What is Derived Demand?
Demand for a factor of production based on the demand for the final product it produces.
What is Marginal Revenue Product (MRP)?
The additional revenue generated by hiring one more worker.
What is Marginal Resource Cost (MRC)?
The cost of hiring one more worker.
What is a perfectly competitive labor market?
A market where many firms compete for workers, and workers are wage-takers.
What is a monopsony?
A market with only one buyer of labor, giving the firm wage-making power.
Define Factor Markets.
Markets where firms buy factors of production (labor, land, capital, entrepreneurship) from households.
Define Wage-Takers.
Workers or firms that cannot influence the market wage; they must accept the going rate.
Define Wage-Makers.
Firms that have the power to influence the market wage, typically due to being the sole or dominant employer.
What are Factors of Production?
Resources used to produce goods and services; typically labor, land, capital, and entrepreneurship.
Define Resource Productivity.
The amount of output produced per unit of a resource (e.g., labor).
Analyze a perfectly competitive labor market graph.
The market wage and quantity are determined by the intersection of market supply and demand for labor. Individual firms face a horizontal MRC curve at the market wage.
Analyze a monopsony labor market graph.
The MRC curve is above the labor supply curve. The monopsonist hires where MRP = MRC, but pays the wage on the labor supply curve at that quantity, resulting in lower wage and employment.
How does a minimum wage above equilibrium affect a perfectly competitive labor market graph?
It creates a surplus of labor (unemployment), shown by the quantity supplied exceeding the quantity demanded at the minimum wage.
What does the firm's demand curve for labor represent in perfect competition?
The firm's demand curve for labor is its MRP curve.
How does increased demand for cars affect autoworkers?
Increased demand for cars leads to increased derived demand for autoworkers.
How do firms use MRP and MRC?
Firms hire workers as long as MRP ≥ MRC to maximize profit.
How does increased worker productivity affect labor demand?
Increased worker productivity increases the demand for labor.
How does a minimum wage affect a perfectly competitive labor market?
A minimum wage above the equilibrium wage can create a surplus of labor (unemployment).
How does a monopsony affect wages and employment?
A monopsony results in lower wages and less employment compared to a perfectly competitive market.
How does increased automation (capital) affect labor demand?
Increased automation (cheaper capital) may decrease the demand for labor if capital is a substitute.
How does increased value of leisure affect labor supply?
If people value leisure more, they will supply less labor, shifting the labor supply curve leftward.
How do occupational licensing requirements affect labor supply?
Occupational licensing requirements reduce the number of qualified workers, decreasing labor supply.
How does the MRP=MRC rule apply in a perfectly competitive labor market?
Firms hire workers up to the point where MRP = MRC = Wage, as the wage is constant.
How do firms minimize costs when hiring labor and capital?
Firms hire workers and buy capital until the marginal product per dollar spent is equal for all resources.
