Hello everyone.

I finally have some time that I can help you.  I am adding the guide bit by bit so check for updates.

Greg

Study Guide 1
Fall 2012
Labor Economics

Chapter 1:  Introduction

As in all of your classes, make sure that you know the jargon

positive economic statements, normative statements, model, analytical model, assumption, exogenous, endogenous, supply, demand, substitution effect, scale effect, equilibrium, methodological individualism, rational, pareto efficient,

What make a good model?

How are analytical models different from descriptive models?

Be able to use a basic supply and demand model.

    You do not need to memorize the factors that affect supply and demand, but you should be able to use them.

Questions 3 and 4 are good examples of a graphic problem

You should also be able to solve for equilibrium if give a demand curve or a supply curve

Question 6 is a good example

Can you explain in word the substitution effect and the scale effect?

What does it mean to be rational?

Is rationality a good assumption?

What is Pareto Efficiency?

What are some problems with our traditional supply and demand framework?

Chapter 2:  The US Labor Market

This chapter is full of jargon and basic equations need to calculate the statistics.

Jargon: Current Population Survey, Total Population, Employment, Unemployment, Discouraged Worker, Marginally Attached, Not in the Labor Force, Labor Force, earnings, employee benefits, total compensation

Equations:

Can you calculate the labor force participation rate

the employment rate

the unemployment rate

the employment-to-population rate

There is a section on earnings, but I will not have you calculate these.  The definitions vary slightly across books and it would be best to look up that information when need.

What is the CPI?

How can we use the CPI to get a real wage?

Chapter 3: Demand for Labor

This chapter gave many of you troubles because of the lack of examples.  I suggest you go look at you review this guide and remind yourself of the equilibrium conditions.  I will make suggestions on ways that I could modify an end of the chapter question to make it a test question.

As always jargon, but I will skip it in this study guide to focus in on the process.

1.  Model of Perfect Competition

You should be able to explain the assumptions used in perfect competition.

2.  The Firms' goal is to max profit

What is the equation for profit max?

And although we are not there yet, you should know the equilibrium condition.

3.  What is preventing you from obtaining unlimited profits?

This constraint is listed in the book as technology, but we could also include capital and raw materials in the short run

This is the section that focus on the production function and the marginal product.

What is the shape of a production function?

What cause the shape of the production function?

....and the marginal product

It was at this point that I deviated from the textbook.  I continues from the point and finished profit max like in 202.

We looked at the cost curves derived from the production function.

We look at the marginal cost curve.

And we said that in PC the P is given and that it is equal to the marginal cost.

This gave us an equilibrium MR = MC

We then explored what would happen if MR was greater than or less than the 0-profit point.

We called this 0-profit point the long-run equilibrium

It was her that I switch back to the book and explored the labor market equilibrium

We know that the basic rule is the MB = MC

and when we are in the labor market the MB is the MRPL
and the MC is the marginal cost of labor MCL

Be sure to be able to explain what the MRPL is.

In general terms MRPL = MPL * MR

In PC MRPL = MPL * P       Because MR=P in PC.

Also in PC the marginal cost of labor MCL is just the nominal wage W.

Our PC equilibrium will be MPL*P = W

This brings us back full circle to the production function and calculating the MPL

The demand for labor is the MRPL and the supply is W.  (Remember that we are talking about 1 firm and not the market.)
My equilibrium is MPL*P = W

If you remember, I stated that the amount of labor derived from our equilibrium above is the exact amount of labor need to produce the profit max amount that we calculated using MR = MC.  They are the same!

The second problem from the end of the chapter 3 questions provides some practice with production functions.

The 4th one is a very good problem.  After reading about the equilibrium in English in both the text and here in the guide you are now asked to find the equilibrium. 

The final two sections illustrate the monopoly and the monopsony.  In spite of my poor problem solving on Friday, they are quite easy.

MONOPOLY

We have the same general rule MRPL = MC

MRPL = MPL * MR    I must stop here!  Above we went on to P, but MR does not equal P in a monopoly case.

Nothing changes on the other side the marginal cost of labor is still W

Equilibrium MPL * MR = MC

We know that the monopoly demand (MPL*MR) is left of the PC demand (MPL*P), therefore, monopolies want fewer workers.  Which makes sense because we leaned in 202 that monopolies produce less that PC.

MONOPSONY

We have the same general rule MRPL = MC

In this case the MRPL does not change.

We have PC for the good so MRPL = MPL * P  (P=MR in PC)

The Cost, however, is different.  We no longer have a constant W.  We must lower the wage to get more.

The margin cost of labor is W(L) + (ΔW / ΔL)*L

The first part is the direct effect and the second is the indirect effect.

Our equilibrium is MPL * P = W(L) + (ΔW / ΔL)*L

Chapter 5 Supply

I will add more later, but I should at least get the basics now.

What is an indifference cure?

What are the rules an indifference curve must follow?

Graph a set of indifference curves for Money Income/Consumption and leisure.

What is the marginal rate of substitution?

What is the marginal utility of leisure?

What is the marginal utility of consumption?

What is the slope of an IC?

MRS = MU of leisure / MU of consumption

What is the BC?

What are we constrained by?

What does it look like when we increase the non-labor income?  Or we increase wages?

What is the slope of the BC

Where is the equilibrium?

Where the slopes are equal

or MRS = slope of BC

or (MU of leisure / MU consumption) = W

or MU of leisure = W * MU of consumption

or (the way I like)  W / MU of leisure = 1 / MU of consumption

What happens when income increases?

What happens when wage increases?

What is the substitution effect?  (In words is good enough)

What is the income effect?  (In words is good enough)