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AP E CONOMICS R EVIEW : C HAPTERS 18,19,20 J.T. Haughey.

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Presentation on theme: "AP E CONOMICS R EVIEW : C HAPTERS 18,19,20 J.T. Haughey."— Presentation transcript:

1 AP E CONOMICS R EVIEW : C HAPTERS 18,19,20 J.T. Haughey

2 C HAPTER 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: -A ll markets are competitive. The typical firm is a price taker in the market for the product it produces in the labor market -F irms care only about maximizing profits. Each firm’s supply of output and demand for inputs are derived from this goal.

3 S OME 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

4 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

5 F ACTORS THAT INFLUENCE L ABOR D EMAND 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)

6 T HE SUPPLY CURVE -the supply curve slopes upward because it takes an increasing wage to make me give up leisure time

7 F ACTORS THAT INFLUENCE SUPPLY Change in tastes Changes in alternative opportunities Immigration

8 SHIFTS IN LABOR SUPPLY An increase in labor supply will raise employment and lower wages (and the reverse)

9 SHIFTS IN LABOR DEMAND An increase in labor demand will raise employment and increase wages

10 C HAPTER 19: E ARNINGS A ND D ISCRIMINATION Compensating differentials Difference in wages that arises to offset the nonmonetary characteristics of different jobs Examples: paying garbage collectors more than beach patrols

11 H UMAN 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

12 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

13 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

14 T HE 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

15 C HAPTER 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

16 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

17 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

18 U TILITARIANISM 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

19 L IBERALISM 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

20 M INIMUM - 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

21 W ELFARE 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

22 N EGATIVE I NCOME T AX 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

23 IN - KIND TRANSFERS Argument for: ensures money goes toward alleviating poverty Argument against: disrespectful, inefficient

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