Micro Econ Chapter 10 Lecture Notes PDF

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Chapter 10:● The Labor Market is where labor supply and labor demand interact with each other ● Derived Demand: a demand for a good that emerges indirectly from demand for another good ● Factor demand results from the demand of the output being produced ● The Value of the Marginal Product: the incre...

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Chapter 10: ● The Labor Market is where labor supply and labor demand interact with each other ● Derived Demand: a demand for a good that emerges indirectly from demand for another good ● Factor demand results from the demand of the output being produced ● The Value of the Marginal Product: the increase in output from employing one more unit of the factor ● The Value of the Marginal Product of Labor (VMPL): increase in revenue created by hiring an additional worker Change ∈ quantity Marginal Product of Labor = Change ∈ labor Value of the Marginal Product of Labor = Product Price x Marginal Product of Labor ● Rational Rule for Employers: hire more workers, as long as the marginal benefit of a worker > marginal cost of a worker (VMPL > wage rate) ● The profit-maximizing level of employment is such that VMPL = wage rate ● Because of diminishing returns, each additional worker contributes less to total output than the previous worker ● Main causes that shift the factor demand curve ○ Changes in the price of output or demand for output ■ If the price of wheat changes, wheat workers’ VMPL changes, and the firm will change its hiring decision ○ Changes in the supply of other factors ■ If the construction firm buys more equipment and each worker now produces more, the VMPL changes, and the firm’s hiring decision changes ○ Changes in technology or productivity ■ Tractor technology reduced the demand for horses and ATMs reduced the demand for bank tellers ● Equilibrium VMPL: the additional value produced by the last unit of the factor employed in the labor market as a whole ● Marginal Productivity Theory (of income distribution): in a perfectly competitive economy, every factor of production is paid its equilibrium value of the marginal product ● Compensating Differential: a difference in wages that offsets differences in working conditions ○ Fewer people are willing to work in dangerous or unpleasant jobs, so the supply of labor is reduced and wage is increased ● A person with a higher quantity of human capital (from education and training) typically generates a higher VMPL by producing a product that commands a higher price ● Efficiency Wage: an above-equilibrium wage paid by firms as an incentive for better performance and to increase worker productivity

● The individual labor supply curve shows how the quantity of labor supplied by an individual depends on that individual’s wage rate ● The Rational Rule for Workers: work one more hour as long as the wage is at least as large as the marginal benefit of another hour of leisure ● The Substitution Effect: a higher wage raises the opportunity cost of leisure ○ An incentive to work more ● The Income Effect: a higher wage rate makes you richer ○ An incentive to work less and buy yourself more leisure...