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Economics Chapter 16 Study Guide

# Economics Chapter 16 Study Guide - Economics Chapter 16...

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Economics Chapter 16 Study Guide 1) Introduction a) Firms use factors of production-such as labor, capital and natural resources to produce goods and services. b) A firm’s demand for factors of production is a derived demand because it is based on the underlying consumer demand for the good or service the factor is being used to produce. 2) The Demand for Labor a) The demand for labor is a derived demand. A derived demand is the demand for a factor of production that is based on the demand for the good the factor produces. b) Ex: Sony c) Sony’s demand for labor depends primarily on two factors: i) The additional televisions Sony will be able to produce if it hires one more worker ii) The additional revenue Sony receives form selling the additional televisions. d) The Marginal Revenue Product of Labor i) Marginal product of labor is the additional output a firm produces as a result of hiring one more worker. (1) Calculate it as the change in total output as each additional worker is hired. (2) Because of the law of diminishing returns, the marginal product of labor declines as a firm hires more workers. ii) Firms are concerned with maximizing their revenue not their output. iii) Marginal Revenue product of labor is the change in the firm’s revenue as a result of hiring one more worker. iv) To decide how many workers to hire, firms must compare the additional revenue it earns form hiring another worker to the increase in its cost from paying that worker. When… Then the Firm… MRP W Should hire more workers to increase profits MRP < W Should hire fewer workers to increase profits MRP = W Is hiring the optima number of workers and is maximizing profits v) **The marginal revenue product of labor curve is the demand curve for labor. vi) We determine the market demand curve for labor by adding up the quantity of labor demanded by each firm at each wage, holding constant all other variables that might affect the willingness of firms to hire workers. e) Factors That Shift the Labor Demand Curve i) An increase or decrease in the wage causes an increase or decrease in the quantity of labor demanded, which we show by a movement along the demand curve. ii) If any variable other than the wage changes, the result is an increase or decrease in the demand for labor, which we show by a shift in the demand curve.

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iii) Variables that cause labor demand curve to shift: (1) Increases in Human Capital (a) Human capital is the accumulated training and skills that workers posses. (b) If more people become educated then they can produce output quicker so the demand for their service will increase causing a shift to the right of the demand curve. (2) Changes in Technology
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Economics Chapter 16 Study Guide - Economics Chapter 16...

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