Transcript AP Economics Review: Chapters 18,19,20

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 510% 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 TaxA tax system that
collects revenue from
high-income
households and gives
transfers to lowincome 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
