Week 9 Key Knowledge Flashcards
What is the wave setting decision?
Firms have to set wage sufficiently high to make job loss costly, in order to motivate employees to work hard in the absence of complete contracts.
What is price setting decision?
Firms set a markup above the cost of production, to maximize their profits subject to demand.
What is real wage?
Real wage is the nominal wage divided by the price level of the bundle of consumer goods purchased.
Nominal wage / Price of consumer goods purchased.
How do firms actually decide how much employment there is and what the real wage is?
Firms decide on its price, wage and how many people to hire.
Adding up all of these across all firms gives the total employment in the economy and the real wage.
What is the chain of a firm’s decisions that leads to how many employees to hire?
Nominal wage is decided based on other firm’s prices and wages also the unemployment rate.
This leads to the firm setting the price for the product or service based on their own nominal wage and the demand for the product.
The firm then decides how much to produce (how much output) based on the optimal price and the demand curve for the firm.
Then after the firm has decided output it will know the amount of employees needed as they know how much they want to produce.
What is the wage-setting curve?
The real wage necessary at each level of economy-wide employment to provide workers with incentives to work hard and well.
In order to motivate employees to work hard and well firms must what?
Firms must set the wage sufficiently high so that the worker recieves an employment rent.
This means there is a cost of job loss she is better off being employed than being fired due to inadequate effort.
How does the level of employment effect the wage of employees?
If the worker is very likely to find alternative work if she is fired, which will be the case if the employment level in the economy is high, she will need a higher wage to work harder.
Who business is wage setting in a firm?
The business of the human resources department of the firm.
What is the trade off firms face when selling goods?
Firms face a trade-off between selling more goods and setting a higher price, due to the demand curve they face.
How do firms determine the price they sell for?
The firm finds the markup over their production cost that balances the gains from a higher price against the losses from lower sales so as to maximise its profits.
This profit-maximising markup determines the division of the firm’s revenues between profits and wages.
What are the characteristics of someone who is unemployed?
Were without work during a reference period usually four weeks, which means they were not in paid employment or self-employment.
Were available for work.
Were seeking work, which means they had taken specfic steps in that period to seek paid employment or self-employment.
What is the simple definition of unemployed?
A situation in which a person who is able and willing to work is not employed.
How is the labour market broken down?
Population is subsectioned in to peopl whom are of working age.
The population of the working age is broken down into the labour force and out of labour force (economically inactive).
The labour force is then broken down into employed and unemployed.
What is the population of the working age?
This is the population, minus children and those over 64. It is divided into two parts: the labour force and those out of the labour force known as economically inactive people.
