Summary
Economics 114 Summary
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,ttotttHH.tt:L:-
UNIT 9 .
> price -
setting firms =
produce differentiated products
> principle agent module = explain conflict of interest btwn employers + employee over workers efforts
s even in an equi Iib .
supply of labour exeeds demand for labour
◦
those w/out wrk in this situation =
involuntarily unemployed
→
labour =
only input in production
d. : the firms WAGE
only cost to =
( nominal
>
profit =
f wage , price of good ,
ave .
output per wrker per hour )
diff . btwn the value of a job t the value of the nxt
best alternative -
[When = to be unemployed +
hiring to search
THE LABOR MARKET for another job]
◦
firms + employees :
wages =
must be set high enough so tht employees earn employment rent
firm + customers how firms determine wht price to charge for their good
• :
>
they hv.to determine profit -
maximizing mark -
up
WAGES EMPLOYMENT +
real Nominal
wage
=
wage
Price / v1 of Std bundle of
goods
> 2 Step process :
1. each firm sets their price :
decides how many workers to hire + wht wage to pay thm each
2 . we add together each individual firm 's decision ,
we get :
> tot . employment for the economy + real wage
step one :
each firm sets price I # of workers to hire + Wht wage to pay thm ]
>
HR dept .
=
determine the lowest wage it can pay
◦
wage = NOMINAL WAGE =
f- ( price of others firm 's product > the
wage tht other firms -
_
paying •
unemployment rate in the country )
info abt the nominal sent to the
marketing dept
◦
wage
=
.
>
mrkting dept.
=
sets price [ based on ] :
{
>
nominal wage ,
and
price = then set thru production dept .
>
shape + position of demand curve
r
determines # workers to hire to produce the amt . of output [determined by mrkting dept ]
step two :
combining firms decision to
get tot . employment t real wage
all firms make their price ( P) / mark up / wage ( w )
◦
= -
"
output per wrkr = ÷ into real wage [ worker receives ] + real profit [owner receives ]
◦
if firms =
charging same price + set same nominal wage then : ↑ real wage ( %) =
↓ mark-up ( I -
%)
ECONOMICALLY ACTIVE
[ Whn looking @ the
narrow labour force ]
The Labour Market
7
}
T employed
LABOUR FORCE
defhitioofmemmmem-fg.g.gg
working age popn
,yed
-
( WAP )
willing + able to wrk
[ gagging +☐ woad
, , g. µ , µ ,, , , µ ,,,
g , ,,,y, , , age,
=
discourage wrk
seekers ]
]
/
15 -
04
,
discouraged wrk
seekers
POPULATION
people < 15 or > 04
/
✓ i. too
young / old to
" mm "mom" "" ' " nom " " " "" " "=
" ""
INACTIVE
Neither willing nor
[ Whn looking @ the
able to wrk [ Whn looking @ the narrow labour force ]
broad labour force
[ inactive ] ]
LABOUR MARKET STATS
participation rate :
labour force broad participation rate : BROAD labour force broad unemployment rate = # of ppl unemployed according to broad definition of unemployment
Popn of the working age popn of working age # Of people in broad labour
the force
= # of ppl narrowly unemployed t
discouraged wrk seekers
# Of ppl in broad labour force
unemployment rate :
unemployed narrow participation rate : NARROW labour force
labour force Popn Of working age
narrow unemployment rate = # of ppl unemployed according to narrow definition of unemployment
= broad labour force -
discouraged Nrkseekers # of ppl in broad labour force -
discouraged wrk seekers
popn of working age
employment rate employed =
# of ppl unemployed according to narrow definition of unemployment
= # of narrowly unemployed t # of employed ppl ppl employed
popn of # Of narrowly unemployed + # of
the working age
popn of working age
unemployment rate + employment rate ≠ 1
, ttottttits-tt.tn:
9. 3 WAGE -
SETTING CURVE :
employment + real wage board Labour force
real wage =w
'ʳ /
WP
Labour
real wage : force §
Willing + able
1.
to wrk
§
( broad labour force )
%
0 """ " " me"
rate = 5%
""""" "
0=12 %
" """ '
E E
O
3 &
-
A
wage setting curve
employment rate unemployment
B
-
,
◦ ʳᵈ" =
" % • •
!
//
popn of working age 9 WAP [ ppl btwn 15 -
04 yrs ] 0.5
proportion of working age I
best response function 0=5 %
,
E
E
EE
...f µ
"
E
www.unemp.a.mn, @ man ,
;¥
, .
..mn. , , µ,
±¥
, .
w. wa
wages ,,
÷
3 by employer
g. status quo * response a. we
go @u =
,,,
, wage is w,
hourly wage , w ( s)
B. best response curve ( w/ higher unemployment benefit )0 ° "
4=12-1 0=51 . I
W- W"
◦,
.
reservation
o
wages
proportion of working age popn
-
Hourly wage
9. L .
THE FIRM 'S HIRING DIIISION
•
how firms decide how many wrkers to hire > firm =
only 1 input : labour 9 . : the only cost for firm =
wages
(w
how many workers a firm hires =
f ( how much the firm produces ) A FURTHER SIMPLIFYING ASSUMPTION :
" """ " """ combined decision "
HR , marketing { Production
how much a firm produces =
f- ( quant the firm is able to sell ) > 1hr of labour = 1 unit of output . : are product of labour = X ( lamda ) =
I
department
.
quantity tht a firm is able to sell =
f- ( price of good )
-
HR sets the nominal wage (w) marketing department sets price of output ( P)
production department determines employment ( n)
> wrk force
HR sets wage sufficiently high enough to motivate the
then the MARKETING DEPT :
2. determines which combos of p +
q
=
feasible and
,
2. picks apt .
On demand curve to see how profitable each price -
quantity combo will be
>
using the
wage ( w) determined by HR the , Mrkting Dept .
constructs the iso profit curve ↑
*
profit per unit output each iso profit curves all the combos of price +
quant .
tht =
yield the same / v1
a
wage per unit output of profit given the wage
Yu%¥s
.
!?÷;÷. .
" a ,
Slope of the isoprofit curve =
MRS
=
( P -
W)
tot revenue =
p*xq*
q
WAGE > the mrkting dept .
sets price p* t calculates tht •
production dept knows tht each hrs of worker's time produces 1 unit of the good
*
?
" n* '
n* =q*
÷:*
" "" •
firm hires workers hrs of labour where
jÉ
,
A
•
PRODUCTION FUNCTION OF THE FIRM
w •
..
•
@ point A : on lower isoprofit curve the mrkting dept .
=
↑ price t tell production dept to produce less
,
q* (given economy wide -
demand )
. "" ""
.i ."" " " "
9. I PNII-SI-IHNI-NRVI-WAh-I-si-PROH.IS/NIHI-WHllIIl0N0 MY
Nominal wage =
set by HR
real wage
wages
OUTPUT PRICE
profit
real Profit
labour SUPPLY
firm sets price as mark up over wage cost
-
w.i.ir?: . .:.:*-1=:µ : : :.i. . .in
real profit per
OÉ .
-
.
price per unit of output =
profit per unit + wage cost per unit
É
s
#↓^
Of labour j
e ,
É
or
oÉ
3
B n
ʰ
• price setting curve
Whn all firms set their price this way
:
o output per ^
"" """ °" .
sÉ
-
a
curve output per worker [ labour productivity / average product of labour , × ]
8-
⇐ •
wages
v v v r
=
real profit per worker t real wage per worker
high
employment "
=
Whn P too high ,
↑ denominator [ P ]
employment ,
N ( whole economy ) @ A
,
real wage = too high + mark up -
too low
; firms = raise prices t given demand > output falls
@ C
,
real wage = too low t mark -
up too high ; firm = lowers price + given demand s output rises
frm A → B : -
increase prices
-
decreased employment
The Price -
setting curve :
real wage paid Whn firms choose their profit -
maximizing price .
it depends on : •
competition when determines mark -
up
◦
labour productivity which determines real wage for given mark UP -
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