Micro Review Utility, Wages, and Externalities

TP and AP Total Product (TP)- the total output of a particular good or service produced Average Product (AP)- the total output produced per unit of a resource employed AP = total product divided by quantity of resource employed

Marginal Product (MP) Additional output resulting from using each additional unit of labor Law of diminishing returns applies to marginal product---at some point the MP will decrease

Marginal Revenue Product (MRP) The change in a firm’s total revenue when it employs 1 additional unit of a resource MRP = change in total revenue/change in the quantity of the resource employed

Marginal Resource Cost (MRC) aka Marginal Factor Cost (MFC) The amount that each additional unit of a resource adds to the firm’s total (resource) cost MRC = change in total (resource) cost/unit change in resource quantity

MRP=MRC Rule To maximize profit a firm should employ the quantity of a resource at which MRP=MRC To maximize profit, a firm should hire any additional units of a specific resource as long as each successive unit adds more to the firm’s TR than it adds to cost TC

Labor Market Equilibrium The intersection of the market labor demand curve and the market supply curve determines the equilibrium wage rate and level of employment ($10) W C Quantity of Labor QCQC (1000) 0 D=MRP (∑ mrps) S

Individual Firm The individual firm in a perfectly competitive firm maximizes profit by hiring workers to the point where Wage rate = MRP Wage Rate (Dollars) ($10) W C Quantity of Labor 0 d=mrp qCqC (5) s=MRC c

Derived Demand Demand that is derived from the products that the resource helps produce Resources don’t usually go directly to satisfy the consumer---indirectly through their use in goods and services EX- land, tractor, farmer lead to demand for food

Law of Diminishing Marginal Utility Added satisfaction declines as a consumer acquires additional units of a given product The more the consumer obtains the less they want more of it Ex- cars (excluding collectors)

Optimal Level for Utility MU of product A/Price of A = MU of B/Price B If this equation is not true, then the consumer should reallocate their funds differently

Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10 (1) Unit of Product (a) Marginal Utility, Utils (a) Marginal Utility, Utils (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (2) Product A: Price = $1 (3) Product B: Price = $2 First Second Third Fourth Fifth Sixth Seventh Compare Marginal Utilities Then Compare Per Dollar - MU/Price Choose the Highest Check Budget - Proceed to Next Item

(1) Unit of Product (a) Marginal Utility, Utils (a) Marginal Utility, Utils (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (2) Product A: Price = $1 (3) Product B: Price = $2 First Second Third Fourth Fifth Sixth Seventh Again, Compare Per Dollar - MU/Price Choose the Highest Buy One of Each – Budget Has $5 Left Proceed to Next Item

(1) Unit of Product (a) Marginal Utility, Utils (a) Marginal Utility, Utils (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (2) Product A: Price = $1 (3) Product B: Price = $2 First Second Third Fourth Fifth Sixth Seventh Again, Compare Per Dollar - MU/Price Buy One More B – Budget Has $3 Left Proceed to Next Item

(1) Unit of Product (a) Marginal Utility, Utils (a) Marginal Utility, Utils (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (2) Product A: Price = $1 (3) Product B: Price = $2 First Second Third Fourth Fifth Sixth Seventh Again, Compare Per Dollar - MU/Price Buy One of Each – Budget Exhausted

Monopsony A single employer of labor has substantial buying (hiring power) with the following characteristics: 1.Only a single buyer of a particular good 2. Labor is immobile (workers would have to move or acquire new skills) 3. The firm is a wage maker **monopsony power can vary

Monopsony Model Wage Rate (Dollars) Quantity of Labor 0 S MRP MRC c b a WcWc WmWm QmQm QcQc Examples of Monopsony Power Monopsonistic Labor Market W 14.1

Positive Externalities P S D private D Social Quantity P Q mktQ Social Spillover Benefit Subsidy The government can correct this externality by subsidizing the producer or the consumer (vouchers)

Negative Externalities P Pmkt Quantity D S Social S private Spillover Costs = Pollution Tax