All Flashcards
What does the downward-sloping demand curve in the labor market represent?
It represents the diminishing marginal returns to labor; each additional worker adds less revenue.
What does the upward-sloping supply curve in the labor market represent?
It represents that higher wages encourage more people to work, giving up leisure time.
On a firm's labor market graph, what does the perfectly elastic supply curve represent?
It represents that firms are wage takers and can hire all workers at the same market wage.
How does an increase in labor supply shift the market graph?
The labor supply curve shifts to the right, decreasing the market wage and increasing the quantity of labor.
How does an increase in labor demand shift the market graph?
The labor demand curve shifts to the right, increasing the market wage and increasing the quantity of labor.
On a side-by-side graph, what happens to the firm's MRC curve when the market wage increases?
The firm's MRC curve shifts upward, reflecting the higher cost of hiring each worker.
What does the intersection of MRP and MRC on the firm's graph indicate?
It indicates the profit-maximizing quantity of labor the firm should hire.
How does a technological advancement that increases worker productivity affect the labor demand curve?
It shifts the labor demand curve to the right, increasing both the wage and the quantity of labor hired.
Illustrate and explain the effect of a minimum wage above the equilibrium wage on the labor market graph.
A minimum wage above the equilibrium wage creates a surplus of labor (unemployment) as the quantity supplied exceeds the quantity demanded at the higher wage.
Explain how a decrease in the price of the firm's output affects the MRP curve.
A decrease in the price of the firm's output decreases the MRP, shifting the MRP curve to the left, leading to a decrease in the quantity of labor hired.
Define perfectly competitive labor market.
Many small firms hiring labor; firms are wage takers; identical workers; easy hiring; profit maximization where MRP=MRC.
What does 'wage taker' mean in a perfectly competitive labor market?
Firms must accept the market wage and cannot influence it.
Define Marginal Revenue Product (MRP).
The additional revenue generated by hiring one more worker.
Define Marginal Resource Cost (MRC).
The additional cost of hiring one more worker.
What is the Least-Cost Rule?
Firms minimize costs when MPx/Px = MPy/Py, where MP is marginal product and P is price.
Define the Profit-Maximizing Rule for resources.
Firms maximize profit when MRPx = MRCx and MRPy = MRCy for all resources.
What is the significance of identical workers in a perfectly competitive labor market?
All workers are considered equally skilled and perfect substitutes for one another.
Define diminishing marginal returns in the context of labor.
Each additional worker adds less revenue due to limited resources, causing the demand for labor to be downward-sloping.
What does a perfectly elastic labor supply curve mean for a firm?
Firms can hire as many workers as they need at the market wage without affecting the wage rate.
What is the relationship between the market wage and the firm's MRC in perfect competition?
In a perfectly competitive labor market, the MRC is equal to the market wage because firms are wage takers.
How does an increase in product demand affect a firm's demand for labor?
An increase in product demand increases the firm's MRP, shifting the labor demand curve to the right, increasing the wage and quantity of labor hired.
If MRP > MRC, what should a firm do?
The firm should hire more of that resource to increase profits.
If MP_labor/P_labor < MP_capital/P_capital, how should a firm adjust its resource mix?
The firm should hire less labor and more capital to minimize costs.
How does increased automation (robots) affect the demand for labor?
Increased automation may decrease the demand for labor if robots are substitutes for workers, shifting the labor demand curve to the left.
How does an increase in the supply of labor affect the market wage?
An increase in the supply of labor decreases the market wage as more workers are available at each wage level.
A firm is deciding whether to hire another worker. How should they decide?
The firm should compare the worker's MRP to the MRC (wage). If MRP ≥ MRC, hire the worker.
Explain how the availability of alternative job opportunities affects the labor supply.
If alternative job opportunities with higher wages become available, the labor supply in the original market will decrease as workers move to the better-paying jobs.
How does improved worker training affect the MRP?
Improved worker training increases worker productivity, leading to a higher MRP and a higher demand for labor.
How does an increase in the price of capital affect the demand for labor if labor and capital are complements?
If labor and capital are complements, an increase in the price of capital may decrease the demand for labor as firms use less capital, thus needing less labor.
How does a government subsidy on labor affect the firm's hiring decisions?
A government subsidy on labor reduces the firm's MRC, encouraging them to hire more labor.