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ECO100 Term Test 3 Study Notes

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University of Toronto St. George
Jack Carr

Microeconomics 18. Markets for Factors of Production Economys income distributed in markets for factors of production: labour, land & capital Demand for factors is derived demand (comes from firms that use factors to produce goods & services). Competitive, profit-maximizing firms hire each factor up to point @which value of marginal product of factor = its price Supply of labour arises from individuals trade-off between work & leisure. Upward-sloping labour supply curve means ppl respond to increase in wage by enjoying less leisure & working more Price paid to each factor adjusts to balance supply & demand for that factor. [Factor demand reflects value of marginal product of that factor; in equilibrium, each is compensated according to its marginal contribution to the production of g&s Because factors of production are used together, marginal product of any one factor depends on quantities of all factors available. {change in supply of one factor alters equilibrium earnings of all factors} Capital equipment & structures used to produce g&s Diminishing marginal product property whereby marginal product of an input as quantity of input Factors of production inputs used to produce g&s Marginal product of labour increase in amount of output from additional unit of labour Production function relationship between quantity of inputs used to make a good & quantity of output Value of the marginal product marginal product of input X price of output 19. Earnings & Discrimination To some extent, wage differentials compensate workers for job attributes Workers with more human capital get paid > workers with less human capital. Return to accumulating human capital is high & has increased over past 2 decades Although years of education, experience & job characteristics affect earnings as theory predicts, much variation in earnings that cannot be explain by things economists measure by unexplained variation in earnings largely attributable to natural ability, effort & chance Some economists have suggested that more educated workers earn higher w ages not because education raises productivity but bec workers with high natural ability used edu as way to signal to employers. {If this theory is correct, then increasing edu attainment of all workers wouldnt raise overall level of wages} Wages are sometimes pushed above level that brings supply & demand into balance because: minimum wage laws, unions & efficiency wages Some differences in earnings are attributable to discrimination on basis of race, sex, etc. Competitive markets tend to limit impact of discrimination on wages {Profit-maximizing behaviour can reduce discriminatory wage differentials} Compensating differential difference in wages that arises to offset nonmonetary characteristics of different jobs Efficiency wages above-equilibrium wages paid by firms in order to increase worker productivity Human capital accumulation of investments in people, such as education and on-the-job training Strike organized withdrawl of labour from a firm by a union Union worker association that bargains with employers over wages & working conditions 20. Income Inequality & Poverty Data on distribution of income show wide disparity in society; richest fifth earn 8x poorest fifth Because in-kind transfers, economic life cycle, transitory income & economic mobility are so important for understanding variation in income, difficult to gauge degree of inequality in our society using data in a single year. When these other factors taken into account, tend to suggest that economic well-being is more equally distributed than annual income Political philosophers differ in views re: role of govt in altering distribution of income. o Utilitarians would choose distribution of income to max sum of utility of everyone in society o Liberals would determine distribution of income as if behind a veil of ignorance that prevented us from knowing stations in life
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