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Micro Review

Micro Review. Utility, Wages, and Externalities. TP and AP. Total Product (TP)- the total output of a particular good or service produced Average Product (AP)- the total output produced per unit of a resource employed AP = total product divided by quantity of resource employed.

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Micro Review

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  1. Micro Review Utility, Wages, and Externalities

  2. TP and AP • Total Product (TP)- the total output of a particular good or service produced • Average Product (AP)- the total output produced per unit of a resource employed • AP = total product divided by quantity of resource employed

  3. Marginal Product (MP) • Additional output resulting from using each additional unit of labor • Law of diminishing returns applies to marginal product---at some point the MP will decrease

  4. Marginal Revenue Product (MRP) • The change in a firm’s total revenue when it employs 1 additional unit of a resource • MRP = change in total revenue/change in the quantity of the resource employed

  5. Marginal Resource Cost (MRC) aka Marginal Factor Cost (MFC) • The amount that each additional unit of a resource adds to the firm’s total (resource) cost • MRC = change in total (resource) cost/unit change in resource quantity

  6. MRP=MRC Rule • To maximize profit a firm should employ the quantity of a resource at which MRP=MRC • To maximize profit, a firm should hire any additional units of a specific resource as long as each successive unit adds more to the firm’s TR than it adds to cost TC

  7. Labor Market Equilibrium • The intersection of the market labor demand curve and the market supply curve determines the equilibrium wage rate and level of employment S ($10) WC D=MRP (∑ mrps) 0 QC (1000) Quantity of Labor

  8. Individual Firm • The individual firm in a perfectly competitive firm maximizes profit by hiring workers to the point where Wage rate = MRP s=MRC Wage Rate (Dollars) ($10) WC d=mrp c 0 qC (5) Quantity of Labor

  9. Derived Demand • Demand that is derived from the products that the resource helps produce • Resources don’t usually go directly to satisfy the consumer---indirectly through their use in goods and services • EX- land, tractor, farmer lead to demand for food

  10. Law of Diminishing Marginal Utility • Added satisfaction declines as a consumer acquires additional units of a given product • The more the consumer obtains the less they want more of it • Ex- cars (excluding collectors)

  11. Optimal Level for Utility • MU of product A/Price of A = MU of B/Price B • If this equation is not true, then the consumer should reallocate their funds differently

  12. (3) Product B: Price = $2 (2) Product A: Price = $1 (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (a) Marginal Utility, Utils (a) Marginal Utility, Utils First Second Third Fourth Fifth Sixth Seventh 10 8 7 6 5 4 3 10 8 7 6 5 4 3 24 20 18 16 12 6 4 12 10 9 8 6 3 2 Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10 (1) Unit of Product Compare Marginal Utilities Then Compare Per Dollar - MU/Price Choose the Highest Check Budget - Proceed to Next Item

  13. (3) Product B: Price = $2 (2) Product A: Price = $1 (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (a) Marginal Utility, Utils (a) Marginal Utility, Utils First Second Third Fourth Fifth Sixth Seventh 10 8 7 6 5 4 3 10 8 7 6 5 4 3 24 20 18 16 12 6 4 12 10 9 8 6 3 2 (1) Unit of Product Again, Compare Per Dollar - MU/Price Choose the Highest Buy One of Each – Budget Has $5 Left Proceed to Next Item

  14. (3) Product B: Price = $2 (2) Product A: Price = $1 (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (a) Marginal Utility, Utils (a) Marginal Utility, Utils First Second Third Fourth Fifth Sixth Seventh 10 8 7 6 5 4 3 10 8 7 6 5 4 3 24 20 18 16 12 6 4 12 10 9 8 6 3 2 (1) Unit of Product Again, Compare Per Dollar - MU/Price Buy One More B – Budget Has $3 Left Proceed to Next Item

  15. (3) Product B: Price = $2 (2) Product A: Price = $1 (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (a) Marginal Utility, Utils (a) Marginal Utility, Utils First Second Third Fourth Fifth Sixth Seventh 10 8 7 6 5 4 3 10 8 7 6 5 4 3 24 20 18 16 12 6 4 12 10 9 8 6 3 2 (1) Unit of Product Again, Compare Per Dollar - MU/Price Buy One of Each – Budget Exhausted

  16. Monopsony A single employer of labor has substantial buying (hiring power) with the following characteristics: • Only a single buyer of a particular good 2. Labor is immobile (workers would have to move or acquire new skills) 3. The firm is a wage maker **monopsony power can vary

  17. W 14.1 Monopsony Model Monopsonistic Labor Market MRC S b a Wage Rate (Dollars) Wc Wm c MRP 0 Qc Qm Quantity of Labor Examples of Monopsony Power

  18. Positive Externalities P The government can correct this externality by subsidizing the producer or the consumer (vouchers) S Spillover Benefit Subsidy P D Social D private Q mkt Q Social Quantity

  19. Negative Externalities P Pmkt S Social S private Spillover Costs = Pollution Tax D Quantity

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