ap e conomics r eview : c hapters 18,19,20 j.t. haughey
TRANSCRIPT
AP ECONOMICS REVIEW:CHAPTERS 18,19,20
J.T. Haughey
CHAPTER 18: THE MARKETS FOR THE FACTORS OF PRODUCTION Factors of Production- The inputs
used to produce goods and services.
-Labor, Land and Capital Prices and quantities of these
inputs are determined by supply & demand in factor markets.
We can always assume these two things:
-All markets are competitive.
The typical firm is a price taker in the market for the product it
produces in the labor market
-Firms care only about maximizing profits.
Each firm’s supply of output and demand for inputs are derived from this goal.
SOME IMPORTANT VOCAB WORDS
Production Function: the relationship between the quantity of inputs used to make a good and the quantity of output of that good.
Marginal Product of Labor: the increase in the amount of output from an additional unit of labor
Diminishing Marginal Product: the property whereby the marginal product of an input declines as the quantity of the input increases
THE VALUE OF THE MARGINAL PRODUCT
A profit-maximizing
firm will hire workers up to the point where the VMP=market wage
VMP is equal to the demand curve for labor
FACTORS THAT INFLUENCE LABOR DEMAND The output price (if the
product becomes worth more, the demand for labor will increase)
Technological change (if workers are more productive, the willingness to hire will increase)
Other supply factors (all the factors are linked, so if rent becomes cheaper it is likely the demand for labor will increase)
THE SUPPLY CURVE
- the supply curve slopes upward because it takes an increasing wage to make me give up leisure time
FACTORS THAT INFLUENCE SUPPLY
Change in tastes Changes in
alternative opportunities
Immigration
SHIFTS IN LABOR SUPPLY
An increase in labor supply will raise employment and lower wages (and the reverse)
SHIFTS IN LABOR DEMAND
An increase in labor demand will raise employment and increase wages
CHAPTER 19: EARNINGS AND DISCRIMINATION
Compensating differentials
Difference in wages that arises to offset the nonmonetary characteristics of different jobs
Examples: paying garbage collectors more than beach patrols
HUMAN CAPITAL
The accumulation of investments in people, such as education and on-the-job training
The more human capital you have, the higher wages you can demand
Changes due to globalization and technology
ABILITY, EFFORT AND CHANCE
Attractive people earn 5% more than average, who earn 5-10% more than below average, even in jobs that have it shouldn’t directly apply to
Taller people earn more, it’s about $700/year per inch on average
ABOVE EQUILIBRIUM WAGES (CAUSES)
Minimum Wage Laws Unions - a worker association that
bargains with employers over wages and working conditions
- their main tools are strikes - studies show that union
workers earn about 10 to 20 percent more than similar nonunion workers
Efficiency Wages -above-equilibrium wages
paid by firms in order to increase worker productivity
THE ECONOMICS OF DISCRIMINATION
Discrimination – the offering of different opportunities to similar individuals who differ only by race, ethnic group, sex, age, or other personal characteristic
CHAPTER 20: INCOME INEQUALITY AND POVERTY The measurement of
inequality
Top fifth of families make ~$100,000 , bottom fifth less than $25,000
Gap has gotten bigger The main reason is
technology has started rewarding skilled labor even more than before
Inherited wealth is a factor too
POVERTY Poverty rate – the percentage
of population below poverty line
Poverty line – an absolute level set by the government for each family size below which a family is deemed to be in poverty (unable to supply the basic needs of food, clothing, shelter, etc…)
About 13% of present Americans live in poverty
Poverty is correlated with race, age and family composition
About half of Hispanic or black children with single mothers live in poverty
economic life cycle – the regular pattern of income variation over a person’s life
permanent income – a person’s normal income
for many, income can vary a great deal and therefore poverty greatly fluctuate
UTILITARIANISM Utility – the level of
happiness or satisfaction that a person receives from her circumstances
Basically taking a dollar from the rich and giving it to the poor creates more for the poor than the rich loses
It’s critical for society to keep in mind two things: incentive to work and government inefficiencies
LIBERALISM T he idea that actions
should pursue policies seen by a completely impartial observer as just (the “veil of ignorance”)
maximin criterion – the idea that the government should am to maximize the well-being of the worst-off person in society
The political philosophy according to which the government should punish crimes and agreements but not redistribute income
MINIMUM-WAGE LAWS
Pros: Raises wages
to “living wage” If demand for
unskilled labor is inelastic, it results in continued demand
Cons: If demand for unskilled labor is elastic, it reduces number employed
WELFARE
Welfare- Government programs that supplement the incomes of the needy
TANF (Temporary Assistance to Needy Families)
Distorted incentives is a big con against welfare, such as: The Incentive to work, The Number of kids, The Time available
NEGATIVE INCOME TAX
Negative Income Tax- A tax system that collects revenue from high-income households and gives transfers to low-income households
It guarantees a certain level of income to all Americans
Claim is that it distorts fewer incentives
IN-KIND TRANSFERS
Argument for: ensures money goes toward alleviating poverty
Argument against: disrespectful, inefficient