Sorry about the fonts and the underlining, but I think that should be OK.

 

Labor

Ø       the labor demand of competitive, profit-maximizing firms.

Ø       the household decisions that lie behind labor supply.

Ø       why equilibrium wages equal the value of the marginal product of labor.

KEY POINTS:

1.       The economy’s income is distributed in the markets for the factors of production.  The three most important factors of production are labor, land, and capital.

2.       The demand for factors, such as labor, is a derived demand that comes from firms that use the factors to produce goods and services.  Competitive, profit-maximizing firms hire each factor up to the point at which the value of the marginal product of the factor equals its price.

3.       The supply of labor arises from individuals’ tradeoffs between work and leisure. 

4.       The price paid to each factor adjusts to balance the supply and demand for that factor.  Because factor demand reflects the value of the marginal product of that factor, in equilibrium each factor is compensated according to its marginal contribution to the production of goods and services.

 

I.          Definition of factors of production: the inputs used to produce goods and services.

A.         The markets for these factors of production are similar to the markets for goods and services discussed earlier, but they are different in one important way.

B.         The demand for a factor of production is a derived demand, meaning that the firm's demand for a factor of production is derived from its decision to supply a good in another market.

II.         The Demand for Labor

Text Box: In the market for labor, households are the suppliers while firms are the demanders. 


  

 

A.         The wage earned by workers is determined by the supply and demand for workers.

B.         The Competitive Profit-Maximizing Firm

1.         Example: A firm that owns an orchard must decide how many apple pickers to hire.

2.         Assume that the firm operates in both a competitive output market and a competitive labor market.

a.         This implies that the firm is a price taker in the apple market, meaning that it has no control over the price at which it can sell its apples.

b.         The firm is also a price taker in the labor market, meaning that it has no control over the wage that it must pay its apple pickers.

3.         Assume also that the firm's goal is to maximize profit (total revenue – total cost).

 

 

1.         The firm must consider how the quantity of apples it can harvest and sell is affected by the number of apple pickers hired.

 

2.         Definition of marginal product of labor: the increase in the amount of output from an additional unit of labor.

3.         Definition of diminishing marginal product: the property whereby the marginal product of an input declines as the quantity of the input increases.  This was crowding in my birdhouse factory!

D.         The Value of Marginal Product and the Demand for Labor

1.         When deciding how many workers to hire, the firm considers how much profit each worker would bring in.

2.         Because profit equals total revenue minus total cost, the profit from an additional worker is the worker's contribution to revenue minus the worker's wage.

3.         Definition of value of the marginal product: the marginal product of an input times the price of the output.

 

Text Box:

 
 

            a.         Economists sometimes refer to the value of marginal product as the firm’s marginal revenue product.

 

            b.         The value of the marginal product is the extra revenue a firm gets from hiring an additional unit of a factor of production.

6.         A competitive, profit-maximizing firm hires workers up to the point where the value of the marginal product of labor is equal to the wage.

 

 

 

 

7.         Because the firm chooses the quantity of labor at which the value of the marginal product equals the wage, the value-of-marginal-product curve is the firm's labor demand curve.

 

 

            F.         What Causes the Labor Demand Curve to change?

                      1.         The Output Price

                      2.         Technological Change

                      3.         The Supply of Other Factors

                      4.         Other workers

 

III.        The Supply of Labor

 

            A.         The Tradeoff between Work and Leisure

1.         Any hours spent working are hours that could be devoted to something else like studying, or watching television.  Economists refer to all time not spent working for pay as “leisure.”

2.         The opportunity cost of an hour of leisure is the amount of money that would have been earned if that hour was spent at work.

4.         The labor supply choice is in terms of the labor-leisure tradeoff.

 

            B.         What Causes the Labor Supply to Change?

                         1.         Changes in Tastes (for leisure vs. working)

                         2.         Changes in Alternative Opportunities (other occupations)

                         3.         Immigration

 

IV.        Equilibrium in the Labor Market

 

1.         The wage adjusts to balance the supply and demand for labor.

KEY POINTS:
  1. The goal of firms is to maximize profit, which equals total revenue minus total cost.
  2. When analyzing a firm’s behavior, it is important to include all the opportunity costs of production. Some of the opportunity costs, such as the wages a firm pays its workers, are explicit. Other opportunity costs, such as the wages the firm owner gives up by working in the firm rather than taking another job, are implicit.
  3. A firm’s total costs can be divided between fixed costs and variable costs. Fixed costs are costs that do not change when the firm alters the quantity of output produced. Variable costs are costs that do change when the firm alters the quantity of output produced.
  4. When analyzing firm behavior, it is often useful to graph the marginal revenue and the marginal cost. For a typical firm, marginal cost rises with the quantity of output and marginal is constant at the price
  5. A firm’s costs often depend on the time horizon being considered. In particular, many costs are fixed in the short run but variable in the long run.

 What Are Costs?

A. Total Revenue, Total Cost, and Profit

1. Goal of a firm: to maximize profit.

2. Definition of Total Revenue: the amount a firm receives for the sale of its output.

3. Definition of Total Cost: the market value of the inputs a firm uses in production.

4. Definition of Profit: total revenue minus total cost.

B. Costs as Opportunity Costs

1. The cost of something is what you give up to get it.

2. The costs of producing an item must include all of the opportunity costs of inputs used in production.

3. Total opportunity costs include both implicit and explicit costs.

                           II. From the Production Function to the Total-Cost Curve

1. We can draw a graph of the firm’s total cost curve by plotting the level of output (x-axis) against the total cost of producing that output (y-axis).

a. The total cost curve gets steeper and steeper as output rises.

III. The Various Measures of Cost

A. Fixed and Variable Costs

1. Definition of Fixed Costs: costs that do not vary with the quantity of output produced.

2. Definition of Variable Costs: costs that do vary with the quantity of output produced.

3.  Definition of Marginal Cost: the increase in total cost that arises from an extra unit of production.

4. Rising Marginal Cost

a. This occurs because of crowding (in my birdhouse factory.)

FIRMS IN COMPETITIVE MARKETS

KEY POINTS:
  1. Because a competitive firm is a price taker, its revenue is equal to its price.
  2. To maximize profit, a firm chooses a quantity of output such that the spread between total revenue and total cost is at its greatest or that marginal revenue equals marginal cost. Because marginal revenue for a competitive firm equals the market price, the firm chooses quantity so that price equals marginal cost.
  3. In a market with free entry and exit, profits are driven to zero in the long run.

I. What Is a Competitive Market?

A. The Meaning of Competition

B. The Revenue of a Competitive Firm

1. Total revenue from the sale of output is equal to price times quantity.

    1. Definition of Marginal Revenue: the change in total revenue from an additional unit sold.

3. The profit-maximizing quantity can be found by comparing marginal revenue and marginal cost.

a. If marginal revenue is greater than the marginal cost, the firm can increase its profit by increasing output.

b. If marginal cost is greater than marginal revenue, the firm can increase its profit by decreasing output.

c. At the profit-maximizing level of output, marginal revenue is equal to marginal cost.

 

D. The Firm’s Long-Run Decision to Exit or Enter a Market

Exit if TR < TC.  ie Profit is < 0

Enter if  TR > TC. ie Profit is > 0

MONOPOLY

  Ø       why some markets have only one seller.
Ø       how a monopoly determines the quantity to produce and the price to charge.
Ø       the various public policies aimed at solving the problem of monopoly.

KEY POINTS:

1.       A monopoly is a firm that is the sole seller in its market.  A monopoly arises when a single firm owns a key resource, when the government gives a firm the exclusive right to produce a good, or when a single firm can supply the entire market at a smaller cost than many firms could.

2.       Because a monopoly is the sole producer in its market, it does not have a constant price like the perfect competitor.

3.       Like a competitive firm, a monopoly firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost.  Unlike a competitive firm, a monopoly firm’s price exceeds its marginal revenue, so its price exceeds marginal cost.

 4.       A monopolist’s profit-maximizing level of output is below the level that of the perfect competitor.

 5.       Policymakers can respond to the inefficiency of monopoly behavior in four ways.  They can use the antitrust laws to try to make the industry more competitive.  They can regulate the prices that the monopoly charges.  They can turn the monopolist into a government-run enterprise.  Or, if the market failure is deemed small compared to the inevitable imperfections of policies, they can do nothing at all.

Some Notes 

I.          A competitive firm is a price taker; a monopoly firm is a price maker.

 II.         Why Monopolies Arise

     A.         Definition of monopoly: a firm that is the sole seller of a product without close substitutes.

     B.         The fundamental cause of monopoly is barriers to entry.

         1.         Monopoly Resources

                     a.         A monopoly could have sole ownership or control of a key resource that is used in the production of the good.

                     b.         The DeBeers Diamond Monopoly—this firm controls about 80 percent of the diamonds in the world.

         2.         Government-Created Monopolies

                     a.         Monopolies can arise because the government grants one person or one firm the exclusive right to sell some good or service.

                     b.         Patents are issued by the government to give firms the exclusive right to produce a product for 20 years.

 3.         Monopolies because of high fixed costs.

 

III.        How Monopolies Make Production and Pricing Decisions

 

A.         Monopoly Versus Competition

1.         The key difference between a competitive firm and a monopoly is the monopoly's ability to control price.

                                                 a.         A competitive firm can sell all that it wants to at this price.

                                                 b.         A monopoly faces the market demand curve because it is the only seller in the market.  If a monopoly wants to sell more output, it must lower the price
                                                              of its product.

 

C.         Profit Maximization

 

1.         The monopolist's profit-maximizing quantity of output occurs where marginal revenue is equal to marginal cost.

 

a.         If the firm's marginal revenue is greater than marginal cost, profit can be increased by raising the level of output.

 

b.         If the firm's marginal revenue is less than marginal cost, profit can be increased by lowering the level of output.

 

2.         Even though MR = MC is the profit-maximizing rule for both competitive firms and monopolies, there is one important difference.

a.         In competitive firms, P = MR; at the profit-maximizing level of output, MR = MC.

                                                 b.         In a monopoly, P does not equal MR; but the profit-maximizing level of output, is still MR = MC.

 IV.         Public Policies toward Monopolies

     A.         Increasing Competition with Antitrust Laws

         B.         Regulation

                 Text Box:             Local phone and electric companies are good examples of regulated monopoly firms. 1.         Regulation is often used when the government is dealing with a natural monopoly.

 


  

2.         Most often, regulation involves government limits on the price of the product.

C.         Public Ownership

                             1.         Rather than regulating a monopoly run by a private firm, the government can run the monopoly itself.

                             2.         If government bureaucrats do a bad job running a monopoly, the political system is the taxpayers only recourse.

 D.         Do Nothing

     1.         Sometimes the costs of government regulation outweigh the benefits.

     2.         Therefore, some economists believe that it is best for the government to leave monopolies alone.