1 Chapter 11 Labor Markets • Key Concepts • Summary • Practice Quiz • Internet Exercises ©2002 South-Western College Publishing
Dec 24, 2015
1
Chapter 11 Labor Markets
• Key Concepts• Summary• Practice Quiz• Internet Exercises
©2002 South-Western College Publishing
2
In a perfectly competitive market, what determines the
level of wages?The intersection of the demand for labor and the supply of labor
3
D
S
Market Supply and DemandW
ages
Quantity of Labor
4
What does the demand curve for labor show?The different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus
5
40
10
1 2 4
Production Function
30
20
5
50
63
60
To
tal O
utp
ut
Quantity of Labor
Total Output
6
What is marginal revenue product?
The increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource
7
8
2
1 2 4
Marginal Product Curve
6
4
5
10
63
12
Mar
gin
al P
rod
uct
Quantity of Labor
Law of Diminishing
Returns
8
What is the demand curve for labor equal to?It is equal to the marginal revenue product of labor
9
$280
$210
$140
$70
1 2 3 4
Demand Curve for Labor
MRP = demand
$350
5Q
10
Decrease in Wage Rate
Increase in Quantity of labor an employer will hire
11
How do we measure MRP in perfect competition?
A perfectly competitive firm’s marginal revenue product is equal to the marginal product of its labor times the price of its product
12
What isderived demand?
The demand for labor and other factors of production that depends on the consumer demand for final goods and services the factors produce
13
What does the supply curve for labor show?
The different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus
14
$280
$210
$140
$70
10 20 30 40
Supply Curve of Labor$350
50
S
Quantity of Labor
Wag
e R
ate
per
day
15
Increase in Wage Rate
Increase in Quantity of labor willing to work
16
What is human capital?The accumulation of education, training, experience, and health that enables a worker to enter an occupation and be productive
17
$280
$210
$140
$70
10 20 30 40
Competitive Labor Market$350
50
S
D
E
Quantity of Labor
Wag
e R
ate
per
day
18
$280
$210
$140
$70
1 2 3 4
Competitive Labor Market$350
5
S
D
E
Quantity of Labor
Wag
e R
ate
per
day
19
Does the perfectly competitive model apply
to workers in unions?
No
20
What are examples of unions?
• Teamsters• United Auto Workers• National Education Assoc.• American Federation of Government Employees
21
How do unions attempt to raise wages?
• Increase demand for labor• Decrease supply for labor• Power
22
What is featherbedding?
Unions force firms to hire more workers than are required or to impose work rules that reduce output per worker
23
What else can unions do to increase the demand for labor?
Decrease competition from other nations
24
$280
$210
$140
$70
10 20 30 40
Unions cause an increase in the demand for labor$350
50
S
D2
E1
D1
E2
Quantity of Labor
Wag
e R
ate
per
day
25
Union featherbeds
Increase in the demand for labor
Increase in wages and employment
26
$350
$280
$210
$140
10 20 30 40
Unions cause a decrease in the supply for labor$420
50
S2
D1
E1
E2
Quantity of Labor
Wag
e R
ate
per
day
S1
27
How else can unions raise wages?
Collective bargaining
28
What iscollective bargaining?
The process of negotiations between the union and management over wages and working conditions
29
$280
$210
$140
$70
10 20 30 40
Collective Bargaining causes a Wage Rate increase$350
50
D
UnemploymentW
age
Rat
e p
er d
ayS
Quantity of Labor
30
What factors can cause a change in the
demand for labor?• Unions• Prices of substitute goods• Demand for final products• Marginal product of labor
31
What factors can cause a change in the
supply for labor?• Unions• Demographic trends• Expectations of future income• Changes in immigrations laws• Education and training
32
What has happened to union membership
since WWII?Union power has declined
33
How does union membership in the
U.S. compare to other countries?
Union membership is far below that of other industrialized countries
34
What is a monopsony?
A labor market in which a single firm hires labor
35
15%24%
29%32% 32%
40%
U.S. Japan Canada U.K. Germany Italy SwedenDenmark
87%
75%
36
What is marginal factor cost (MFC)?The additional total cost resulting from a one-unit increase in the quantity of labor
37
What conclusion can be drawn from a
monopsonistic market?Because the monopsonist can hire additional workers only by raising the wage rate for all workers, the MFC > W
38
$15
$12
$9
$6
1 2 3 4 5
Do
llars
per
ho
ur
S
Quantity of Labor
MFC$18
A Monopsonist determines its Wage Rate
E
F
D (MRP)
39
How are wages compared between the
two markets?A monopsony hires fewer workers and pays a lower wage than a firm in a competitive labor market
40
Key Concepts
41
Key Concepts• In a perfectly competitive market, what determine
s the level of wages?• What is marginal revenue product?• What is the demand curve for labor equal to?• How do we measure mrp in perfect competition?• What does the supply curve for labor show?
42
Key Concepts cont.• How do unions attempt to raise wages?• What is featherbedding?• What is collective bargaining?• What factors can cause a change in the dema
nd for labor?• What factors can cause a change in the suppl
y for labor?
43
Key Concepts cont.• What has happened to union membership since
WWII?• How does union membership in the u.S. Compa
re to other countries?• What is a monopsony?• What is marginal factor cost (mfc)?• How are wages compared between the two
markets?
44
Summary
45
Marginal revenue product (MRP) is determined by a worker’s contribution to a firm’s total revenue. Algebraically, the MRP equals the price of the product times the worker’s marginal product (MP).
46
The demand curve for labor is the curve showing the quantities of labor a firm is willing to hire at different prices of labor. The marginal revenue product (MRP) of labor curve is the firm’s demand curve for labor. Summing individual demand for labor curves gives the market demand curve for labor.
47
$280
$210
$140
$70
1 2 3 4
Demand Curve for Labor
MRP = demand
$350
5Q
48
Derived demand means that a firm demands labor because labor is productive. Changes in consumer demand for a product cause changes in demand for labor and for other resources used to make the product.
49
The supply curve of labor is the curve showing the quantities of workers willing to work at different prices of labor. The market supply curve of labor is derived by adding the individual supply curves of labor.
50
$280
$210
$140
$70
10 20 30 40
Supply Curve of Labor$350
50
S
Quantity of Labor
Wag
e R
ate
per
day
51
Human capital is the accumulated people make in education, training, experience, and health in order to make themselves more productive. One explanation for earnings differences is differences in human capital.
52
Collective bargaining is the process through which a union and management negotiate a labor contract.
53
Monopsony is a labor market in which a single firm hires labor. Because the monopsonist faces the industry supply curve of labor and each worker is paid the same wage, changes in total wage cost exceed the wage rate necessary to hire each additional worker. As a result, the marginal factor cost (MFC) of labor curve lies above the supply curve of labor.
54
The monopsonist’s wage rate and quantity of labor are determined where the MFC equals MRP . Since at this point the worker’s MRP is greater than the wage paid, the monopsonist exploits the workers.
55
$15
$12
$9
$6
1 2 3 4 5
Do
llars
per
ho
ur
S
Quantity of Labor
MFC$18
A Monopsonist determines its Wage Rate
E
F
D (MRP)
56
Chapter 11 Quiz
©2002 South-Western College Publishing
57
1. Marginal revenue product measures the increase in a. output resulting from one more unit
of labor.b. TR resulting from one ore unit of
output.c. revenue per unit from one more unit
of output.d. total revenue resulting from one more
unit of labor.D. MRP is the increase in total revenue to
a firm resulting from hiring an additional unit of labor or other variable resource.
58
2. Troll Corporation sells dolls for $10.00 each in a market that is perfectly competitive. Increasing the number of workers from 100 to 101 would cause output to rise from 500 to 510 dolls per day. Troll should hire the 101st worker only when the wage is a. $100 or less per day.b. more than $100 per day.c. $5.10 or less per day.d. none of the above.
A. Under perfect competition, the firm hires workers until the MRP equals the wage rate. MRP equals $10 x MP (510 - 500) = $100.
59
3. Derived demand for labor depends on the a. cost of factors of production used
in the product.b. market supply curve of labor.c. consumer demand for the final
goods produced by labor.d. firm’s total revenue less economic
profit.
C. If consumers do not purchase goods, there is no MRP and no workers are hired.
60
4. If demand for a product falls, the demand curve for labor used to produce the product will shift a. leftward.b. rightward.c. upward.d. downward.
A. If consumers demand for a product decreases and supply remains the constant, the price of the product falls and the MRP (P x MP) decreases.
61
5. The owner of a restaurant will hire waiters if the a. additional labor’s pay is close to
the minimum wage .b. marginal product is at the
maximum.c. additional work of the employees
adds more to total revenue than to costs.
d. waiters do not belong to a union.
C. If MRP exceeds the wage rate paid waiters, it is profitable for the restaurant to hire more waiters.
62
6. In a perfectly competitive market, the demand curve for labor a. slopes upward.b. slopes downward because of
diminishing marginal productivity.
c. is perfectly elastic at the equilibrium wage rate.
d. all of the above.
B. As output expands in the short run, a fixed factor results in diminishing returns causing MP to decrease. Correspondingly, MRP decreases.
63
7. A union can influence the equilibrium wage rate by a. featherbedding.b. requiring longer
apprenticeships.c. favoring trade restrictions on
foreign products.d. all of the above.
D. Featherbedding and trade protectionism increase the demand for labor. Requiring longer apprenticeship decreases the demand for labor.
64
8. In which of the following market structures is the firm not a price taker in the factor market?a. Oligopoly.b. Monopsony.c. Monopoly.d. Perfect competition.
B. Monopsony is a labor market in which a single firm hires labor. For example, the “company town” where everyone works for the same employer.
65
9. The extra cost of obtaining each additional unit of a factor of production is called the marginal a. physical product.b. revenue product.c. factor cost.d. implicit cost.
C. The assumption of MFC is that the firm must pay a higher wage to each additional worker as well as to all previously hired workers.
66
10. A monopsonist’s marginal factor cost curve lies above its supply curve because the firm must a. increase the price of its product to sell
more.b. lower the price of its product to sell
more.c. increase the wage rate to hire more
labor.d. lower the wage rate to hire more labor.
C. The monopsonist can hire an additional worker only by raising the wage rate for all workers. Therefore, the MFC exceeds the wage rate along the labor supply curve.
67
11. In order to maximize profits, a monopsonist will hire the quantity of labor to the point where the marginal factor cost is equal to a. marginal physical product.b. marginal revenue product.c. total revenue product.d. any of the above.
B. The MRP curve is the contribution of each worker to total revenue and MFC the addition to total cost. When MRP > MFC, the firm hires more workers.
68
$8
$6
$4
$2
1 2 3 4 5
Do
llars
per
ho
ur
Quantity of Labor
$10Marginal Factor Cost (MFC) and Marginal Revenue Product (MRP)
Shortage
Surplus
D (MRP)
MFC
69
12. BigBiz, a local monopolist, currently hires 50 workers and pays them $6 per hour. To attract an additional worker to its labor force, BigBiz would have to raise the wage rate to $6.25 per hour. What is BigBiz’s marginal factor cost?a. $6.25 per hour.b. $12.50 per hour. c. $18.75 per hour.d. $20.00 per hour.
C. Its total cost would increase by $18.75 to hire that additional worker (25 x 50 + 6.25).
70
13. Suppose a firm can hire 100 workers at $8.00 per hour, but must pay $8.05 per hour to hire 101 workers. Marginal factor cost (MFC) for the 101st worker is approximately equal to a. $8.00.b. $8.05.c. $13.05.d. $13.00.
C. The firm’s total cost would increase $13.05 to hire the 101st worker (.05 x 100 + 8.05).
71
14. A monopsonist in equilibrium has a marginal revenue product of $10 per worker hour. Its equilibrium wage rate must be a. less than $10.b. equal to $10.c. greater than $10.d. equal to $5.
A. Because of its monopoly in the labor market, a monopsony hires fewer workers and pays a lower wage than a firm in a competitive labor market.
72
$15
$12
$9
$6
1 2 3 4 5
Do
llars
per
ho
ur
S
Quantity of Labor
MFC$18
A Monopsonist determines its Wage Rate
E
F
D (MRP)
73
END