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Questions and Answers
What is the consequence of imposing a minimum wage above the equilibrium wage in a labor market?
What is the consequence of imposing a minimum wage above the equilibrium wage in a labor market?
- No change in labor supply
- An increase in employment
- A surplus of labor (correct)
- A decrease in wages
The market for land can be analyzed similarly to the labor market.
The market for land can be analyzed similarly to the labor market.
True (A)
What causes the supply curve for labor to shift to the left?
What causes the supply curve for labor to shift to the left?
Government policies making professional licenses harder to obtain.
An increase in the demand for labour typically results in a rise in the ________ rates.
An increase in the demand for labour typically results in a rise in the ________ rates.
Match the following scenarios with their effects on the labor market:
Match the following scenarios with their effects on the labor market:
What is the form of payment for land in factor markets?
What is the form of payment for land in factor markets?
Demand for a factor of production is independent of the output that the input helps to produce.
Demand for a factor of production is independent of the output that the input helps to produce.
What does MRP stand for in factor markets?
What does MRP stand for in factor markets?
The form of payment for labour in factor markets is called __________.
The form of payment for labour in factor markets is called __________.
Match the following factors of production with their corresponding forms of payment:
Match the following factors of production with their corresponding forms of payment:
In the circular flow model, who are the suppliers in the factor markets?
In the circular flow model, who are the suppliers in the factor markets?
A firm could be a perfect competitor in the factor market while being a perfect competitor in the product market.
A firm could be a perfect competitor in the factor market while being a perfect competitor in the product market.
What does MRP depend on?
What does MRP depend on?
What does Marginal Revenue Product (MRP) equal?
What does Marginal Revenue Product (MRP) equal?
The demand for labor is primarily for its own sake.
The demand for labor is primarily for its own sake.
What happens to the demand curve for labor if the Marginal Revenue Product increases?
What happens to the demand curve for labor if the Marginal Revenue Product increases?
The market supply curve for labor is _____-sloping.
The market supply curve for labor is _____-sloping.
Match the following factors with their impact on demand for labor:
Match the following factors with their impact on demand for labor:
What does the law of diminishing returns imply about the labor supply curve?
What does the law of diminishing returns imply about the labor supply curve?
What is the opportunity cost of one hour of leisure when the wage is $20/hr?
What is the opportunity cost of one hour of leisure when the wage is $20/hr?
An increase in the wage rate results in a decrease in the quantity of labor supplied.
An increase in the wage rate results in a decrease in the quantity of labor supplied.
What is the equilibrium wage determined by?
What is the equilibrium wage determined by?
If the Marginal Revenue Product (MRP) of labour is greater than the wage rate, firms should reduce the number of workers they hire.
If the Marginal Revenue Product (MRP) of labour is greater than the wage rate, firms should reduce the number of workers they hire.
List one factor that can impact the supply of labour.
List one factor that can impact the supply of labour.
The equilibrium wage equals the __________ of labour at equilibrium.
The equilibrium wage equals the __________ of labour at equilibrium.
Match the following terms with their definitions:
Match the following terms with their definitions:
What happens in the labour market when a minimum wage is set above the equilibrium wage?
What happens in the labour market when a minimum wage is set above the equilibrium wage?
An increase in the value of leisure leads to an increase in the supply of labour.
An increase in the value of leisure leads to an increase in the supply of labour.
What does an employer maximize by hiring workers until MRP equals wage rate?
What does an employer maximize by hiring workers until MRP equals wage rate?
What happens to the equilibrium wage when the demand for shirts increases due to a large export market opening?
What happens to the equilibrium wage when the demand for shirts increases due to a large export market opening?
An increase in the number of workers in the garment industry always leads to higher wages.
An increase in the number of workers in the garment industry always leads to higher wages.
What is Marginal Revenue Product (MRP)?
What is Marginal Revenue Product (MRP)?
The concept that represents the change in total cost resulting from the employment of an additional unit of input is called _______.
The concept that represents the change in total cost resulting from the employment of an additional unit of input is called _______.
Which of the following effects does a labor surplus have on wages?
Which of the following effects does a labor surplus have on wages?
In a perfectly competitive market, product prices are uniform across all firms.
In a perfectly competitive market, product prices are uniform across all firms.
How does immigration affect the labor supply in the garment industry?
How does immigration affect the labor supply in the garment industry?
Flashcards
Factor Markets
Factor Markets
Markets where factors of production (land, labor, capital, entrepreneurship) are bought and sold.
Derived Demand
Derived Demand
Demand for an input (factor of production) that depends on the demand for the output it helps produce.
Marginal Revenue Product (MRP)
Marginal Revenue Product (MRP)
Extra revenue a firm gets from hiring one more unit of a factor of production.
MRP = MR x MP
MRP = MR x MP
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Factors of Production
Factors of Production
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Labour Market
Labour Market
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Perfect Competitor
Perfect Competitor
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Firm's Demand for Labor
Firm's Demand for Labor
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Derived Demand for Labor
Derived Demand for Labor
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Market Demand for Labor
Market Demand for Labor
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Labour Supply Curve
Labour Supply Curve
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Work-leisure trade-off
Work-leisure trade-off
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Upward-sloping supply curve
Upward-sloping supply curve
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Factors Affecting Labor Demand
Factors Affecting Labor Demand
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Value of Leisure
Value of Leisure
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Wage in Alternative Occupations
Wage in Alternative Occupations
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Equilibrium Wage
Equilibrium Wage
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Wage = MRP (at Equilibrium)
Wage = MRP (at Equilibrium)
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MRP > w
MRP > w
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MRP < w
MRP < w
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Minimum Wage Law
Minimum Wage Law
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Minimum Wage Impact
Minimum Wage Impact
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Shifting Labor Supply Left
Shifting Labor Supply Left
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What causes wage increases?
What causes wage increases?
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Land Supply Curve
Land Supply Curve
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MRP = Equilibrium Wage
MRP = Equilibrium Wage
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What happens to labour demand when a new export market opens?
What happens to labour demand when a new export market opens?
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What effect does immigration have on the labour market?
What effect does immigration have on the labour market?
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What happens to MRP when labour supply increases?
What happens to MRP when labour supply increases?
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What is the Marginal Revenue Product (MRP)?
What is the Marginal Revenue Product (MRP)?
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What is Marginal Resource Cost (MRC)?
What is Marginal Resource Cost (MRC)?
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What determines the equilibrium wage?
What determines the equilibrium wage?
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How does MRP relate to a firm's demand for labour?
How does MRP relate to a firm's demand for labour?
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What is the relationship between wages and MRP?
What is the relationship between wages and MRP?
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Study Notes
Factor Markets
- Factor markets are where buyers and sellers of factors of production (inputs) meet.
- These inputs include land, labor, capital, and entrepreneurship.
- The payment for the factors of production are rent, wages, interest, and profit.
- Households sell factors of production in factor markets, and firms buy them.
Revisiting Factors of Production
- Factors of production and their forms of remuneration:
- Land: Rent
- Labor: Wages
- Capital: Interest
- Entrepreneurship: Profit
Circular Flow Model
- The circular flow model shows the flow of resources and goods/services between households and firms.
- Households supply factors of production to factor markets.
- Firms purchase factors of production in exchange for rent, wages, interest, and profit.
- Firms then use these factors to produce goods and services.
- Then firms sell goods and services to households in product markets.
- Households then buy the goods and services produced.
Factor Markets
- Factor markets are like other markets, with buyers and sellers exchanging goods or services.
- In factor markets, the good or service is a factor of production, or resource.
- Derived Demand: Demand for an input depends on demand from the output that the input helps produce. A firm employs factors up to the point where the additional revenue equals the cost.
- The demand for input is derived from the demand for the output produced.
Factor Markets - Firm Competition
- A firm can be a perfect competitor in the product market, but not in the factor market, and vice versa.
- In factor markets, businesses are the demanders and households are the suppliers of factors (e.g., labor).
Marginal Revenue Product (MRP)
- MRP is the change in total revenue resulting from employing one extra unit of an input.
- MRP = marginal revenue × marginal product
- A firm will continue hiring workers until the MRP of labor equals the wage rate.
Deriving Marginal Revenue Product
- MRP = (change in total revenue) / (change in quantity of labor)
- MRP = MR × MP
Derived Demand for Labor
- The market demand for labor is a downward-sloping curve, reflecting an inverse relationship between wage and quantity of labour.
- This is due to the law of diminishing returns and substitutability of labor for capital.
- Labor demand is derived demand, meaning labor is not demanded in itself but for its ability to produce goods and services.
- Demand increases when the demand for the product or service increases because more labour is required.
Demand for Labour
- Market demand for labor is the sum of each firm's MRP for labor.
- Factors that affect labor demand:
- Product price
- Product demand
- Productivity of labor
- Change in price of capital
Supply of Labor
- Labor supply is upward sloping and shows the relationship between wage rate and quantity of labor supplied.
- The labor supply curve reflects how workers respond to changes in the opportunity cost of leisure.
- Supply factors include number/availability of workers, population, age, value of leisure, wages in alternative occupations and improvements in occupational mobility.
Equilibrium in the Labor Market
- Equilibrium wage is where labor demand and labor supply intersect.
- Firms hire workers until the MRP of labor equals the wage rate.
MRP and the Wage Rate
- The table shows MRP is in relation with wage rates and worker numbers.
- As workers employed increases, MRP decreases and workers' wage rate.
Minimum Wage
- Minimum wage laws create a price floor above the equilibrium wage, leading to labor surplus.
Shifts in Labor Market Equilibrium - Demand
- An increase in demand for shirts increases labor demand, leading to higher wages and employment.
Shifts in Labor Market Equilibrium - Supply
- Increased immigration increases labor supply, leading to lower wages.
Marginal Resource Cost (MRC)
- MRC is the change in total cost from employing one extra unit of an input.
- MRC = (change in total cost) / (change in quantity of input)
- MRC = change in total cost/ change in labor
Summary
- Labor demand and supply determine equilibrium wage.
- Shifts in demand or supply affect wages.
- Profit maximization ensures equilibrium wage equals MRP.
- Other factor markets (e.g. land, capital) are analyzed similarly.
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Description
This quiz covers the essential concepts of factor markets and the circular flow model in economics. Explore how factors of production are sold and bought, and the remuneration associated with each factor. Understand the interaction between households and firms in the economy.
