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39 Cards in this Set

  • Front
  • Back

Derived Demand

This is the term for the demand for factors of production because it arises out of the demand for the firm's good or service.

Marginal Productivity Theory

The theory of marginal productivity states that the demand for a factor depends on its marginal revenue product. Firms will only demand a factor if it adds to revenue more than it adds to cost.

Assumptions of the Marginal Productivity Theory

1. Perfect Competition in the factor market:


•Units of Factors of Production are homogeneous (identical in terms of productivity)


•Freedom Entry: there is no restriction on the movement of labour.


•both employees and employers are wage takers.


2. Every Producer aims at maximizing profit.


3. State of technology remains constant: there is no change in the technique of production.


4. Other factors of production are held constant during the period being considered.

Limitations of Marginal Productivity Theory

1. It is difficult to determine the marginal physical product of service workers and administrative staff because they do not produce measurable output.



2. The freedom of entry and exit is not realistic as there could be labour immobility, other labour market imperfections like trade union activites.



3. It assumes that other factor of production are held constant whilst labour changes.



4. Wages may be set independently of the state of labour demand. Public sector workers may have their pay set directly by government.



5. Not all firms seek to maximize profit.

Factor Price Determination in a Competitive Market

Factor prices are determined by the interaction of the demand and supply of the factor.

Equilibrium Factor Price

This is the price which all firms in the perfect competition industry accept, as they are price takers.

Costs of Work

Work involves two major costs to the worker:


•When people work they sacrifice leisure.


•The work itself may bee unpleasant.

Reservation Wage

A person's reservation wage is the lowest wage rate for which he or she is willing to supply labor.

The Supply of an Individual Worker

As the wage rate rises above the reservation wage, the quantity of labor supplied increases resulting in an upward sloping curve. On the other hand as income rises, this enables consumers to buy more of all goods. This means people can afford to work less and have more leisure.

Note Briefly

Leisure is a normal good because as income increases, it's demand increase also.

The Substitution Effect

This is when wage rate rises above the reservation wage and workers substitute income for leisure because it now has a higher opportunity cost.

Income Effect

As income rises, this enables consumers to buy more of all goods. This means people can afford to work less and have more leisure.

Backward Bending Supply of Labor Curve

The labor supply curve upward at low wage rates but eventually bends backward at high wage rates.

The Supply by an Individual Worker

At low wage rates the substitution effect dominates the income effect, so a rise in the wage rate increases the quantity of labor supplied. At high wage rates the income effect dominates the substitution effect, so a rise in the wage rate decreases the quantity of labor supplied.

The Supply of Labor to an Individual Employer

Under perfect competition the supply of labor will be perfectly elastic. The firm is a wage taker and thus has no power to influence wages.

Market Supply of a Given Type of Labor

This will be upward sloping because the higher wage rate offered in a particular type of job, the more people will want to do that job.

Factors Affecting the Supply of Labor

Trade Unions Influence


•Net Migration


•Health

The Demand for Labor

The demand for a factor depends on its marginal revenue product. Therefore the demand curve for labor will also represent the marginal revenue product curve, hence D=MRP.

Marginal Cost of Labor

This is the extra cost of employing one more worker. Under perfect competition, the firm is too small to affect the market wage. Therefore it faces a horizontal supply curve. Thus the additional cost of employing one more person is equal to the wage: MCL=W

Marginal Revenue Product of labour (MRPL)

The marginal revenue that the firm gains from employing one more worker is called the marginal revenue product of labour. It is found by multiplying marginal physical product and the marginal revenue.



MRPL=MPPL×MR

Total Revenue

Total Physical Product × Price

Monopsony

A single employer of labor, for example, the post office is a monopsony employer of postal workers.

Oligopsony

When there are just few employers demanding a certain type of workers.

Monopolist

When a single employer union bargains on behalf of a certain type of labor

Olgopolists

When there is more than one employer union bargains on behalf of a type of labor.

Wage Determination in the Imperfect Market

Monopsonists and oligopsonists are wage setters. Such firms face an upward sloping supply curve of labor. If the firm wants to take on more labor it will have to pay a higher wage rate to attract workers away from other industries. But conversely, by employing less labour it can get away with paying a lower wage rate.

The supply of labor curve of Imperfect Competition

The supply is the average cost curve of labor since it shows the wage and the quantity of labor that will employed.

Wage Differentials

These are differences in wages arising between workers in terms of occupation, firms, industries and region.

Factors that Cause Wage Differentials

Differences in labor marginal productivity and revenue creation: workers whose efficiency and ability to grnerate revenue for a firm is highest should be rewarded with higher pay.



Different level of Education: the gap between poorly skilled and highly skilled workers gets wider every year. One reason is that the market demand for skilled labor grows more quickly than the demand for semu-skilled labor. This pushes up pay levels. Highly skilled workers are often on inelastic supply and rising demand forces up the 'going wage rate' in an industry.

Factors that Cause Wage Differentials Continued

Geographical Immobility: when labor is unwilling to move places because of leaving family and friends, then there will be wage differentials assuming the new location would have offered a higher pay.



Occupational Immobility: occurs due to educational requirements of the job. Compare a doctor to a high school teacher. Wage differential exist as a form of returns to the doctor for the opportunity cost for gone in the many years of Education he has done, while a teacher cannot choose to become a doctor due to barriers to entry into the doctor profession (the medical education requirements).

Factors that Cause Wage Differentials Continued

Relative demand and supply of labour: if the supply of labour is more than demand, then wages be low and vice versa.



Compensating (equalizing) differentials: a compensating differential, which is also called a equalizing difference, is defined as the additional amount of income that must be offered to motivate them to accept a given undesirable job, relative to other jobs that worker could perform. Therefore wage differentials exist because some additional income has to be paid due to the fact that some jobs are more unpleasant and risky that others.

Factors that Cause Wage Differentials Continued

Efficiency Wage: this is a situation where managers pay their employees more than the market equilibrium wage in order to increase their productivity, raise worker morale, discourage absenteeism, inventory shrinkage and increase efficiency. This increased labor productivity pays for the higher wages.



Trade Unions and their Collective Bargaining: unions may exercise their bargaining power to offset the power of an employer in a particular occupation and in doing so achieve a mark-up on wages compared to those on offer to non-union members.

Causes of Imperfections in the Labor Market (Demand Side)

•Difference in the marginal productivity of labor


•Discrimination in terms of race, gender and religion.


•Monopsonies


•Minimum Wage (government intervetion)


•New technology

Causes of Imperfections in the Labor Market (Supply Side)

•Trade Union


•Decrease in Population


•Geographical Immobility


•Occupational Immobility


•Immigration or brain drain

Trade Unions

These are organisations that seek to represent labor in their place of work. Through collective bargaining with employers, they act on the behalf of their members.

Strategies Used by Trade Unions

Picketing


Work to rule


Strike action


Closed shop

Role of the Government

Government set minimum wage to.refuce poverty and exploitation of workers by their employers. If lanour markets are competitive, a minimum wages could cause unemployment.

Minimum wage (competitive market)

Is practically price flooring from price controls.

Role of Employers' Association

°They may set wages above the market equilibrium e.g. efficiency wage.


°They give employers monopsony power in the market


°Providing himan resources and training services to member organizations.


°Engage in political lobbying designed to promote the passage of legislation favorable to employers.