9-1 Economics: Theory Through Applications

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9-3 Chapter 9 Growing Jobs

9-4 Learning Objectives What is a production function? How does a firm decide how much to produce? What factors determine a firm’s labor demand? What is the difference between a fixed cost and a variable cost? What factors determine if a firm should remain in business? What is a sunk cost?

Learning Objectives What is the process of matching workers and vacancies? What is the optimal strategy to follow when looking for a job? How are wages determined in labor markets? What government policies impact job creation and destruction? What are the effects of trade on job creation and destruction? 9-5

Figure Walmart Fact Sheet 9-6

Figure Walmart: Growing Jobs? 9-7

Figure US Net Job Creation from 2000 to

Figure Labor Market Equilibrium 9-9

Figure The Technology of a Firm 9-10

A Production Function That Uses Only Labor 9-11

Table Production Function for Housecleaning 9-12

Figure A Linear Production Function 9-13

A Production Function That Uses Only Labor 9-14

Table Production Function for Coffee with a Diminishing Marginal Product of Labor 9-15

A Production Function That Uses Only Labor 9-16

Figure A Production Function with a Diminishing Marginal Product of Labor 9-17

The Cost Function 9-18

Figure The Cost Function 9-19

Figure The Cost Function with a Decreasing Marginal Productivity of Labor 9-20

Figure The Marginal Cost Function 9-21

Marginal Cost 9-22

The Price/Output Decision 9-23

Figure Output and Price Decisions of a Profit-Maximizing Firm 9-24

Figure The Effect of a Change in Marginal Cost on a Firm’s Choice of Output and Employment 9-25

Figure The Demand for Labor 9-26

Figure The Effect of a Change in Demand on a Firm’s Choice of Output and Employment 9-27

Exit 9-28

Table Monthly Costs of Production 9-29

Figure Total Costs, Fixed Costs, and Variable Costs 9-30

The Exit Decision 9-31

Table Demand and Profit before Walmart Comes to Town 9-32

Table Demand and Profit after Walmart Comes to Town 9-33

The Exit Decision 9-34

Entry 9-35

Figure The Valuation of a Job 9-36

Key Terms Factors of production: The inputs used in a firm’s production process, primarily physical capital, labor hours, raw materials, and technology Technology: A means of producing output from inputs Production function: A description of how much output a firm can produce as it varies its inputs Marginal product of labor: The amount of extra output produced from one extra hour of labor input Diminishing marginal product of labor: The idea that each additional hour of labor input contributes a smaller and smaller amount to output 9-37

Key Terms Fixed costs: Costs that are the same at all levels of production Variable costs: Costs that vary with the level of production Total costs: The sum of fixed costs and variable costs Fixed operating costs: Costs incurred regularly during the normal operation of a business Recoverable asset: An asset you can resell for at least its purchase price Entry costs: The one-time fixed costs that a firm must incur when establishing a business 9-38

Key Terms Sunk cost: A cost that, once incurred, cannot be recovered Recoverable cost: A cost that, once incurred, can be recovered Sunk cost fallacy: The mistake of including sunk costs in future-looking decisions, even though they should properly be ignored Opportunity cost: What you must give up to carry out an action Reservation wage: The lowest wage that a searching worker will accept 9-39

Key Takeaways A firm produces a quantity such that the marginal cost of producing an extra unit of output equals the marginal revenue from selling that extra unit of output The demand for labor depends on the level of productivity, the demand for a firm’s product, and the cost of labor compared to the cost of other inputs in the production process A fixed cost is paid regardless of the level of output produced; a variable cost depends on the level of output produced 9-40

Key Takeaways A firm should exit when the discounted present value of its future profits decreases below the value it can receive from selling its assets A sunk cost is a cost that cannot be recovered, such as the cost of entry – This cost should have no effect on the decision to exit The search process brings together workers and vacancies of firms – This process lies behind the supply and demand curves for labor For many searches, it is best to follow a reservation wage strategy: accept a job if and only if the wage exceeds the reservation wage 9-41

Key Takeaways Wages are determined through a bargaining process – Sometimes this is through a take-it-or-leave-it offer of the firm – Often there is bargaining between a firm and its workers (or their union) to share the surplus of the employment relationship In the United States, firms are able to close plants if they choose to do so- this is not the case in all countries The government promotes small businesses, viewing them as a source of job creation The reduction of trade barriers creates new jobs and destroys others 9-42