1 Chapter 10 Labor Markets and Income Distribution Key Concepts Key Concepts Summary Summary Practice Quiz ©2004 Thomson/South-Western

Production Function Total Output Quantity of Labor Total Output

3 What does the demand curve for labor show? The different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus

4 $350 $280 $210 $ A B C D Computech’s Demand Curve for Labor P Q

5 What is the demand curve for labor equal to? It is equal to the marginal revenue product of labor

6 What is marginal revenue product? The increase in total revenue to a firm resulting from hiring an additional unit of labor or other variable resource

Marginal Product Curve Marginal Product Quantity of Labor Law of Diminishing Returns

8 $280 $210 $140 $ Demand Curve for Labor MRP = demand $350 5 Q

9 How do we measure MRP in perfect competition? A perfectly competitive firm’s marginal revenue product is equal to the marginal product of its labor times the price of its product

10 What is derived demand? The demand for labor and other factors of production that depends on the consumer demand for final goods and services the factors produce

11 What does the supply curve for labor show? The different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus

12 $350 $280 $210 $ Computech’s Supply Curve for Labor P Q B A S New wage rate Initial wage rate

13 In a perfectly competitive market, what determines the level of wages? The intersection of the demand for labor and the supply of labor

14 D S Market Supply and Demand Wages Quantity of Labor $210 3

15 Does the perfectly competitive model apply to workers in unions? No

16 What are examples of unions? Teamsters United Auto Workers National Education Assoc. American Federation of Government Employees

17 How do unions attempt to raise wages? Increase demand for labor Decrease supply for labor Power

18 What factors can cause a change in the demand for labor? Unions Prices of substitute goods Demand for final products Marginal product of labor

19 $280 $210 $140 $ Unions cause an increase in the demand for labor $ S D2D2 E1E1 D1D1 E2E2 Quantity of Labor Wage Rate per day

20 What factors can cause a change in the supply for labor? Unions Demographic trends Expectations of future income Changes in immigrations laws Education and training

21 $350 $280 $210 $ Unions cause a decrease in the supply for labor $ S2S2 D1D1 E1E1 E2E2 Quantity of Labor Wage Rate per day S1S1

22 How else can unions raise wages? Collective bargaining

23 What is collective bargaining? The process of negotiations between the union and management over wages and working conditions

24 $280 $210 $140 $ Collective Bargaining causes a Wage Rate increase $ D Unemployment Wage Rate per day S Quantity of Labor

25 What factors can cause a change in the supply for labor? Unions Demographic trends Expectations of future income Changes in immigrations laws Education and training

26 What has happened to union membership since WWII? Union power has declined

27 How does union membership in the U.S. compare to other countries? Union membership is far below that of other industrialized countries

28 14% 24% 29% 32% 40% U.S.JapanCanadaU.K.GermanyItalySwedenDenmark 87% 75%

29 What has happened to real median income in the U.S.? Since 1993 it has risen

30 What is poverty? There are two views

31 What is poverty in absolute terms? A dollar figure that represents some level of income per year required to purchase essential goods and services

32 What is poverty in relative terms? A level of income that places a family in, lets say, the lowest 20% of households

33 What is the poverty line? A level of income below which a person or a family is considered poor

34 How does the government help the poor?  By in-kind transfers  cash assistance

35 What is an in-kind transfer? Government payments in the form of goods and services, rather than cash

36 What are some examples of in- kind transfers?  Food stamps  Medicaid  Housing assistance

37 What are some examples of cash assistance?  Social Security  Unemployment compensation  Temporary assistance to needy countries

38 Key Concepts

39 Key Concepts In a perfectly competitive market, what determines the level of wages?In a perfectly competitive market, what determines the level of wages? What is marginal revenue product? What is the demand curve for labor equal to? How do we measure mrp in perfect competition?How do we measure mrp in perfect competition? What does the supply curve for labor show?

40 Key Concepts cont. How do unions attempt to raise wages?How do unions attempt to raise wages? What is collective bargaining? What factors can cause a change in the demand for labor?What factors can cause a change in the demand for labor? What factors can cause a change in the supply for labor?What factors can cause a change in the supply for labor?

41 Key Concepts cont. What has happened to union membership since WWII?What has happened to union membership since WWII? How does union membership in the U.S. Compare to other countries?How does union membership in the U.S. Compare to other countries? What is poverty? How does the government help the poor?

42 Summary

43 Marginal revenue product (MRP) is determined by a worker’s contribution to a firm’s total revenue. Algebraically, the MRP equals the price of the product times the worker’s marginal product (MP).

44 The demand curve for labor is the curve showing the quantities of labor a firm is willing to hire at different prices of labor. The marginal revenue product (MRP) of labor curve is the firm’s demand curve for labor. Summing individual demand for labor curves gives the market demand curve for labor.

45 $280 $210 $140 $ Demand Curve for Labor MRP = demand $350 5 Q

46 Derived demand means that a firm demands labor because labor is productive. Changes in consumer demand for a product cause changes in demand for labor and for other resources used to make the product.

47 The supply curve of labor is the curve showing the quantities of workers willing to work at different prices of labor. The market supply curve of labor is derived by adding the individual supply curves of labor.

48 $280 $210 $140 $ Supply Curve of Labor$ S Quantity of Labor Wage Rate per day

49 Collective bargaining is the process through which a union and management negotiate a labor contract.

50 Poverty is absolute terms is a dollar figure that represents some level of income per year required to purchase essential goods and services

51 Poverty is relative terms is a level of income that places a family in, lets say, the lowest 20% of households

52 END