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Prinecomi lectureppt ch14
- 1. The Demand and Supplyof Resources14
- 2. Previously… • Oligopoly – Amarket structure in which there are a small number of firms – Firms interact strategically – Can be competitive (results closer to monopolistic competition) – Can be collusive (results closer to monopoly) • Antitrust policies – Restrain excessive market power – Give incentives to compete instead of collude – Each industry examined on a case-by-case basis
- 3. Big Questions 1. Whatare the factors of production? 2. Where does the demand for labor come from? 3. Where does the supply of labor come from? 4. What are the determinants of demand and supply in the labor market? 5. What role do land and capital play in production?
- 4. The Factors ofProduction • Factors of production – Inputs used in the production of goods and services – Land—physical location – Labor—employees – Capital—equipment, buildings, machinery • Derived demand – Demand for inputs used in the production process – Demand for inputs is derived from the demand for the output those inputs produce. Demand for labor will increase if the demand for the good the labor produces increases.
- 5. Demand for Labor •You may be used to thinking of yourself as a demander (consumer) and firms as suppliers (producers). • However, in the labor market – Individuals are suppliers of labors – Firms are demanders (purchasers) of labor – The price of labor is the wage rate – A supply-demand analysis is still useful for determining the amount of labor traded and the price of labor
- 6. Demand for Labor •Marginal product of labor (MPL) – The change in output associated with hiring one additional worker – MPL will eventually be diminishing. We’ll eventually get to a point where the next worker adds less output than the previous worker.
- 7. Demand for Labor •Value of the Marginal Product (VMP) – MPL multiplied by the price of the output it produces – Sometimes called marginal revenue product – Think of this as the total revenue generated by the worker
- 8. Deciding How ManyLaborers to Hire
- 9. Value of theMarginal Product
- 10. Changes in theDemand for Labor • Change in the demand for the product that the firm produces will change the demand for labor • Example: 1. Your business produces sandwiches 2. The demand for sandwiches increases, pushing the sandwich prices higher and making sandwich production more profitable 3. More workers are needed to produce these sandwiches 4. More workers will have VMP > cost of labor 5. Demand for labor increases
- 11. Changes in theDemand for Labor • Changes in technology and Pproductivity – New low-cost technology can substitute for workers – More technology will decrease the demand for labor
- 12. Changes in theDemand for Labor • Technology replacing labor: good or bad? • Short run – May seem bad if workers lose jobs • Long run – Society benefits! Production is cheaper and safer. Workers will hopefully find other jobs, allowing production in other sectors to increase. – Our society would be harmed in the long run if we tried to save jobs being replaced by technology
- 13. The Labor DemandCurve
- 14. The Supply ofLabor • The labor supply curve shows the relationship between the price of labor (wage rate) and the quantity supplied of labor • Labor-leisure trade-off – The opportunity cost of working is giving up leisure – The opportunity cost of leisure is giving up earnings from work – However, income is often required to enjoy leisure
- 15. Labor-Leisure Trade-off • Ifwages rise, what happens? • People may be willing to work more hours – The opportunity cost of leisure is now higher – This is called the substitution effect—when wages increase, you substitute in labor and substitute out leisure • People may be willing to work less hours – Suppose you just need $1,000 per week to be satisfied. With a pay raise, you could earn this amount working fewer hours, and enjoy more leisure hours – This is called the income effect. You use your extra income to purchase more leisure (a normal good).
- 16. Labor-Leisure Trade-off • Whatis the slope of the labor supply curve? Do people work more or less when wages increase? • At lower wages – The substitution effect usually dominates. Higher wages lead to more working hours as leisure becomes more costly. • At high wage levels – The income effect may dominate. This can actually lead to a backward-bending labor supply curve. May not happen with most people and most wages.
- 17. The Labor SupplyCurve
- 18. Changes in theSupply of Labor • Other employment opportunities – If Job A increases wages, the supply of labor for Job B will shift left – Think of workers as having substitute options for jobs. There is an inverse relationship between the wage in Job A and the supply of labor in Job B. • Changing composition of workforce – Increase in females in workforce shifted the supply of labor to the right. More laborers willing to work. • Migration and immigration – People may move to or move from an area, increasing or decreasing the supply of labor, respectively
- 19. Economics in ADay without a Mexican • Immigration and labor markets • What would happen if the supply of labor decreased because immigrants disappeared?
- 20. Labor Market Equilibrium •Equilibrium in the labor market – The quantity of labor demanded is equal to the quantity of labor supplied; occurs at equilibrium wage – Quantity supplied of labor illustrates how many workers are willing to work at various wages – Quantity demanded of labor illustrates how many workers firm is willing to hire at various wages
- 21. Labor Market Equilibrium •Surplus of labor – Qs > Qd. This is unemployment! • Shortage of labor – Qd > Qs. The number of workers firms want to hire is greater than the number willing to work
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- 25. Outsourcing • Outsourcing – Theshifting of jobs from within the firm to an outside company. – Why? An outside company may have cheaper labor. This is especially true for overseas companies. – May be done locally or globally • Examples – GM opens a plant in Tennessee where wages are lower than other GM plants – Textbook has labor intensive processes done overseas where labor is cheaper
- 26. Outsourcing • General implications –Pool of workers expands (rightward supply shift), which lowers wages – If wages decline, domestic workers will choose to work less, causing a decrease in employment – Firms may also relocate (even within a country) to a place where labor is cheaper.
- 27. Outsourcing Globally • Globalresults of outsourcing – Ability to outsource increases pool of workers – Decreases wages for domestic workers – Unemployment in the industry rises • Outsourcing winners – Workers in country with increased labor demand – Firm that is hiring cheaper labor • Outsourcing losers – Workers who may have lost their job or experienced wage reductions
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- 29. Outsourcing in theLong Run • In the short run, it appears that outsourcing can be painful for some individuals • Outsourcing in the long run – Allows specialization – Increases efficiency – Lowers costs (and prices) – Helps firms and consumers • Are workers helped? – Outsourcing relocates jobs to efficient workers – Increases labor demand in the long run
- 30. Economics in Outsourced •This great clip shows what can happen when jobs can be outsourced to use cheaper labor • Some jobs may be lost, but prices will fall due to lower costs
- 31. Monopsony • Monopsony – Amarket situation in which there is only one buyer – Contrast with monopoly, where there is one seller • Monopsony results – Monopsonist has market power – Pushes prices down – Monopsonist labor buyer will push wages low – (If people only have one choice of employment, that employer will pay low wages)
- 32. Monopsony and theWNBA • NBA – Teams are all owned separately – Many competing purchasers of NBA labor – Higher wages – Average salary of NBA player in 2011 was $5.15 million • WNBA – At first, teams are all owned by the NBA – One purchaser of WNBA labor (monopsony) – Lower wages – Salary cap for WNBA TEAM in 2013 was $869,000
- 33. The Market forLand • Supply of land is fixed, so supply is perfectly inelastic (vertical) – Increases in demand result in price increases, but not quantity increases
- 34. The Market forLand • Economic rent – The difference between what a factor of production earns and its next-best alternative – Ability of investors to beat their opportunity costs • Economic rent example – Apartment near campus has higher price than apartment 10 miles from campus – Higher demand for living near campus
- 35. Supply and Demandfor Land
- 36. The Market forCapital • Demand for capital – Determined by the value of marginal product of capital – Also a derived demand— firm demands as much capital as is required to make the product of the goods it sells – Downward sloping— marginal product declines with increased amounts of capital employed
- 37. When to UseMore Labor, Land, or Capital • A firm can decide the best of use of its resources by comparing the VMP per dollar spent on each of the three inputs – If the firm is going to spend more on inputs, it wants to spend money on the most productive input – The firm wants to maximize revenue per dollar spent • Connection to firm behavior? – Relatively less productive inputs will be used less or sold in exchange for relatively more productive inputs – Countries with cheaper (or more productive) labor will use more labor – This is true for land and capital as well
- 38. Land, Labor, andCapital Example
- 39. Summary • The demandfor each factor of production is a derived demand that stems from a firm’s desire to supply a good in another market. • Labor demand is contingent upon the value of the marginal product that is produced, and the value of the marginal product is equivalent to the firm’s labor demand curve. • The supply of labor depends on the wage rate that is offered, and also on each person’s goals and other opportunities. At high-wage levels the income effect may become larger than the substitution effect and cause the supply curve to bend backward.
- 40. Summary • Labor marketsreconcile the forces of demand and supply into a wage signal that conveys information to both sides of the market • At wages above the equilibrium, the supply of workers exceeds the demand for labor. This results in a surplus of available workers. • At wages below the equilibrium, the demand for labor exceeds the available supply of workers and a shortage develops
- 41. Summary • Outsourcing – Thereis no definitive result for outsourcing of labor in the short run. – In the long run, outsourcing moves jobs to workers who are more productive, and thus increases the overall productivity of workers everywhere. • A monopsonist in the labor market is able to leverage market power by paying workers less. • Economic rent is the difference between what a factor of production earns and what it could earn in the next-best alternative.
- 42. Practice What YouKnow The demand for labor will increase if A. The wage rate decreases B. If there is a decrease in the number of firms hiring C. The demand for the product produced by the labor increases D. If labor becomes less productive
- 43. Practice What YouKnow A firm will keep hiring workers as long as the wages paid to workers is less than the A. Wages the workers could earn elsewhere B. Price of the goods being produced C. Marginal Product of Labor (MPL) D. Value of Marginal Product (VMP)
- 44. Practice What YouKnow What could lead to a backward-bending labor supply curve? A. The income effect dominating the substitution effect at high wages B. The substitution effect dominating the income effect at high wages C. Laborers always working more hours when wages are higher D. Firms choosing to hire less workers when market wages are higher
- 45. Practice What YouKnow What is true about outsourcing? A. Outsourcing generally helps the firm by raising the price of the goods sold B. Outsourcing may decrease wages for domestic workers C. Outsourcing will decrease the overall supply of workers that a firm can employ D. There are no significant economic trade-offs with regards to outsourcing
- 46. Practice What YouKnow What is true about monopsony? A. Unlike a monopolist, a monopsonist has no market power B. Monopsony exists when there is one seller of a good, service, or resource C. If a market becomes monopsonized, there will be an increase in the demand for labor. D. A monopsonist has the incentive to use market power to lower the price of a resource
Editor's Notes
- #5 Lecture notes: Notes about derived demand: Imagine if you were the owner of a pizza restaurant. How do you consider your demand for labor? How do you consider how much labor to employ? You do NOT say: “Workers are good. I’ll hire workers because I think the benefit is greater than the cost.” The firm doesn’t “consume” labor like we consume food or clothing. The firm DOES say: “How popular is my pizza? What is the demand for my pizza? How many workers will I need to produce the amount of pizza demanded?” That is derived demand. The amount of workers you demand is derived from the demand for the product they create.
- #6 Lecture notes: Thus, you may have to remind students that the labor market may seem “backward” at first since they are the suppliers of labor and the firms are the demanders of labor. Firms buy labor that you supply to them. The price of labor is the wage rate paid in exchange for the service of labor.
- #7 Lecture notes: The intuition of diminishing MPL was discussed previously in Chapter 8. As more of a variable input (labor) is added to a fixed input (capital), the marginal product of the variable input will eventually start to diminish. Think about “too many cooks in the kitchen.” VMP is also called MRP (marginal revenue product). Labor demanded by the firm depends on the value of the marginal product that is produced. If a worker doesn’t generate enough revenue, the firm won’t hire that worker. Example: If you produce 12 sandwiches that are each sold at $4, your VMP is $48. By hiring you, the firm increased its revenue by $48. If the firm pays you total wages less than $48, hiring you will increase the overall profitability of the firm. Picture: A computer station probably has very rapidly diminishing MPL. A second person standing there won’t create much additional output if there is just one computer.
- #8 Lecture notes: The intuition of diminishing MPL was discussed previously in Chapter 8. As more of a variable input (labor) is added to a fixed input (capital), the marginal product of the variable input will eventually start to diminish. Think about “too many cooks in the kitchen.” VMP is also called MRP (marginal revenue product). Labor demanded by the firm depends on the value of the marginal product that is produced. If a worker doesn’t generate enough revenue, the firm won’t hire that worker. Example: If you produce 12 sandwiches that are each sold at $4, your VMP is $48. By hiring you, the firm increased its revenue by $48. If the firm pays you total wages less than $48, hiring you will increase the overall profitability of the firm.
- #9 Lecture notes; In this situation, the price of the good being sold is P = $10. Table: Column (1) lists the number of laborers. Column (2) reports the daily numbers of meals that can be produced with differing numbers of workers. Column (3) is the marginal product of labor, or the change in output associated with hiring one additional worker. (For instance, the marginal product of the fourth worker is 20 meals. By adding him, we increase our output by 20). Note that the values in column (3) decline as additional workers are hired due to diminishing marginal product. VMP (column 4) notes: Found by multiplying the price of $10 per meal by the marginal product of each worker Places an upper limit on the amount the company is willing to pay each worker. The hiring decision: Hire a worker if their VMP >= wage rate.
- #10 Image: Animated Figure 14.1 Lecture notes: The figure plots the value of the marginal product (VMP) from the previous table. The curve looks similar to a demand curve! The VMP is the firm’s willingness to pay for each laborer; in other words, it is the firm’s labor demand curve. The VMP curve slopes downward due to diminishing marginal product. As long as the value of the marginal product is higher than the market wage, shown as $100 a day, the firm will hire more workers. For example, when the firm hires the first cook, the VMP is $500. This amount easily exceeds the market wage of hiring an extra worker and creates a marginal profit of $400. As the value of the marginal product declines, there will be a point at which hiring additional workers will cause profits to fall. As a result, whenever the value of the marginal product is less than the market wage, the firm will not hire additional workers. Therefore, labor demand is contingent upon the value of the marginal product that is produced, and the value of the marginal product is equivalent to the firm’s labor demand curve.
- #11 Lecture notes: Two primary factors shift labor demand: a change in demand for the product that the firm produces, and a change in the cost of producing that product. Why would the demand for your product increase? A few possible reasons: The price of a competitor’s product increases The price of a complement good to your product decreases People just like your good more When the demand for your product increases, you can increase profits by selling more of that good at higher prices. You’ll need more labor to handle the increase in output you want to produce! You’ll hire more labor (no matter what the labor price is), and this is an increase in your firm’s demand for labor. This list is numbered to show an “order of events” in which the derived demand for labor depends on the demand for the product the labor produces!
- #12 Lecture notes: Changes in cost can be positive—for example, a new technology; or negative—for example, an increase in the cost of a needed raw material. Picture: The logging industry is an example of how capital and technology have greatly replaced the need for labor inputs.
- #13 Lecture notes: Changes in cost can be positive—for example, a new technology; or negative—for example, an increase in the cost of a needed raw material. Economics in real life over time: This is how economic development works through time. The most successful countries have moved from simple, low-income economies with a high proportion of jobs in manual labor, to modern, high-income economies by utilizing more capital in the production process to raise the VMP of each worker. At the same time, the quality of life is improved since workers in modern economies earn more and have safer jobs. Think about this: What if firms continued to use labor for jobs when capital is available? You may think that’s good because people keep their jobs. But here is what would happen: If we insisted on using traditional methods to fell trees, we could employ more lumberjacks. The process of cutting wood would remain expensive and dangerous. Instead, if we use capital and technology: Trees can be cut down faster and more safely. Overall production rises because while one worker harvests trees, nine others are able to move into related fields, or to do something entirely different. With the use of new technology, one person can now safely produce the same amount that formerly required ten people to risk their lives.
- #14 Image: Animated Figure 14.2 Lecture notes: When the wages of workers change, the quantity of workers demanded, shown by the orange arrow moving along the demand curve, also changes. Changes that shift the entire labor demand curve, shown by the gray arrows, include changes in the demand for the product that the firm produces, in labor productivity or innovation. To summarize, if labor becomes more productive, the VMP curve shifts to the right, driving up both wages and employment. There is the potential for substitution as well, causing the demand for traditional labor to fall.
- #15 Lecture notes: People work because they need to earn a living. Many workers enjoy their jobs, but this does not mean they would work for nothing. In other words, while many people experience satisfaction in the work they perform, most of us have other interests, obligations, and goals. As a result, the supply of labor depends both on the wage that is offered and how individuals want to use their time. This is known as the labor-leisure trade-off.
- #16 Lecture notes: If you got a pay raise to earn more money per hour, would you work more? Yes and No. Generally, the substitution effect is stronger than the income effect. If SE > IE, it means that people will work more hours when wages are increased. However, for very high wages, people may realize that their high wages can purchase a lot of leisure. Imagine if you earned $500 per hour. You might work fewer hours because you don’t need to work as much to get the overall income to live the lifestyle you want to. At these very high wages, the income effect may be greater than substitution effect. Graphically, this could lead to a backward-bending labor supply curve.
- #17 Lecture notes: Do people work more when their wages increase? It generally depends on if the person had been earning low or high wages to begin with. Generally, the substitution effect is stronger than the income effect. If SE > IE, it means that people will work more hours when wages are increased. However, for very high wages, people may realize that their high wages can purchase a lot of leisure. Imagine if you earned $500 per hour. You might work fewer hours because you don’t need to work as much to get the overall income to live the lifestyle you want to. At these very high wages, the income effect may be greater than substitution effect. Graphically, this could lead to a backward-bending labor supply curve.
- #18 Image: Animated Figure 14.3 Lecture notes: At high-wage levels the income effect may become larger than the substitution effect and cause the labor supply curve to bend backward. The backward- bending supply curve exists when additional leisure time becomes more valuable than additional income.
- #19 Lecture notes: Other employment opportunities If workers are mobile, they’ll generally want to go where wages are higher (assuming the job qualifications and tasks are similar). This can sometimes lead to “labor raiding” where one company tries to steal away workers from another company with the lure of higher wages. Changing composition of workforce Increasing the retirement age would also increase the number of workers. Migration and immigration Southern and western states accounted for 84% of the nation’s population growth from 2000 to 2010, with Nevada, Utah, North Carolina, Idaho, and Texas all adding at least 20% to their populations.
- #20 Economics in the media Lecture tip: The clip mentioned on the slide can be found in the Interactive Instructor’s Guide. Access the direct link by clicking the icon in the PowerPoint above.
- #21 Lecture notes: Once again, the equilibrium in this market is a stable equilibrium. Without any interference, the wage rate will move toward the equilibrium wage due to the forces of supply and demand.
- #22 Lecture notes: There can be surpluses or shortages of labor, just like there can be surpluses or shortages of goods that consumers purchase. Notice that the same basic definition of shortage and surplus applies here when we compare the Qd and Qs of labor. Labor surpluses put downward pressure on wages. Labor shortages put upward pressure on wages.
- #23 Image: Animated Figure 14.5 Lecture notes: At high wages a surplus of workers exists. This drives the wage rate down until the supply of workers and the demand for workers reach the equilibrium. At low wages a shortage occurs. A shortage forces the wage rate up until the equilibrium wage is reached and the shortage disappears.
- #24 Image: Animated Figure 14.6.a Lecture notes: Imagine that demand for medical care increases due to an aging population and that, as a result, the demand for nurses increases and the demand curve shifts from D1 to D2. This creates a shortage of workers. The shortage of workers places upward pressure on wages, which increase from W1 to W2. As wages rise, nursing becomes more attractive; additional people go into nursing and existing nurses decide to work longer hours or postpone retirement. The number of nurses employed rises from Q1 to Q2. Eventually, the wage settles at E2 and the number of workers employed ends up at Q2.
- #25 Image: Animated Figure 14.6.b Lecture notes: What happens when the supply of nurses increases? As additional nurses are certified the overall supply shifts from S1 to S2. A surplus of workers at W1 places downward pressure on wages. Eventually, the market wage settles at W2, at the new equilibrium point E2, and the number of workers employed ends up at Q2.
- #26 Lecture tip: Before clicking, ask your students why a firm would outsource jobs. Firms need to use inputs in the production process. If the firm has the ability to produce the same output using cheaper inputs, profits will be higher. Firms will have an incentive to outsource if the option is available to them. However, it may be politically unpopular. A firm may consider the costs of NOT outsourcing (higher labor expenses) to the benefits of NOT outsourcing (proud “made in America” labels), which may sway demand for some consumers.
- #27 Lecture notes: Cheaper labor may drive down labor prices for all workers. If another worker is willing to do the job for less pay, you may have to accept less pay or the firm may choose not to use you as an input. Economically, a higher a supply of workers depresses wages as inputs are more abundant.
- #28 Lecture notes: Politically, we often focus on only the “losing” aspect of globalization. “Americans lose jobs if you hire overseas labor! THEY TOOK OUR JOBS! You’re a terrible company!” Politicians often clamor about creating jobs that can’t be outsourced. Economically, this may drive up costs and prices, ultimately hurting consumers.
- #29 Image: Animated Figure 14.7 Lecture notes: The figure shows how outsourcing by foreign firms helps increase U.S. labor demand. Panel (a) Job losses and lower wages are felt in Germany when jobs are outsourced to the United States. This occurs because the demand for labor in Germany falls from D1 to D2 and the wages drops to W2 and employment declines to Q2. Panel (b) Shows the corresponding increase in demand for U.S. labor in Alabama. Demand shifts from D1 to D2 and the wage rises to W2 and employment rises to Q2
- #30 Lecture notes: Once again, outsourcing (just like new technology) may seem painful in the short run when some people lose jobs. However, in the long run, we benefit. Since outsourcing moves jobs where the marginal product per dollar is cheaper, the net effect of outsourcing is to increase the overall productivity of workers everywhere. As a result, the marginal revenue product rises throughout the economy and this directly translates into higher wages for workers. Essentially, outsourcing reallocates jobs toward more productive workers, independent of where those workers may reside.
- #31 Economics in the media Lecture tip: The clip mentioned on the slide can be found in the Interactive Instructor’s Guide. Access the direct link by clicking the icon in the PowerPoint above.
- #32 Lecture notes: A monopsonist in the labor market is also able to leverage its market power; it does so by paying its workers less. Isolated college towns serve as a good example. Workers who wish to live in college towns often find that they must either work for the college or leave the town in order to find suitable work elsewhere. Since a college in an isolated small town is the chief provider of jobs, that employer is said to have a monopsony in the labor market. This means that the college can use its market power to hire workers at low wage levels.
- #33 “Beyond the Book” Slide Sources: www.nba.com/2011/news/features/steve_aschburner/08/19/average-salary/index.html www.altiusdirectory.com/Sports/wnba-salaries.php You could also discuss other factors such as a lower derived demand for WNBA players (not as many people want to watch WNBA compared to NBA). However, monopsony power plays a large role in the striking difference between player salaries among the two leagues.
- #34 Lecture notes: Picture: An interesting exception to the idea of a fixed supply of land. Nakheel Properties, a real estate developer in Dubai, built several artificial islands and land extensions in the Persian Gulf. Waterfront property was so valuable, the firm found it worthwhile to artificially create more of it!
- #35 Lecture notes: Economic land rent: In the case of housing near college campuses, a small studio apartment will often command a much higher rent than a similar apartment located 10 miles away. This occurs because the rent near campus must be high enough to compensate the owners for using their land for an apartment instead of other ways that might also be profitable in the area—for example, for a single residence, a business, or even a parking lot. Once you move 10 miles further out, the number of people interested in using the land for these purposes declines. Hong Kong: An average two-bedroom apartment rents for almost $7,000 per month.
- #36 Image: Animated Figure 14.8 Lecture notes: Since the supply of land is fixed, the price it commands depends on demand. If demand increases from D1 to D2, the price will rise from P1 to P2.
- #37 Lecture notes: Marginal Product of Capital (MPK) is diminishing when we assume a fixed amount of labor. If we keep adding capital (buildings, machines, computers, etc.) but don’t add workers, we’ll eventually get to a point where the additional output produced by the additional capital will start to diminish.
- #38 Lecture notes: The markets for land, labor, and capital are connected. The amount of labor a firm uses is not only a function of the marginal product of labor; it also depends on the marginal product of land and capital. Therefore, a change in the supply of one factor will alter the returns of all factors. For instance, falling wages will induce firms to hire more labor, and simultaneously use less capital to produce goods. Capital itself is not any more, or less, productive. Rather, lower wages reduce the demand for capital.
- #39 Lecture notes: Important notes from the table: It’s not just the price of the input or the productivity of the input . . . BOTH of them matter. You can think of the firm looking for the best revenue per dollar. “How productive are my inputs with respect to how much they’re costing me?,” asks the firm. If an input gets more productive or cheaper, a firm will hire more of that input and less of the other inputs.
- #43 Clicker Question Correct answer: C If people want more of good “X,” then firms will need more laborers to produce good “X.” Why is the answer not A? Answer A illustrates a movement along the labor demand curve, rather than a shift.
- #44 Clicker Question Correct answer: D For the firm, the comparison is this: How much is the worker costing me (wages) versus how much revenue is he bringing me (VMP)? If the worker produces outputs that can be sold for VMP greater than what the worker is costing the firm, the firm will employ that worker.
- #45 Clicker Question Correct answer: A With regards to labor supply (remember that YOU are a supplier of labor!) Substitution effect: if wages rise, people may be willing to work more hours because the opportunity cost of leisure is now higher. Sub in labor, sub out leisure. Income effect: If wages rise, people may be willing to work less hours because you could earn the same total income amount working fewer hours, and enjoy more leisure hours. You use your extra income to purchase more leisure (a normal good).
- #46 Clicker Question Correct answer: B One reason why people may not like outsourcing (especially at a global level) is because it may lower wages. If someone in a foreign country is willing to do your job at lower pay, the firm will higher the cheaper input. If you are not willing to do the job for the same low pay, the firm may no longer use you as an input.
- #47 Clicker Question Correct answer: D A monopsony is where there is a single BUYER of a good or resource. If you are the only one buying the good, you have the ability to control and lower the prices. (where else is the supplier going to sell? You’re the only one buying it!) This usually occurs in labor markets where workers may only have one choice of employment. There is just one firm buying labor.