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Econ 201 chapter 14
The Demand and Supply of Resources
| Question | Answer | |
|---|---|---|
| Inputs used in the production of goods and services | Factors of production | |
| What are the factors of production? | Labor, Land, and capital | |
| What happens in the labor market? | •Individuals are suppliers (sellers) of labor. •Firms are demanders (purchasers) of labor. •The price of labor is the wage rate. •We will use supply-demand analysis to see how wages are determined | |
| The change in output associated with hiring one additional worker. | Marginal product of labor (MPL) Remember that the MPL will eventually diminish | |
| MPL multiplied by the price of the output it produces | Value of the Marginal Product (VMP) (VMPL) = MPL x P | |
| What does value of the marginal product of labor equal(VMPL)? | (VMPL) = MPL x P | |
| INFORMATION VMP is also called MRP (marginal revenue product). Think of this as the amount of revenue each additional worker can generate. | ||
| DELI EXAMPLE: •You hire a worker who can make 10 sandwiches. •You sell a sandwich for $6. •The VMPL = ? ➢A firm will hire a worker as long as: $6 x 10 = $60 VMPL ≥ Wage (W). | ||
| When VMPL>W The firm should: | The firm should hire more workers to increase profit | |
| When VMPL<W The firm should: | The firm should hire fewer workers to increase profit | |
| When VMPL=W The firm should: | The firm is already hiring the optimal number of workers and is maximizing profit. They should do nothing. | |
| What two factors will change the demand for labor? | 1. Change in the demand for the product the firm produces. 2. Change in the cost of producing the product | |
| If workers' productivity improves(non price change), there will be: | An increase in demand for labor | |
| If demand for the product falls (non price change), there will be: | A decrease in demand for labor | |
| If wages of workers change(price change): | The quantity of workers demanded changes. | |
| What are factors that shift the market demand curve for labor? | Increase in human capital changes in technology changes in the price of the product changes in quantity of other inputs changes in number of firms in market | |
| What is human capital? | Knowledge and skills that workers acquire from formal training and education from life experiences Better workers produce more, increasing Value of the Marginal Product of Labor (VMPL) | |
| What are changes in technology? | Improvements in technology allow workers to be more productive, shifting the labor demand curve to the right. | |
| What are Changes in the price of the product? | A higher price increases VMPL, shifting labor demand to the right a lower price decreases VMPL, shifting labor demand to the left. | |
| What are Changes in the quantity of other inputs? | Workers produce more with more machinery/inputs Increase in inputs, increases productivity | |
| What are Changes in the number of firms in the market? | Increase in number of firms increases the demand for labor decreasing number of firms decreases demand for labor | |
| Changes in technology can have what two effects? | New low-cost technology can substitute for workers. More technology will decrease the demand for labor | |
| INFORMATION Short run: Seems bad if workers lose jobs Long run: -Production is cheaper/safer. -Workers will find other jobs, allowing production in other sectors to increase. Society is harmed if we tried to save jobs being replaced by technology. | ||
| o the decisions of individuals about how much to work. | labor supply • Individuals have a limited amount of time. • Labor economists assume they divide that time between labor (working) and leisure (not working) | |
| As the wage rate increases, leisure becomes expensive relative to consumption, so individuals consume less leisure —that is, they work more. This is related to what effect? | Substitution effect | |
| If the wage gets very high, increases in the wage may cause an individual to work less instead of more. What effect? | Income effect the income effect of the wage rate change is stronger than the substitution effect. | |
| Does the substitution or income effect dominate at lower wages? | ➢The substitution effect dominates: ➢Higher wages lead to more working hours because the cost of leisure has risen. | |
| Does the substitution or income effect dominate at higher wages? | ➢The income effect dominates: ➢Higher wages lead to fewer working hours because a high level of income can be maintained, resulting in more leisure hours. | |
| INFORMATION Generally, the substitution effect is stronger than the income effect. ➢If SE > IE → means that people will work more hours when wages are increased. ➢If SE < IE → means that people will work fewer hours when wages are increased. | ||
| What factors will cause the labor supply curve to shift? | Changes in population, changing demographics, changing alternatives | |
| What is a change in population? | Increases or decreases in the number of available workers (due to changes in birth/death rates, or immigration/emigration). | |
| What is a change in demographics? | Demographics refers to the composition of the population. Ex. The role of women in the labor force has changed significantly over the last century: 21 percent of women were in the labor force in the U.S. in 1900; In 2023, the figure is 57 percent. | |
| What is changing alternatives? | People have alternatives to working. A change in how attractive they are changes the supply of labor, such as changing wage rates in alternative jobs or the availability of unemployment benefits. | |
| When the wages of workers change: | The quantity of workers supplied changes | |
| INFORMATION ➢ If there is a surplus of labor: QS > QD ➢ If there is a shortage of labor: QD > QS ➢ Wages should adjust to eliminate any surplus or shortage. | ||
| What happens at low wages? | A shortage of workers The wage rate up until the equilibrium wage is reached and the shortage disappears | |
| What happens at high wages? | A surplus of workers The wage is reduced until the equilibrium wage is reached and the surplus disappears | |
| What causes a backward bending labor supply curve? A. IE dominates SE at high wages. B. SE dominates IE at high wages. C. Laborers working more hours when wages are higher. D. Firms hire fewer workers when market wages are higher | A. The income effect dominating the substitution effect at high wages | |
| The demand for labor will increase if A. the wage rate decreases. B. there is a decrease in the number of firms hiring. C. the demand for the product produced by the labor increases. D. labor becomes less productive. | C. the demand for the product produced by the labor increases. | |
| 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). | D. value of marginal product (VMP). | |
| Occurs when a firm shifts jobs to an outside company, usually overseas, where the cost of labor is lower. | Outsourcing | |
| Why does outsourcing happen? | Jobs are relocated from high-cost to low-cost areas Firms produce goods at lower costs, and consumers get goods at lower prices. | |
| INFORMATION Outsourcing in the Long Run: •Outsourcing allows for greatest specialization and increases efficiency. •Both firms and consumers gain. •Trade creates value. | ||
| Which is a true? A. Outsourcing helps firm by raising price of goods B. Outsourcing decreases wages for domestic workers. C. Outsourcing decreases supply of workers that a firm can employ. D. no economic trade-offs with regard to outsourcing. | B. Outsourcing may decrease wages for domestic workers | |
| How is the supply of land different from other factors of production? | Supply of land is fixed, so supply is perfectly inelastic (vertical). | |
| How would an increase in demand for land affect price and quantity? | Increases in demand result in price increases, but not quantity increases. | |
| The difference between what a factor of production earns and its next-best alternative. Ability of investors to beat their opportunity costs | Economic rent | |
| ECONOMIC RENT EXAMPLE: Apartment near campus has higher price than apartment 10 miles from campus. Higher demand for living near campus | ||
| INFORMATION Market for capital: •Like labor, demand for capital is a derived demand. •Determined by the value of the marginal product of capital (MPK). •Downward sloping: MPK declines with increased amounts of capital employed | ||
| INFORMATION Marginal product of capital (MPK) is diminishing when we assume fixed labor. If we keep adding capital (buildings/machines/computers) but don’t add workers, eventually additional output produced by the additional capital will diminish |
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