prospective employers that college graduates are highly capable.
-Yet, the education itself has no impact on productivity or skills.
-Policy implication: Increasing general educational attainment would not affect wages. |
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Term
| Reasons for Above-Equilibrium Wages |
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Definition
-minimum wage laws
-unions
-efficiency wages |
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Term
| how minimum wage laws can cause above equilibrium wages |
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Definition
| The minimum wage may exceed the eq’m wage of the least-skilled and experienced workers. |
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Term
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Definition
| a worker association that bargains with employers over wages and working conditions |
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Term
| what unions use their market power for |
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Definition
| Unions use their market power to obtain higher wages; most union workers earn 10–20% more than similar nonunion workers. |
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Term
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Definition
| above-equilibrium wages paid by firms to increase worker productivity |
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Term
| why firms may pay efficiency wage |
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Definition
| to reduce turnover, increase worker effort, or attract higher-quality job applicants |
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Term
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Definition
| the offering of different opportunities to similar individuals who differ only by race, ethnicity, gender, or other personal characteristics |
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Term
| Competitive markets provide this natural remedy for employer discrimination. |
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Definition
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Term
| how competitive markets fix the discrimination problem |
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Definition
| forcing discriminating firms out of the market |
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Term
| Discrimination by consumers may result in... |
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Definition
discriminatory wage differentials.
example: consumers preferring to be served by whites may give firms incentive to hire more whites and pay them higher wages |
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Term
| effect of discriminatory gov't policies |
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Definition
| Such policies prevent the market from correcting discriminatory wage differentials. |
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Term
| This tends to limit the impact of employer discrimination on wages. |
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Definition
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Term
| This may lead to persisting wage differentials. |
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Definition
| discrimination by consumers or governments |
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Term
| Differences in equilibrium wages result from differences in... |
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Definition
-worker characteristics
-job characteristics
-sometimes discrimination |
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Term
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Definition
| an absolute level of income set by the govt for each family size below which a family is deemed to be in poverty |
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Term
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Definition
| the percentage of the population whose family income falls below the poverty line |
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Term
| problems measuring inequality |
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Definition
1: in-kind transfers
2: the life cycle
3: transitory vs. permanent income
4: economic mobility |
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Term
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Definition
assistance that takes the form of g&s rather than cash
-Omitted from measures of inequality and poverty, biasing them upward |
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Term
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Definition
the regular pattern of income variation over a person’s life
-Life-cycle income variation causes inequality in income but not inequality in living standards. |
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Term
| Transitory vs. Permanent Income |
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Definition
| permanent income is a better measure of inequality |
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Term
| people can do this to smooth out transitory income fluctuations |
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Definition
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Term
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Definition
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Term
| Do poverty and inequality measures distinguish between the temporarily poor and the persistently poor? |
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Definition
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Term
| 3 philosophies of redistributing income |
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Definition
-Utilitarianism
-Liberalism
-Libertarianism |
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Term
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Definition
| a measure of happiness or satisfaction |
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Term
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Definition
| argues that govt should choose policies to maximize society’s total utility |
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Term
| why redistributing income from rich to poor increases utility of the poor more than it reduces utility of the rich |
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Definition
| diminishing marginal utility |
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Term
| why utilitarians don't advocate equalizing incomes |
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Definition
| because they think that would reduce total income of everyone due to incentive effects and efficiency losses |
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Term
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Definition
argues that govt should choose policies deemed to be just by an impartial observer behind a “veil of ignorance.”
-Calls for more redistribution than utilitarianism (though still not complete equalization of incomes).
-Income redistribution is a form of social insurance, a govt policy aimed at protecting people against the risk of adverse events.
-Liberals believe the government should aim to maximize the well-being of the worst-off person in society. |
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Term
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Definition
| govt should aim to maximize the well-being of society’s worst-off person. |
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Term
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Definition
| a govt policy aimed at protecting people against the risk of adverse events |
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Definition
argues that govt should punish crimes and enforce voluntary agreements but not redistribute income
-Libertarians believe the government should aim for equality of opportunity, not equality of income. |
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Term
| Instead of focusing on outcomes, libertarians focus on... |
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Definition
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Term
| a couple libertarian beliefs |
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Definition
-Govt should enforce individual rights, should try to equalize opportunities.
-If the income distribution is achieved fairly, govt should not interfere, even if unequal. |
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Term
| Poor families are more likely to experience... |
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Definition
-homelessness
-drug dependence
-health problems
-teen pregnancy
-illiteracy
-unemployment |
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Term
| most people believe the govt should provide a... |
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Definition
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Term
| some policies to reduce poverty |
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Definition
1: minimum-wage laws
2: welfare
3: negative income tax
4: in-kind transfers |
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Term
| arguments for minimum-wage laws |
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Definition
-Helps the poor without any cost to the govt.
-Little impact on employment if demand for unskilled labor is relatively inelastic. |
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Term
| arguments against minimum-wage laws |
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Definition
-In the long run, demand for unskilled labor is likely elastic, so minimum wage causes substantial unemployment among the unskilled.
-Those helped by minimum wage are more likely to be teens from middle-income families than low-income adult workers. |
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Term
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Definition
govt programs that supplement the incomes of the needy, such as...
-Temporary Assistance for Needy Families (TANF)
-Supplemental Security Income (SSI) |
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Term
| critics argument against welfare |
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Definition
| Critics argue that such programs create incentives to become or remain needy, argue that welfare contributed to the rise of the single-parent family. |
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Term
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Definition
| a tax system that collects revenue from high-income households and gives transfers to low-income households |
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Term
| similar to negative income tax |
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Definition
| The Earned Income Tax Credit (EITC) is similar to a negative income tax. |
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Term
| examples of in-kind transfers |
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Definition
-homeless shelters
-soup kitchens
-food stamps, govt vouchers redeemable for food at grocery stores
-Medicaid, govt-provided healthcare for the poor |
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Term
| alternative to in-kind transfers |
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Definition
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Term
| Assistance from anti-poverty programs vs. income |
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Definition
| Assistance from anti-poverty programs declines as income rises. |
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Term
| result of anti-poverty programs |
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Definition
-Poor families face high effective marginal tax rates (exceeding 100% in some cases!).
-Such policies therefore discourage the poor from escaping poverty on their own. |
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Term
| one possible solution to the problems caused by anti-poverty programs |
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Definition
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Term
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Definition
| a system requiring people to accept government jobs while collecting benefits. |
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Term
| Policies designed to improve equity often do this. |
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Definition
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Term
| the difference between the richest 20% and the poorest 20% in our society |
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Definition
| The richest 20% of families earn about ten times as much as the poorest 20%. |
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Term
| Problems in measuring inequality arise from... |
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Definition
- in-kind transfers
-the economic life cycle
-transitory income
-economic mobility |
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Term
| why the poor face high effective marginal tax rates, discouraging them from escaping poverty on their own |
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Definition
| because financial assistance falls as income rises |
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Term
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Definition
| a particular combination of the goods, e.g., 40 fish & 300 mangos. |
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Term
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Definition
| the limit on the consumption bundles that a consumer can afford |
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Term
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Definition
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Term
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Definition
| shows consumption bundles that give the consumer the same level of satisfaction |
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Term
| 4 properties of indifference curves |
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Definition
1. Indifference curves are downward-sloping.
2. Higher indifference curves are preferred to lower ones.
3. Indifference curves cannot cross.
4. Indifference curves are bowed inward. |
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Term
| example of an indifference curve |
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Definition
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Term
| marginal rate of substitution (MRS) |
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Definition
the rate at which a consumer is willing to trade one good for another
MRS=slope of indifference curve |
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Term
| the 2 extremes of indifference curves |
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Definition
-perfect substitutes
-perfect complements |
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Term
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Definition
two goods with straight-line indifference curves, constant MRS
in this case, the indifference curve is straight diagonal
example: nickels and dimes; Consumer is always willing to trade two nickels for one dime. |
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Term
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Definition
two goods with right-angle indifference curves
here, the indifference curve is L-shaped
example: left shoes and right shoes |
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Term
| indifference curves for close cubstitutes |
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Definition
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Term
| indifference curves for close complements |
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Definition
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Term
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Definition
| the point on the budget constraint that touches the highest possible indifference curve |
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Term
| equation for marginal rate of substitution (MRS) |
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Definition
| MRS(good x)=P(good x)/P(good y)
MRS(good y)=P(good y)/P(good x) |
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Term
| the effect of an increase in income |
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Definition
An increase in income shifts the budget constraint outward.
-An increase in income increases the quantity demanded of normal goods and reduces the quantity demanded of inferior goods. |
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Term
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Definition
| The income effect is the change in consumption that arises because a lower price makes the consumer better off. It is represented by a movement from a lower indifference curve to a higher one. |
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Term
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Definition
| The substitution effect is the change that arises because a price change encourages greater consumption of the good that has become relatively cheaper. It is represented by a movement along an indifference curve. |
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Term
| substitution effect for substitutes vs. complements |
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Definition
| bigger for substitutes than complements |
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Term
| demand curve for a person |
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Definition
| curve derived from the amount of a good a person is willing to buy at various prices |
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Term
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Definition
good for which an increase in price raises the quantity demanded
happens when income effect>substitution effect
doesn't follow the law of demand |
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Term
| budget constraint in the context of wages and labor supply |
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Definition
-Shows a person’s tradeoff between consumption and leisure.
-Depends on how much time she has to divide between leisure and working.
-The relative price of an hour of leisure is the amount of consumption she could buy with an hour’s wages. |
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Term
| indifference curve in the context of wages and labor supply |
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Definition
| Shows “bundles” of consumption and leisure that give her the same level of satisfaction. |
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Term
| the MRS between leisure and consumption at the optimum |
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Definition
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Term
| the effects of an increase in the wage on the optimal quantity of labor supplied |
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Definition
-substitution effect (SE)
-income effect (IE) |
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Term
| substitution effect in the context of wage and labor supply |
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Definition
A higher wage makes leisure more expensive relative to consumption.
The person chooses less leisure, i.e., increases quantity of labor supplied. |
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Term
| income effect in the context of wage and labor supply |
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Definition
With a higher wage, she can afford more of both “goods.”
She chooses more leisure, i.e., reduces quantity of labor supplied. |
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Term
| what labor supply does when substitution effect>income effect |
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Definition
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Term
| what labor supply does when income effect> substitution effect |
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Definition
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Term
| the MRS between current and future consumption at optimum |
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Definition
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Term
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Definition
| by choosing the point on the highest indifference curve, at which the marginal rate of substitution equals the relative price of the 2 goods |
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Term
| theory of consumer choice |
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Definition
| The theory of consumer choice can be applied in many situations. It can explain why demand curves can potentially slope upward, why higher wages could either increase or decrease labor supply, and why higher interest rates could either increase or decrease saving. |
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