how are wages determined in competitive labor markets the factor market questions on the ap test...

How are wages determined in competitive labor markets

The factor market questions on the AP test will place the heaviest emphasis on labor

markets because labor accounts for almost 70% of payments to factors of production

1. What two factors affect the demand for labor?

1. What two factors affect the demand for labor?

• Product Price produced by labor– Derived demand from the product market

demand for the good– Think Marginal Revenue

• Productivity of labor– Marginal Product

2. How does marginal revenue product affect the demand for

labor?

2. How does marginal revenue product affect the demand for

labor?• A firm hires labor until the wage equals the marginal

revenue product – (mrc = mrp)

• A single firm can’t control the wage, because it is only one among many firms, in the competitive labor market – Just as it can’t control price in the product market

• MRP is the demand curve for labor– Times the # of firms in the market

• A firm will hire workers as long as the worker contributes more to total revenue than total costs

3. Why is the demand curve for labor downward sloping?

3. Why is the demand curve for labor downward sloping?

• Because at a moment in time, all things being equal (ceteris Paribas), the marginal revenue of a product is constant, and

• Because MRP = MR * MP, and• Because the MRP curve for a firm is the

demand curve for labor for the firm• Ergo- Only the law of diminishing

marginal returns explains why the labor curve is downward sloping

4. What determines the market supply of labor?

4. What determines the market supply of labor?

• The number of people willing and able to work at various wages– The opportunity cost of not working

• Leisure• Home with the kids• Education (human capital formation)

5. Why is the market supply curve for labor upward sloping?

5. Why is the market supply curve for labor upward sloping?

• More people are willing or able to work if they are paid more– The opportunity cost of not working has risen– They may have been able but unwilling– They may have been willing but unable

• 6. What is the equilibrium wage in this labor market?

Quantity of Labor

Wag

e R

ates

100

$5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

.50

700 800 900 1,000300200 400 600500

D

S

A Market for Labor

• 6. What is the equilibrium wage in this labor market? $3.00

Quantity of Labor

Wag

e R

ates

100

$5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

.50

700 800 900 1,000300200 400 600500

D

S

A Market for Labor

• 7. How many workers will be hired in this labor market?

Quantity of Labor

Wag

e R

ates

100

$5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

.50

700 800 900 1,000300200 400 600500

D

S

A Market for Labor

• 7. How many workers will be hired in this labor market? 500 workers

Quantity of Labor

Wag

e R

ates

100

$5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

.50

700 800 900 1,000300200 400 600500

D

S

A Market for Labor

• 8. If a minimum-wage law raises the minimum wage to $4.00 an hour, what quantity of labor will be supplied?

Quantity of Labor

Wag

e R

ates

100

$5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

.50

700 800 900 1,000300200 400 600500

D

S

A Market for Labor

• 8. If a minimum-wage law raises the minimum wage to $4.00 an hour, what quantity of labor will be supplied? 800 workers

Quantity of Labor

Wag

e R

ates

100

$5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

.50

700 800 900 1,000300200 400 600500

D

S

A Market for Labor

• 9. At a minimum wage of $4.00 an hour, what quantity of labor will be demanded?

Quantity of Labor

Wag

e R

ates

100

$5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

.50

700 800 900 1,000300200 400 600500

D

S

A Market for Labor

• 9. At a minimum wage of $4.00 an hour, what quantity of labor will be demanded? 300 workers

Quantity of Labor

Wag

e R

ates

100

$5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

.50

700 800 900 1,000300200 400 600500

D

S

A Market for Labor

• 10. How many workers would be laid off or lose their jobs because of the $4.00 minimum wage?

Quantity of Labor

Wag

e R

ates

100

$5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

.50

700 800 900 1,000300200 400 600500

D

S

A Market for Labor

• 10. How many workers would be laid off or lose their jobs because of the $4.00 minimum wage? 200 workers

Quantity of Labor

Wag

e R

ates

100

$5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

.50

700 800 900 1,000300200 400 600500

D

S

A Market for Labor

• 11. How many more workers are seeking a job because of this minimum wage?

Quantity of Labor

Wag

e R

ates

100

$5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

.50

700 800 900 1,000300200 400 600500

D

S

A Market for Labor

• 11. How many more workers are seeking a job because of this minimum wage? 300 workers

Quantity of Labor

Wag

e R

ates

100

$5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

.50

700 800 900 1,000300200 400 600500

D

S

A Market for Labor

• 12. If demand for labor were more inelastic, would more or fewer workers lose their jobs because of the $4.00 minimum wage?

Quantity of Labor

Wag

e R

ates

100

$5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

.50

700 800 900 1,000300200 400 600500

D

S

A Market for Labor

• 12. If demand for labor were more inelastic, would more or fewer workers lose their jobs because of the $4.00 minimum wage? fewer

Quantity of Labor

Wag

e R

ates

100

$5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

.50

700 800 900 1,000300200 400 600500

D

S

A Market for Labor

13. Would skilled or unskilled workers be more likely to lose their jobs because of a minimum-wage

law?

13. Would skilled or unskilled workers be more likely to lose their jobs because of a minimum-wage

law?

• unskilled

14. Who benefits from the minimum wage?

14. Who benefits from the minimum wage?

• Skilled workers and the unskilled workers who have not been laid off

15. Who is hurt by the minimum wage?

15. Who is hurt by the minimum wage?

• Unskilled workers who lose their jobs– Those with the least skills – The youngest workers– Those susceptible to discrimination by

employers• Ethnic Minorities• The disabled• Older higher paid workers

16. Do you favor a higher minimum wage? Why or why not?

16. Do you favor a higher minimum wage? Why or why not?

This is why my tech kids like micro rather than macro; there’s fewer of

these social policy decisions! lol• Yes • No