Labor Market

• labor = factor of production
• labor ≠ immediate satisfaction
• Demand = firms
• Supply = households
• the demand for a product causes the demand for labor thus the demand is DERIVED
• don't sell labor, buy services
• flow of services
• wages and salaries function as prices for the services provided by labor
  

Determinants of Labor Demand

• Endogenous Variables:
  • Wage - inverse relationship between wage and # of workers demanded:      ↑W = ↓Dw
• Exogenous Variables:
  • Technology - diff. way of doing things (machines or other tools used together with labor)
    
  • Price of the Good Being Produced - for workers, if producing expensive product their wages = high vs. if producing a cheap good, then their wages = low
  • Human Capital - learned skills
  • Productivity of Labor - more productive = increase (shift) in demand
  • Price of Other Inputs - such as capital
  • Number of Firms (Producers) - more firms = more labor demanded
  • Government Policy
    

Unskilled vs. Skilled Labor

• demand for unskilled labor = HIGHLY ELASTIC
• demand for skilled labor = HIGHLY INELASTIC
  

Labor Demand

• Q_^dL = f(W)
• dW/dQ_L < 0
  

Determinants for Supply of Labor

• Endogenous Variables:
  • Wage - higher wage = more willing to work
    • opportunity cost for your time
    • direct relationship between wage and # of people willing to work (supply)    ↑W = ↑S_L
• Exogenous Variables:
  • Risk -companies need to compensate workers for risk thru wages (coal miners)
  • Demographic Change - affects how many people are available for work
  • Social Expectations/Cultural Norms - women in labor force
    • increase in women working = increase in supply curve
    • preference for leisure
  • Government Macroeconomic Policy - change retirement years, benefits, work week
    

Wage/Salary vs. Total Compensation

• Wage/Salary:
  • wage = $/hr
  • salary = $/year
• Total Compensation
  • TC = wage/salary + benefits
  • total package
  • benefits = health care, retirement, vacation days, workers compensation
• From firm's p.o.v. TC is more important than wage/salary
• 2004: TC = $23.29/hr  (29% benefits) vs. W = $16.64/hr (71%)
  

Labor Unions

• collective bargain - for better wage/working condition
• power in numbers (individ. cannot influence market)
• higher wage = firms lessen supply and demands higher price to compensate for higher input cost
• protect workers from being fired
• can cause increase in unemployment in market
• can be beneficial (for workers) for company b/c work w/ management to improve conditions and output
• pay to be in union b/c benefits are so great

Labor Discrimination

• Occurs when an equally qualified person is turned down for a job/paid less because of his/her gender, race, age, sexual orientation...
• Makes no economic sense for a profit maximizing firm to do this
• exists b/c of cultural norms, etc.
  • ie. worker moral could be affected if a firm hired a black worker where the workers are demoninantly white
• 
  

Financial Market

• in financial market, attempting to assign 'price' or fee for using 'money' which tends to be controversial
• Usery Law - cannot charge interest beyond a certain %
  • no excessive amount for interest
  • what is excessive?
  • issue w/ credit card interest rates (extremely exorbitant  - law passed '09 against it)
    

Financial Investment

• refers to the supply of financial capital
  • putting $ in bank
• firms invest $ in capital (machines)
• fund = money
• firms want lowest interest rate
• household wants highest interest rate
• Financial investment vs. Physical Capital Investment
  • financial investment = the supply of financial capital
  • physical capt. investm. = refers to the demand for financial capital to buy machinery and equipment
• When we talk about people who are "investing" typically, we are referrring to how they supply financial capital
• when we refer to firms who are 'investing' we are referring to how they are  demanding financial capital so that they can buy physically plant and equipment
  

Supply for Financial Market

• the supply of financial capital is the relationship betwen the quantity of capital supplied (i.e. personal savings) from households and the rate of returns they receive
• holding all other factors affecting the supply for financial capital constant, we expect households' decesion to supply financial capital to be positively correlated with interest rate.
• financial investment (saving) implies sacrificing present consumption, and interest paymnet is the compensation for this sacrifice
• positive time preference
• real versus nominal interest rate (inflation factor)
  

Supply for Financial Market - Exogenous Factors

• exogenous factors:
  • risk
  • time preference (positive t.p. - time value of money)
    • we tend to be miopic = short sighted
    • supply curve decreases (shift up)
    • live in present vs. Japanese = savers
  • cultural norms, social factors & religious beliefs
  • tax status
  • government monetary policy
    

Demand for Financial Market

• demand for financial capital is a relationship between the quantity of capital demanded by  borrowers (firms, households, and government) and the interest rate they pay
• holding all other factors constant, we expect borrowers' decision to supply financial capital to be negatively correlated with interest rate
  
• demand from FIRMS
  • takes money to buy material goods
• inverse relation btwn interest rate and willingness to borrow
• endogenous = interest rate
• firms get money to invest from = retained earnings, borrow money from bank, issue bonds, issue equity (stocks)
  

Demand for Financial Market - Exogenous Factors

• exogenous factors:
  • expected return on investment
  • RISK - higher risk = willing to pay lower interest rate vs. low risk = pay higher R
  • size of firm - bigger firm = lower risk = pay higher interest rate (increase demand)
  • profitability - more profit = willing to pay higher interest rate
    

Pure Competition

• zero market power - price taker (price for product same everywhere)
  
• many small firms
• homogeneous product
• no barriers to entry (freely) - if firms making profit that's above normal, new firms enter into industry to drive down price - price kept low and profits of firm minimal/low
  
• perfect competition increases the consumer surplus when price lowered
• innovation/keeping ahead of competitors allows for above normal profit
• costs are kept low
• the 'invisible hand' that makes this process to continue is competition among firms - consumers benefit
• infinitely elastic
  

Monopolistic Competition

• some limited power to set their price - profit is restrained by competition
  
• many small firms
• differentiated product (retail) - ads
  
• no barriers to entry (freely)
  
• highly elastic b/c of substitute goods
• price higher than pure competition but lower than monopoly
• small dead weight less
• creates variety
  

Oligopoly

• significant market power
• few large firms
• homogeneous/differentiated
• strong barriers (financial) to entry
• ex. Coca Cola and Pepsi
• mutual interdependencies:
  • cannot make decision without considering their competitors
    • cannot change price, output, advertising
  • individual firms must compare w/ others
  • what the other firms do, affects the firms' product revenue
• need more control over consumer

Pure Monopoly

• absolute power to set(make) price - too high price, may lose consumers
  • less elastic the demand = higher the price a monopolist will be able to charge
• single firm - ex. Local utility, USPS, Microsoft
  
• has no close substitutes - demand = less elastic
  
• strong barriers - comes from patents (incentive), government laws (post office), merger
• the less elastic the demand, the greater ability to raise prices
• very low elasticity
• shrinks consumers surplus
• does not encourage innovation
• profit of monopoly will be at expense of consumer
  

Rival Good

• good/service where an individual consumption or use of the good denies the availability of that same good to other people either temporarily or pemanently

Exclusive Ownership Rights

• possible when anyone who does not pay for the good or service can be excluded from enjoying its benefits
• the good is used exclusively by those who paid for the food to use it
  

Externality

• an acitivity is said to generate a beneficial or detrimental externalities if that activity causes incidnetal benefits or damages to others and no corresponding compensation is provided to or paid by those who generate the externality.
• third party or spillover effects of an activity
• side effect
  

Common Property Resources

• goods are rival and non-excludable
• ex. ocean fishery, ambient air, public grazing land, major waterways
• complete lack of ownership
• free of charge
• 1 person's use of commons reduces other abilities to use it
• tragedy of the commons
• contradicts Adam Smith
  

Public Goods

• non-rival - jointly used or consumed (in the absence of congestion)
  • one person's use of this good does not reduce another person's ability to use it
    
• non-exclusive - no need to exclude people if there's no marginal cost (MC = 0)
• assuming they are pure public goods
• ex: bridges, highways, public schools, national parks, national defense
• capable of being jointly consumed by many individ. simultaneously at no additional cost and w/ no reduction in the quality or quantity of the good
• MC = 0 and benefit to the additional use is positive
  

Tragedy of the Commons

• since common property resources are rival, one person's use of the common resource reduces other people's ability to use it.
• "Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons.  Freedom in commons brings ruin to all." ~Garret Hardin
• direct contradiction with Adam Smith & self interest
  

Causes of Tragedy - Externality

• in the presence of externality, the social and private costs differ
• in general, for an incremental use of common property resources:     Marginal Societal Cost > Marginal Cost to Individ. = 0
• Hence, a system of resource allocation based on the accounting of private benefits and costs alone (such as the market system) would lead to over use of exploitation of common property resources
• MSC = MPC + MEC
• MEC > 0 always - spillover effect/3rd party effect (marginal external cost)
  

Free-Rider Problem

• is a situation that occurs when consumers attempt to receive the benefit of a good or service without paying the full-cost or nothing at all
• ex: national defense
• for you, no point in paying as long as everyone else pays
• to stop free-riders - impose a tax
  

Education Example

• Supply = MPC - cost of individual to produce education
• Demand = MPB - personal benefit
• D¹ = MSB - society benefits from the education of that individual (spillover effect/3rd party)
  • MEB > 0 positive
  • MSB = MPB + MEB
• market tends to under provide so when demand increases, individual want more years @ a cost lower than market
  • scholarships for individuals
  • taxes from govt (no guarantee govt can do this)
    

Income

• market assumes you're able to be in the market (meet the market price)
• demand is based on income
  

Unequal Income Distribution

• difference in natural ability (labor)
• differences in human capital - acquired skills (involves schooling and training)
• differences in risk taking capacity
• compensating wage differentials
• discrimination
• inherited wealth
• monopoly power
• luck
  

• public policy
• increase in international trade (helps the rich)
• change int echnology that favors skilled workers
• increased participation of women in the labor force increased the income of the family in the higher income bracket proportionately more than in the lower income family
  

Price Ceiling

• max price that you can legally sell a product
• means that market price is too high
• cannot be above Price Equilibrium
• thus creates a shortage b/c Q_s < Q_d
• probs: untargeted (applied to all instead of needy)
• ex. rent control and price ceiling on oil
  

• minimum legal price on a product
• has to be above Price Equilibrium
• creates surplus b/c Q_d < Q_s
• ex: farm price support (benefitted commercial farmers) and minimum wage