1. ©2002 South-Western College Publishing
Chapter 11 Labor Markets
Key Concepts
Summary
Practice Quiz
Internet Exercises
©2002 South-Western College Publishing

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

3. Market Supply and Demand
Wages D
Quantity of Labor

4. 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

5. Production Function Total Output 1 2 3 4 5 660
Production Function 50 40
Total Output 30
Total Output 20 10
Quantity of Labor 1 2 3 4 5 6

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

7. Marginal Product Curve Law of Diminishing Returns12 10 8
Marginal Product 6
Law of Diminishing Returns 4 2
Quantity of Labor 1 2 3 4 5 6

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

9. Q MRP = demand Demand Curve for Labor 1 2 3 4 5 $350 $280 $210 $140
$70 Q 1 2 3 4 5

10. Increase in Quantity of labor an employer will hire
Decrease in
Wage Rate

11. 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

12. 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

13. 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

14. S $350 Supply Curve of Labor $280 $210 $140 $70 10 20 30 40 50
Wage Rate per day
$140
$70
Quantity of Labor 10 20 30 40 50

15. Increase in Quantity of labor willing to work
Wage Rate

16. What is human capital?
The accumulation of education, training, experience, and health that enables a worker to enter an occupation and be productive

17. Competitive Labor Market
$350
Competitive Labor Market
$280 S E
$210
Wage Rate per day
$140 D
$70
Quantity of Labor 10 20 30 40 50

18. Competitive Labor Market
$350
$280 E S
$210
Wage Rate per day
$140 D
$70
Quantity of Labor 1 2 3 4 5

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

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

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

22. What is featherbedding?
Unions force firms to hire more workers than are required or to impose work rules that reduce output per worker

23. What else can unions do to increase the demand for labor?
Decrease competition from other nations

24. Unions cause an increase in the demand for labor
$350
$280 S E2
$210
Wage Rate per day E1
$140 D2
$70 D1
Quantity of Labor 10 20 30 40 50

25. Increase in wages and employment
Increase in the demand for labor
Union featherbeds

26. Unions cause a decrease in the supply for labor
$420
$350 S2 E2 S1
$280
Wage Rate per day E1
$210 D1
$140
Quantity of Labor 10 20 30 40 50

27. How else can unions raise wages?
Collective bargaining

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

29. Collective Bargaining causes a Wage Rate increase
$350
$280 S
Unemployment
$210
Wage Rate per day
$140 D
$70
Quantity of Labor 10 20 30 40 50

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

31. 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

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

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

34. What is a monopsony?
A labor market in which a single firm hires labor

35. Union Membership for Different Countries
87%
75%
Union Membership for Different Countries
40%
32%
32%
29%
24%
15%
U.S.
Japan
Canada
U.K.
Germany
Italy
Denmark
Sweden

36. What is marginal factor cost (MFC)?
The additional total cost resulting from a one-unit increase in the quantity of labor

37. What conclusion can be drawn from a monopsonistic market?
Because the monopsonist can hire additional workers only by raising the wage rate for all workers, the MFC > W

38. A Monopsonist determines its Wage Rate
$18
MFC
$15 E S
$12
Dollars per hour F $9
D (MRP) $6
Quantity of Labor 1 2 3 4 5

39. How are wages compared between the two markets?
A monopsony hires fewer workers and pays a lower wage than a firm in a competitive labor market

40. Key Concepts

41. Key Concepts
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?
What does the supply curve for labor show?

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

43. Key Concepts cont. What has happened to union membership since WWII?
How does union membership in the u.S. Compare to other countries?
What is a monopsony?
What is marginal factor cost (mfc)?
How are wages compared between the two markets?

44. Summary

45. 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).

46. 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.

47. Q MRP = demand Demand Curve for Labor 1 2 3 4 5 $350 $280 $210 $140
$70 Q 1 2 3 4 5

48. 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.

49. 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.

50. S $350 Supply Curve of Labor $280 $210 $140 $70 10 20 30 40 50
Wage Rate per day
$140
$70
Quantity of Labor 10 20 30 40 50

51. Human capital is the accumulated people make in education, training, experience, and health in order to make themselves more productive. One explanation for earnings differences is differences in human capital.

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

53. Monopsony is a labor market in which a single firm hires labor
Monopsony is a labor market in which a single firm hires labor. Because the monopsonist faces the industry supply curve of labor and each worker is paid the same wage, changes in total wage cost exceed the wage rate necessary to hire each additional worker. As a result, the marginal factor cost (MFC) of labor curve lies above the supply curve of labor.

54. The monopsonist’s wage rate and quantity of labor are determined where the MFC equals MRP . Since at this point the worker’s MRP is greater than the wage paid, the monopsonist exploits the workers.

55. A Monopsonist determines its Wage Rate
$18
MFC
$15 E S
$12
Dollars per hour F $9
D (MRP) $6
Quantity of Labor 1 2 3 4 5

56. END