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