AP Microeconomics Notes

Chapter 13: Resource Markets with Applications to Labor


  1. Important Concepts
    1. Marginal Revenue Product (MRP)
      1. A downward sloping demand curve that tells the firm hiring (ex. labor) what that resource contributes to the revenue of the firm at the margin of each additional unit
      2. Equation:
        1. MRPL = MPPL x MRX
        2. MRis PX in perfectly competitive product markets
        3. x is the product produced
    2. ​​Marginal Factor Cost (MFC)
      1. The cost of each additional unit of resource utilized by the firm
    3. Profit Maximization
      1. More of the resource should be added until MRP = MFC
      2. For more than one resource:
        1.  MRPL = MRPK   …    MPPN  = 1
               MFCL    MFCK          MFCN
        2. L – labor
        3. K – capital
        4. wage rate can substitute for MFC in a perfectly competitive market
    4. ​​Cost Minimization
      1. Criterion:
        1. MPPL = MPPK    …    MPPN 
              MFCL    MFCK           MFCN
        2. wage rate can substitute for MFC in a perfectly competitive market
    5. ​​Derived Demand
      1. The demand for a resource is derived from the demand for the product produced by the resource
    6. Imperfections/Interference with Resource Markets
      1. Price ceilings/floors
      2. Trade unions
      3. Monopsonies
        1. lower wage rates and hire fewer workers
        2. market with a single buyer of labor
    7. ​​The Bases for Wage Inequality
      1. Risk
      2. ​​Attractiveness of job
      3. Human capital investment
      4. Discrimination
      5. Immobility
    8. Factors that Cause Shifts in Supply/Demand for Resources
      1. Example:
        1. increase in wage rates
  2. ​​​Derived Demand
    1. Wage Elasticity of Demand
      1. Equation:
        1. % ∆ Quantity Demanded of Labor   
                             % ∆Wage Rate
    2. The Laws of Derived Demand
      1. The higher the price elasticity of demand for the product, the higher the wage elasticity of demand
      2. The higher the proportion of labor costs relative to total costs of production, the higher will be the wage elasticity of demand
      3. The greater the number of substitute resources available and the degree to which they are substitutable, the higher will be the wage elasticity of demand
  3. ​​Transfer Earnings and Rents
    1. Transfer Earnings
      1. The minimum price we must pay as consumers in order to assure a continuing supply of goods and services
    2. Rents
      1. Those payments that suppliers receive that are in excess of transfer earnings or are in excess of what those suppliers could earn elsewhere
      2. Cause a reallocation of resources away from more productive uses of resources
  4. ​​The Bases of Wage Differentials
    1. Bases
      1. Not all jobs/occupations are equally attractive
        1. we may need to pay people in certain professions more than would be ordinarily necessary since there may be an insufficient supply of people due to its unattractive nature
      2. Innate differences
        1. among the skills, aptitude, and experience of people
      3. Human capital
        1. investment in education, job training and experience
      4. Compensating wage differentials
        1. some workers are paid more than others because of special characteristics of the jobs (ex. risk)
      5. Psychic income
      6. Discrimination
        1. based on age, gender, sexual orientation, and race
      7. Immobility
        1. sociological ties to an area
        2. tenure/union security
        3. lack of knowledge of job opportunities
        4. financial inability to seek opportunities
      8. Labor market imperfections
        1. some unions are able to extract rents for their members
        2. monopsonists (single buyers of labor) pay lower wages than do more competitive labor market employers
      9. Government interference
        1. minimum wage laws
        2. licensing requirements
        3. government wage subsidies
  5. ​​Income Inequality
    1. Line of proportionality
      1. Coordinate points are equidistant from both axes
        1. population %
        2. total income %
      2. 20% of population has 20% of total income
    2. ​​​Lorenz Curve
      1. Used to measure income inequality
      2. The greater the difference between it and the line of proportionality, the greater the degree of income inequality
      3. ​​Points on it represent unequal shares of income per deciles of the population
      4. Applies to across a country or across several countries

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How to cite this note (with MLA)

Aboukhadijeh, Feross. "Chapter 13: Resource Markets with Applications to Labor" StudyNotes.org. StudyNotes, Inc., 13 Oct. 2013. Web. 29 Aug. 2014. <//www.apstudynotes.org/microeconomics/outlines/chapter-13-resource-markets-with/>.
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