Download Economics 0401 Definitions-Part 1 01. SCARCITY: This occurs

Economics 0401
Definitions-Part 1
01.
SCARCITY: This occurs when relatively unlimited human
wants exceed the ability of limited resources to satisfy
those wants.
02.
OPPORTUNITY COST: The value of the next best alternative
given up in order to accomplish a certain goal.
03.
RATIONALITY: Individuals weigh the expected benefits and
costs of their actions, all other things held constant, and
act when expected benefits exceed expected cost but refrain
from acting when expected costs exceed expected benefits.
04.
VOLUNTARY EXCHANGE: Provided that a seller of a good or
service owns whatever is to be exchanged and the two
parties to a potential exchange can bargain over the
exchange price (a) exchange will occur if both parties
benefit from the exchange, or (b) exchange will not occur
if one party does not benefit from the exchange.
NOTE: Exchange is voluntary when both parties consent to
the exchange or (b) when either party is free to turn down
an offer of exchange.
05.
COERCED EXCHANGE: When one party to a potential exchange
can force an exchange using the force of law as long as
such an exchange is beneficial to him. The other party will
typically lose from the exchange, and so would not have
consented to the exchange if given the freedom to refuse
the offer. Such exchanges generally generate negative
unintended consequences.
06.
BARGAINING POWER: There are two types of bargaining power.
(a) Competitive bargaining power occurs when exchange is
voluntary while the division of the gains from trade depend
on the bargaining experience of each party.
(b) Monopolistic bargaining power occurs when one party to
an exchange can legally coerce some or all of the parties
on the opposite side of the market to accept terms such
that most or all the gains from trade accrue to parties on
one side of the market and some or all of the nonconsenting parties on the other side of the market incur
smaller gains from trade or losses.
07.
EXPLOITATION: In labor markets, this occurs when buyers can
force the marginal seller to accept a wage below his
productivity or sellers can force the marginal buyer to pay
a wage above their productivity.
08.
LAW OF DEMAND FOR LABOR: The quantity demanded of labor
varies inversely with the wage rate, all other things held
constant.
09.
DEMAND PRICE OF LABOR: The maximum wage that an employer is
willing to pay a given worker, based on an estimate of that
worker’s productivity.
10.
OUTPUT (SCALE) EFFECT: The change in employment which
occurs because of a change in the firm’s output. This
change in output is caused by a change in the wage rate
which causes the firm’s cost of production and the desired
level of output to change.
11.
SUBSTITUTION EFFECT (As It Relates to Production): The
change in employment resulting solely from a change in the
relative price of labor, output being held constant.
12.
SHIFTS IN THE DEMAND FOR LABOR: Changes in the factors
that are held constant will cause a shift in the demand
curve as opposed to a movement along the demand curve.
These changes include changes in the product demand, prices
of other inputs (substitutes or complements), and
the number of employers.
13.
DERIVED DEMAND: The notion that the demand curves for labor
and other productive services are derived from the demand
for the product they are used to produce.
14.
LAW OF SUPPLY FOR LABOR: The quantity supplied of labor
varies directly with the wage, all other things held
constant.
15.
SUPPLY PRICE OF LABOR: The lowest wage at which a given
worker is willing to supply labor to a particular market.
This wage is determined by the opportunity cost to that
worker of supplying his labor services to that market
instead of his next best alternative.
16.
SHIFTS IN THE SUPPLY OF LABOR: Changes in the things held
constant will cause shifts in the labor supply curve, as
opposed to a movement along the curve. These changes
include (a) other wage rates, (b) non-wage income, (c) nonwage aspects of jobs, and (d) the number of qualified labor
suppliers.
17.
EQUILIBRIUM: Occurs when the quantity demanded of labor
equals the quantity supplied of labor at a given wage.
18.
EXCESS SUPPLY (ES): Occurs when the market wage is greater
than the equilibrium wage, so that the quantity supplied of
labor is greater than the quantity demanded of labor (ES =
LS – LD > 0). In this situation, wages have a tendency to
fall as unemployed workers lower their wage offers in order
become employed.
19.
EXCESS DEMAND (ED): Occurs when the market wage is less
than the equilibrium wage, so that the quantity demanded of
labor is greater than the quantity supplied of labor (ED =
LD – LS > 0). In This situation wages have a tendency to
rise as employers try to fill their vacant positions.
20.
SOCIAL WELFARE MAXIMUM (SWM): This occurs when the sum of
the gains from trade for workers and employers is a
maximum, a situation that normally occurs at the market
equilibrium.
21.
WELFARE LOSS (WL): This occurs because either (a) too few
workers are employed relative to the number of workers
employed at the social welfare maximum (with workers being
diverted to other markets where they have lower valued
uses) or (b) too many workers are employed relative to the
number of workers employed at the social welfare maximum
(with workers being employed in a lower valued use in the
given market).
.