Download Utility, Wages, and Externalities (Micro Review

Micro Review
Utility, Wages, and Externalities
TP and AP
• Total Product (TP)- the total output of a
particular good or service produced
• Average Product (AP)- the total output
produced per unit of a resource employed
• AP = total product divided by quantity of
resource employed
Marginal Product (MP)
• Additional output resulting from using each
additional unit of labor
• Law of diminishing returns applies to marginal
product---at some point the MP will decrease
Marginal Revenue Product (MRP)
• The change in a firm’s total revenue
when it employs 1 additional unit of a
resource
• MRP = change in total revenue/change in
the quantity of the resource employed
Marginal Resource Cost (MRC) aka
Marginal Factor Cost (MFC)
• The amount that each additional unit of
a resource adds to the firm’s total
(resource) cost
• MRC = change in total (resource)
cost/unit change in resource quantity
MRP=MRC Rule
• To maximize profit a firm should employ the
quantity of a resource at which MRP=MRC
• To maximize profit, a firm should hire any
additional units of a specific resource as long
as each successive unit adds more to the
firm’s TR than it adds to cost TC
Labor Market Equilibrium
• The intersection of the market labor demand
curve and the market supply curve determines
the equilibrium wage rate and level of
employment
S
($10)
WC
D=MRP
(∑ mrps)
0
QC
(1000)
Quantity of Labor
Individual Firm
Wage Rate (Dollars)
• The individual firm in a perfectly competitive
firm maximizes profit by hiring workers to the
point where Wage rate = MRP
s=MRC
($10)
WC
0
c
d=mrp
qC
(5)
Quantity of Labor
Derived Demand
• Demand that is derived from the products
that the resource helps produce
• Resources don’t usually go directly to satisfy
the consumer---indirectly through their use in
goods and services
• EX- land, tractor, farmer lead to demand for
food
Law of Diminishing Marginal Utility
• Added satisfaction declines as a consumer
acquires additional units of a given product
• The more the consumer obtains the less they
want more of it
• Ex- cars (excluding collectors)
Optimal Level for Utility
• MU of product A/Price of A = MU of B/Price B
• If this equation is not true, then the consumer
should reallocate their funds differently
Utility-Maximizing Combination of Products A and
B Obtainable with an Income of $10
(2)
Product A:
Price = $1
(1)
Unit of
Product
(a)
Marginal
Utility,
Utils
(b)
Marginal
Utility
Per Dollar
(MU/Price)
(3)
Product B:
Price = $2
(a)
Marginal
Utility,
Utils
First
10
10
24
Second
8
8
20
Third
7
7
18
Compare
Marginal
Utilities
Fourth
6
6
16
Then
Compare
Per Dollar
- MU/Price
Fifth
5
5
12
Choose
the Highest
Sixth
4
4
6
Check
Seventh Budget3 - Proceed
3 to Next Item
4
(b)
Marginal
Utility
Per Dollar
(MU/Price)
12
10
9
8
6
3
2
(2)
Product A:
Price = $1
(1)
Unit of
Product
(a)
Marginal
Utility,
Utils
(b)
Marginal
Utility
Per Dollar
(MU/Price)
(3)
Product B:
Price = $2
(a)
Marginal
Utility,
Utils
First
10
10
24
Second
8
8
20
Third
7
7
18
Again,
Compare
Per Dollar
- MU/Price
Fourth
6
6
16
Choose
the Highest
Fifth
5
5
12
Buy
– Budget
Has $5 6Left
Sixth One of Each
4
4
Proceed
to Next
Item 3
Seventh
3
4
(b)
Marginal
Utility
Per Dollar
(MU/Price)
12
10
9
8
6
3
2
(2)
Product A:
Price = $1
(1)
Unit of
Product
(a)
Marginal
Utility,
Utils
(b)
Marginal
Utility
Per Dollar
(MU/Price)
First
10
10
Second
8
8
Third
7
7
Fourth
6
6
Again,
Compare
Per Dollar
Fifth
5
5
Buy
Sixth One More
4 B – Budget
4
Proceed
to Next
Item 3
Seventh
3
(3)
Product B:
Price = $2
(a)
Marginal
Utility,
Utils
24
20
18
16
- MU/Price
12
Has $36 Left
4
(b)
Marginal
Utility
Per Dollar
(MU/Price)
12
10
9
8
6
3
2
(2)
Product A:
Price = $1
(1)
Unit of
Product
(a)
Marginal
Utility,
Utils
(b)
Marginal
Utility
Per Dollar
(MU/Price)
(3)
Product B:
Price = $2
(a)
Marginal
Utility,
Utils
First
10
10
24
Second
8
8
20
Third
7
7
18
Fourth
6
6
16
Fifth
5
5
12
Again,
Compare
- MU/Price
Sixth
4 Per Dollar
4
6
Buy
One of Each
– Budget
Exhausted
Seventh
3
3
4
(b)
Marginal
Utility
Per Dollar
(MU/Price)
12
10
9
8
6
3
2
Monopsony
A single employer of labor has substantial
buying (hiring power) with the following
characteristics:
1. Only a single buyer of a particular good
2. Labor is immobile (workers would have to
move or acquire new skills)
3. The firm is a wage maker
**monopsony power can vary
Monopsony Model
Monopsonistic Labor Market
Wage Rate (Dollars)
MRC
W 14.1
S
b
a
Wc
Wm
c
MRP
0
Qm
Qc
Quantity of Labor
Examples of Monopsony Power
Positive Externalities
P
S
Spillover Benefit
Subsidy
P
D Social
D private
Q mkt Q Social
Quantity
The government
can correct this
externality by
subsidizing the
producer or the
consumer
(vouchers)
Negative Externalities
P
S Social
S private
Spillover Costs = Pollution Tax
Pmkt
D
Quantity