Week 3 Flashcards
(29 cards)
What is the neoclassical model of the labour market?
It assumes a perfectly competitive labour market where:
- Labour Demand: Comes from firms needing labour for production.
- Labour Supply: Comes from individuals offering their labour for wages.
- Wage Rate: The price of labour, paid per unit of time (e.g., hourly wage).
How is the demand for labour determined?
Firms hire labour to maximize profits. Labour demand depends on the marginal product of labour (MP) and the wage rate.
What is the Marginal Product (MP) of labour?
The MP of labour is the additional output generated by one more unit of labour, calculated as Change in Output / Change in Labour Input.
What is the Value of the Marginal Product (VMP)?
VMP = Marginal Product of labour (MP) × Unit Price of the Product. It represents the additional revenue from employing one more worker.
How do firms decide the optimal number of workers to hire?
Firms hire workers up to the point where the wage (MC of labour) equals the VMP (MB of labour). This is where profit maximization occurs.
If a firm hires workers at $10/hour, how does it determine how many to employ?
The firm will hire until the VMP of each worker equals $10. For example, if each pencil is sold at $0.50, the firm calculates VMP by multiplying the marginal product by $0.50, stopping when VMP equals the wage.
What happens if the wage decreases to $9/hour?
The firm can afford to hire more workers, as more workers will now have a VMP equal to or greater than the lower wage.
How is real wage calculated, and why is it important?
Real Wage (w) = Nominal Wage / CPI. It shows the purchasing power of wages, affecting labour demand and supply by indicating how much goods and services wages can actually buy.
How does an increase in productivity affect the demand for labour?
Increased productivity raises the marginal product, which in turn raises the VMP, potentially increasing demand for labour if real wages remain constant.
Describe the labour supply curve’s behavior in response to wages.
Generally, as real wages increase, the quantity of labour supplied also increases, as more people are willing to work or work longer hours.
What is labour market equilibrium?
Labour market equilibrium is the point where labour demand equals labour supply, determining the equilibrium real wage and employment level.
What are the main types of unemployment, and what causes each?
- Frictional Unemployment: Short-term, due to job search and matching in a flexible labour market.
- Structural Unemployment: Caused by a mismatch between workers’ skills and job requirements, often due to technological change.
- Cyclical Unemployment: Results from economic downturns (recessions) when demand for goods and services falls, reducing labour demand.
What is the natural rate of unemployment (NRU)?
The NRU is the level of unemployment when only frictional and structural unemployment are present, with cyclical unemployment at zero.
Define the unemployment rate and the participation rate.
Unemployment Rate: Number of Unemployed / Labour Force × 100%.
Participation Rate: Labour Force / Working Age Population × 100%.
What is a discouraged worker?
A discouraged worker is someone who has stopped looking for a job due to lack of success, and is therefore not counted in the labour force.
What is underemployment?
Underemployment refers to workers who are employed but wish to work more hours than they currently do. They are not counted as unemployed but reflect unutilized labour capacity.
What are business cycles?
Business cycles are the periodic expansions and contractions in economic activity, typically measured by fluctuations in GDP.
What is a recession, and how is it technically defined?
A recession is a period of economic contraction, defined as at least two consecutive quarters of negative GDP growth.
Differentiate between a classical cycle and a growth cycle.
Classical Cycle: Refers to periods of absolute expansions and contractions in economic activity.
Growth Cycle: Refers to variations in the growth rate of GDP, with growth recessions occurring when GDP grows below its trend or potential rate.
What is potential output (full-employment output)?
Potential output (y*) is the highest level of GDP an economy can sustain over the long term without causing inflation, using resources like labour and capital at normal rates.
Define the output gap and its implications.
Output gap = Actual GDP - Potential GDP.
Positive Output Gap: Actual > Potential, indicating an over-utilization of resources, which can lead to inflation.
Negative Output Gap: Actual < Potential, indicating underutilized resources, often associated with higher unemployment.
What is Okun’s Law, and what does it signify?
Okun’s Law shows the inverse relationship between GDP growth and unemployment, stating that for every 2% increase in GDP above potential, the unemployment rate falls by about 1%.
How can Okun’s Law be used to estimate the output gap?
Okun’s Law suggests that each percentage point difference between actual unemployment and the natural rate corresponds to a proportional difference in actual vs. potential output, often by a factor (e.g., β = 2).
How does government policy influence the natural rate of unemployment?
Policies like unemployment insurance, retraining programs, minimum wage laws, and employment protection can affect structural and frictional unemployment, thus impacting the natural rate.
