Chapter 1

Question 0

How is “labor” considered to be a market?

Answer 0

1) institutions such as want ads and employment agencies have been developed to facilitate contact between buyers and sellers of labor services
2) information about price and quality is exchanged in employment applications and interviews

3) some kind of contract (formal or informal) is made covering compensation, conditions of work, job security, and duration of the job.
- employers compensate employees for their time and not for what they produce
- employers give careful attention to worker motivation and dependability of workers.

Question 1

In the labor market, labor services can only be…

Answer 1

Rented

Workers can’t be bought and sold

Because labor services cannot be separated from workers, the conditions under which services are rented are often as important as the price.
-nonpecuniary factors

A host of institutions and pieces of legislation that influence the employment relationship do not exist in other markets

Question 2

What is the most important national resource, and where is it allocated?

Answer 2

Through the labor market, out most important national resource (labor) is allocated to firms, industries, occupations, and regions.

Question 3

Labor economics

Answer 3

The study of the workings and outcomes of the market for labor.

Labor economics is primarily concerned with the behavior of employers and employees in response to the general incentives of wages, prices, profits, and nonpecuniary aspects of the employment relationship, such as working conditions

These incentives serve to both motivate and to limit individual choice

Question 4

The focus in economics is on inducements for behavior that are impersonal and apply to a wide range of…

Answer 4

People.

Question 5

Positive economics

Most used

“What is”

Answer 5

Is a theory of behavior in which people are typically assumed to respond favorably to benefits and negatively to costs

Closely resembles the skinnerian psychology, which views behavior as shaped by rewards and punishments

The rewards in economic theory are pecuniary and nonpecuniary gains (benefits), while the punishments are forgone opportunities (costs)

The purpose of positive economics is to analyze, or understand, the behavior of people as they respond to market incentives.

Question 6

Scarcity

Answer 6

Any resource devoted to satisfying one set of desires could have been used to satisfy another set, which means that there is a cost to any decision or action.

We are always constrained in our choices by the resources available to us.

Question 7

Rationality

A second basic assumption of positive economics is that people are rational.

Answer 7

They have an objective and pursue it in a reasonably consistent fashion.

When considering persons, economists assume that the objective being pursued is utility maximization

Question 8

Utility maximization

(Part of rationality)

Utility is generated by both p…….. And n……….. Dimensions of employment

Answer 8

People are assumed to strive toward the goal of making themselves as happy as they can, given their limited resources.

Utility is generated by both pecuniary and nonpecuniary dimensions of employment

Question 9

Profit maximization

(Part of rationality)

When considering the behavior of firms (nonpersonal entities) economists assume that the goal of behavior is profit maximization.

Answer 9

Profit maximization is a special case of utility maximization in which pecuniary gain is emphasized and nonpecuniary factors are ignored

Question 10

The assumption of R………. Implies a consistency of response to general economic incentives and an adaptability of behavior when those incentives change.

These two characteristics of behavior underlie predictions about how workers and firms will respond to various incentives

Answer 10

Rationality

Question 11

Behavioral predictions in economics flow more or less directly from the two fundamental assumptions of s……. And R……….

Economists usually assume that when making these choices, employees and employers are guided by their desires to m……. U…… Or p…..

What is more important to the economic theory of behavior is not the particular goal of either employees or employers, rather it’s that economic actors weigh the costs and benefits of various alternative transactions in the context of achieving some goal or other

The theory underlying positive economics should be judged on the basis of its predictions, not its assumptions.

Answer 11

Scarcity and rationality

(Applies to both workers and employers)

Maximize utility or profit

Question 12

Anytime we attempt to explain a complex set of behaviors and outcomes using a few fundamental influences, we have created a m….

Answer 12

Model

Models are not intended to capture every complexity of behavior; instead, they are created to strip away random and idiosyncratic factors so that the focus is on general principles.

Question 13

A physical model- average tendencies

Answer 13

Calculated estimate, based on known information

Question 14

Understanding normative economics begins with the realization that there are two kinds of economic transactions.

One kind is entered into voluntary because…?

Answer 14

All parties to the transaction gain

Question 15

The role of the labor market is to facilitate these v…….., m……. a……….. Transactions

Answer 15

Voluntary, mutually advantageous transactions

Question 16

Pareto (economic) efficiency

Answer 16

If the market is successful in facilitating all possible mutually beneficial transactions

Question 17

The word e……… Is used by economists in a very specialized sense to denote a condition in which all mutually beneficial transactions have been concluded.
This definition of the word is more comprehensive than its normal connotation of cost minimization.

Answer 17

Efficiency

Question 18

If p….. E……… Were actually attained, no more transactions would be undertaken voluntarily because they would NOT be mutually advantageous.

Answer 18

Pareto efficiency

Question 19

Understanding normative economics begins with the realization that there are two kinds of economic transactions.

The second kind of transaction is in which one or more parties L…

These transactions often involve the R…………. Of I….., for gain at the expense of others

Answer 19

Lose

Redistribution of income (not entered into voluntarily unless motivated by charity, in which case the donors gain nonpecuniary satisfaction)

• otherwise, redistribution transactions are mandated by government through tax and expenditure policies
• while markets facilitate voluntary transactions, the government’s job is often to make certain transactions mandatory.

Question 20

Normative economics

Answer 20

Use this to judge “what should be”

Any normative statement (what ought to exist) is based on some underlying value.

Question 21

G……… P……. Affecting the labor market are often based on the widely shared, but not universally agreed upon, value that society should try to make the distribution of income more equal

Normative economics

Answer 21

Government policies

• welfare, minimum wage laws, and restrictions on immigration are all policies based on distributional considerations.
• other labor market policies are intended either to change or to overrule the choices workers make in maximizing their utility

-underlying value= workers should not be allowed to place themselves or their families at risk of physical or financial harm
(Wearing protective devices like hard hats and earplugs,=seen as meritorious in certain settings that is required of workers even if they would choose otherwise)

Question 22

Policies seeking to R……….. I….. Or force the consumption of meritorious goods are often controversial because…?

Answer 22

Some workers will feel worse off when the policies are adopted.

-these transactions must be governmentally mandated because they will not be entered into voluntarily

Question 23

Pareto improving

Answer 23

Policies or transactions from which all affected parties

Promote Pareto Efficiency

These policies or transactions can be justified on the grounds that they unambiguously enhance social welfare; therefore they can be unanimously supported

These policies are of special interest to economists because economics is largely the study of market behavior-voluntary transactions in the pursuit of self-interest.

Question 24

A transaction can unanimously supported when one of the following occurs: A) all parties who are affected by the transaction .... B) some parties .... No one else ..... C) some parties gain and some lose from the transaction, but...?

Answer 24

A) all parties who are affected by the transaction gain B) some parties gain No one else loses C) some parties gain and some lose from the transaction, but the gainers fully compensate the losers -when "C" happens, it is said to become "B"

Question 25

Many economists argue that compensation must take place for a government policy to be justified on the grounds that it promotes P..... E.........

Answer 25

Pareto efficiency

Question 26

Economists often judge a transaction by whether the g.... of the beneficiaries exceed the costs borne by the l....., making it possible that there would be no l.....

Answer 26

Gains, losers When the compensation of losers IS possible but DOES NOT take place there are in fact losers

Question 27

Market failure: i........ People may be i....... Of some important facts, leading them to make decisions that are not in their self interest

Answer 27

Ignorant

Question 28

Market failures 1) i........ 2) t.......... B....... 3) e............ 4) p..... G.... 5) p.... D.........

Answer 28

Market failures 1) ignorance 2) transaction barriers 3) externalities 4) public goods 5) price distortion

Question 29

Market failure: t.......... B....... Often created by what?

Answer 29

Transaction barrier There may be some barrier to the completion of a transaction Often created by laws that prohibit certain transactions. (Women's rights for employment) -Society as a whole can suffer losses when transactions that are mutually beneficial are prohibited by government Another barrier may be the expense of completing the transactions. -unskilled workers facing very limited opportunities in one region might desire to move to take better jobs, or might want to enter job-training programs.. But might lack the funds to do so.

Question 30

Market failure: e............

Answer 30

Externalities When a buyer and a seller agree to a transaction that imposes costs or benefits on people who were NOT party to their decision -some decisions have costs or benefits that are "external" to the decision makers. If all transaction costs and benefits fall to the decision makers, then society can be assured that the transaction represents a step toward Pareto efficiency. If there are costs or benefits to people who were NOT able to influence the decision, then the transaction may not have positive net benefits to society

Question 31

With externalities: For is to have confidence that a particular transaction is a step toward Pareto efficiency, the decision must be...?

Answer 31

Voluntarily accepted by all who are affected by it. If there are externalities to a transaction, people who are affected by it, but can't influence the ultimate decision, are being forced into a transaction that they may not have been willing to make. -may be that the cost of transaction is greater than benefits, once all costs and benefits (not just the main decision makers) are accounted for.

Question 32

Child labor is considered to be an e..........

Answer 32

Externality Kids can't make decisions for themselves If adult figures ignore the best interest of the kids and force them to work instead of go to school, then society is at a loss

Question 33

What would exist if workers have no mechanism to transfer their costs of being injured at work to their employers, who are making the decisions about how much to spend to reduce workplace risk

Answer 33

Externalities If these mechanisms don't exist, then our workplaces will be less safe than they should be, because employers are ignoring at least some costs in making their decisions about risk reduction.

Question 34

Market failure: p..... G....

Answer 34

Public goods A special kind of externality called the "free rider problem"

Question 35

Research findings are an example of a....

Answer 35

Public good. A good that can be consumed by any number of people at the same time, including those who do not pay Because nonpayers cannot be excluded from consuming the good, no potential customer will have an incentive to pay -may cause the provider not to produce this

Question 36

In the case of public goods, private decision makers ignore the benefits to others when making their decisions because...?

Answer 36

They have no mechanism to "capture" these benefits As a result, society will under-invest in such goods unless the government, which can compel payments through taxes, steps in to produce the public good.

Question 37

Market failure: p.... D.........

Answer 37

Price distortion A special barrier to transaction is caused by taxes, subsidies, or other forces that create "incorrect" prices. Prices powerfully influence the incentives to transact, and the prices asked or received in a transaction should reflect the true preferences of the parties to it.

Question 38

Price distortion: When prices become decoupled from preferences, parties may be led to make transactions that are...?

Answer 38

Not socially beneficial or avoid others that would be advantageous If plumbers charge $25 per hour, but customers must pay an extra $5 of tax to the government, customers who are willing to pay between $25 & $30 per hour and would hire plumbers in the absence of the tax are discouraged from doing so- to the detriment of both parties.

Question 39

Normative economics and government policy For other types of transaction barriers, the needed intervention is for the government to either compel or actively promote transactions different from the ones that would be made by "the market" When the government decides to "replace" a market decision by one of its own, the policy prescription is complicated because?

Answer 39

Of the need to guess what the appropriate transaction could/should be Could be beneficial or cause major problems

Question 40

Capital market imperfections Workers find it difficult to obtain loans that would allow them to obtain Job training or finance them to relocate for a better job because usually all they can offer is their promise to pay it back. The government responds by?

Answer 40

- making the loans even though it could be risky because allowing workers to acquire new skills or move to where workers are needed would strengthen the overall economy - they would also have to decide on the appropriate circumstances of approving such loans, like how much to loan. Performing the benefit-cost analyses needed to intelligently address the problem of externalities requires a solid grasp of economic theory

Question 41

Efficiency versus equity The social goal of a more equitable distribution of income is of often paramount importance to political decision makers, and disputes can arise over whether e..... Or e....... E......... Should be the prime consideration in setting policy

Answer 41

Equity or economic efficiency -one source of dispute is that there is not a unique set of transactions that are Pareto efficient There are a lot of different sets of transactions that can satisfy our definition of economic efficiency, and questions can arise over which one is more equitable -second source of dispute over equity and efficiency is rooted in the problem that to achieve more equity, steps away from Pareto efficiency must often be taken ~minimum wage laws block transactions of parties who would be willing to make a lower wage

Question 42

Normative economics tends to stress e......... Over e..... Considerations, not because it is more important but because...?

Answer 42

Efficiency over equity Because it can be analyzed more scientifically

Question 43

For a transaction to be mutually beneficial, all that is required is?

Answer 43

For each party to feel better off Thus, studying voluntary transactions is useful when taking economic efficiency into account

Question 44

Equity considerations always involve?

Answer 44

Comparing the welfare lost by some against the utility gained by others -can't be scientifically done because we can't measure happiness

Question 45

For policy decisions based on considerations of equity, society usually turns to guidance from the ......... ...... Not from the .......

Answer 45

Political system. Not the markets.