Income Distribution

1. Income Distribution Microeconomics What is Marketing? Principles of Marketing

2. Labor’s Share of U.S. Income

3. One Labor Market or Many?

4. The Demand for Labor With perfect competition, the marginal revenue product for labor, MRPL, equals the marginal product of labor, MPL, times the price, P, of the good or service the labor produces: In perfect competition,MRPL= MPL× P Marginal factor cost (MFC) is the change in total cost (ΔTC) divided by the change in the quantity of the factor (Δf):

5. Marginal Product and Marginal Revenue Product From these values we derive the marginal product and marginal revenue product curves.

6. Marginal Revenue Product and Demand

7. Shifts in Labor Demand • Changes in technology may increase demand for some workers and decrease it for others • Change in product demand leads to change in labor demand (derived demand) • Change in the number of firms • Changes in the Use of Other Factors of Production • complementary factors of production including human capital • substitute factors of production if the increased use of one lowers the demand for the other such as robots

8. Predictions of Task Model for the Impact of Computerization

9. Supply Curve for Labor • A higher wage increases the opportunity cost or price of leisure and increases worker incomes. The effects of these two changes pull the quantity of labor supplied in opposite directions. • A wage increase raises the quantity of labor supplied through the substitution effect, but it reduces the quantity supplied through the income effect. Thus an individual’s supply curve of labor may be positively or negatively sloped, or have sections that are positively sloped, sections that are negatively sloped, and vertical sections. While some exceptions have been found, the labor supply curves for specific labor markets are generally upward sloping.

10. The Substitution and Income Effects of a Wage Change

11. A Backward Bending Labor Supply Curve

12. Shifts in the Supply Curve for Labor • The supply curve for labor will shift as a result of a change in worker preferences, a change in nonlabor income, a change in the prices of related goods and services, a change in population, or a change in expectations • In addition to the effects on labor supply of the variables just cited, other factors that can change the supply of labor in particular markets are changes in wages in related markets or changes in entry requirements

13. Labor Markets • Wages in a competitive market are determined by demand and supply. • An increase in demand or a reduction in supply will increase the equilibrium wage. A reduction in demand or an increase in supply will reduce the equilibrium wage. • The government may respond to low wages for some workers by imposing the minimum wage, by attempting to increase the demand for those workers, or by subsidizing the wages of workers whose incomes fall below a certain level.

14. Wage Determination and Employment in Perfect Competition

15. Changes in the Demand for and Supply of Labor

16. Alternative Government Responses to Low Wages

17. Finding Demand for Capital A firm will maximize profits by acquiring additional capital up to the point that the present value of capital’s marginal revenue product equals the present value of marginal factor cost. If the revenues generated by an asset in period n equal Rn and the costs in period n equal Cn, then the net present value NPV0 of an asset expected to last for n years is:

18. Demand Curve for Capital

19. Shifts in the Demand for Capital • Changes in expectations: Net present value is computed from the expected revenues and costs over the expected life of an asset • Technological change • Change in demand for goods and services • Changes in relative factor prices may cause firms to substitute labor for capital for example • Changes in tax policy

20. The interest rate is set by the market for loanable funds

21. When will firms invest? The net present value (NPV) of an investment project is equal to the present value of its expected revenues minus the present value of its expected costs. Firms will want to undertake those investments for which the NPV is greater than or equal to zero

22. Loanable Funds Changes in the demand for capital affect the loanable funds market, and changes in the loanable funds market affect the quantity of capital demanded

23. Natural Resources • Natural resources are either exhaustible or renewable. • The demand for the services of a natural resource in any period is given by the marginal revenue product of those services. • Owners of natural resources have an incentive to take into account the current price, the expected future demand for them, and the interest rate when making choices about resource supply. • The services of a renewable natural resource may be consumed at levels that are below or greater than the carrying capacity of the resource. • The payment for a resource above the minimum price necessary to make the resource available is economic rent.

24. Factor Market Price Takers and Price Setters

25. Monopsony • In the monopsony model there is one buyer for a good, service, or factor of production. A monopsony firm is a price setter in the market in which it has monopsony power • The monopsony buyer selects a profit-maximizing solution by employing the quantity of factor at which marginal factor cost (MFC) equals marginal revenue product (MRP) and paying the price on the factor’s supply curve corresponding to that quantity • A degree of monopsony power exists whenever a firm faces an upward-sloping supply curve for a factor

26. Monopsony: Supply and Marginal Factor Cost

27. Monopsony Equilibrium Given the supply curve for labor, S, and the marginal factor cost curve, MFC, the monopsony firm will select the quantity of labor at which the MRP of labor equals its MFC. It thus uses Lm units of labor (determined by at the intersection of MRP and MFC) and pays a wage of Wm per unit (the wage is taken from the supply curve at which Lm units of labor are available). The quantity of labor used by the monopsony firm is less than would be used in a competitive market (Lc); the wage paid, Wm, is lower than would be paid in a competitive labor market.

28. Monopoly vs. Monopsony

29. Monopsony and Minimum Wage In a competitive labor market, an increase in the minimum wage reduces employment. But in a monopsony labor market, a minimum wage could increase employment at the same time it increases wages.

30. Labor Unions A labor union is an organization of workers that negotiates with employers over wages and working conditions. A labor union seeks to change the balance of power between employers and workers by requiring employers to deal with workers collectively, rather than as individuals. Thus, negotiations between unions and firms are sometimes called collective bargaining

31. Unions in the United States • Their members earn about 20% more than nonunion workers, even after adjusting for factors such as years of work experience and education level • The bad news for unions is that the share of U.S. workers who belong to a labor union has been steadily declining for 50 years

32. Union Wage Negotiations Unions raise wages for unionized workers but lower the quantity of labor demanded

33. Bilateral Monopoly In bilateral monopoly, a monopsony buyer faces a monopoly seller. Prices in the model are indeterminate

34. Poverty and Income Inequality • Poverty is measured by the number of people who fall below a certain level of income—called the poverty line—that defines the income needed for a basic standard of living • Income inequality compares the share of the total income in society that is received by different groups

35. Poverty Rates in the United States

36. Practice Question The poverty line is based on the idea that food accounts for one third of a household budget. What impact does this have on the accuracy of the poverty line? Why might policy-makers be reluctant to change the poverty line?

37. The Poverty Trap If government assistance to the poor decreases when they earn more income, the person experiences no net gain for working

38. The Safety Net • TANF – cash benefits vary greatly by state, recipients are required to work and may only collect benefits for 5 years during their lifetime • SNAP – (food stamps) • Earned Income Tax Credit is designed to reward work and is phased out very gradually • Medicaid

39. Income Inequality • The distribution of income has, according to the Census Bureau, become somewhat more unequal in the United States during the past 40 years • The degree of mobility up and down the distribution of income appears to have declined in recent years • Among the factors explaining increased inequality have been changes in family structure and changes in the demand for labor that have rewarded those with college degrees and have penalized unskilled workers

40. Income Inequality

41. The Lorenz Curve The Lorenz curve shows the cumulative share of population on the horizontal axis and the cumulative percentage of total income received on the vertical axis

42. Quick Review • How do people earn incomes for the factors of production (land, labor, capital, entrepreneurship) wages, interest, rents, and profit? • How does perfect/imperfect competition between buyers and sellers of factors impact wages, interest, and rents? • How does the marginal productivity theory of income distribution fit real world income distribution? • How do economists use the Lorenz Curve to analyze the distribution of income and wealth?