Micro topic 5: A minimum wage (2016)Apunte Inglés
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Introduction to microeconomics
TOPIC 5: A MINIMUM WAGE
BM Chap. 5
M Chapter 6 and Chapter 18
The labor market is a market in which units of labor are bought and sold whose price is salary.
Firms demand labor to use in the production of goods.
The workers offer their labor, and are willing to work provided they are compensated for what they could do with that time if they did not work.
In a competitive market, wages are adjusted to match demand and supply.
THE DEMAND FOR LABOR The rule of the value of the marginal product: if a company must produce a positive amount, it will maximize profits by hiring workers as long as the value of the marginal product of contracting one more employee > salary of the employee.
Marginal product: the additional income a firm obtains by hiring an additional worker. (It is different for every worker).
Putting one more worker increases the total value of production by x€. Then x is the value of the marginal product.
The optimal number of workers a firm should hire is determined by the value of the marginal product: the value of the marginal product must be higher than the salary that will be paid to the worker in order to maximize profits.
Marginal product and average product IMPORTANT: Do not confuse the value of the marginal product with average product value (labor productivity).
1 Topic 5 Introduction to microeconomics Clara Castells Average product= value of the units produced by each employee Average product= Value of production/Number of workers Average product=Units produced*Price of product/Number of workers Marginal product= Value of the units produced by one more labor unit Marginal product=Production with N+1 employees – Production with N employees.
Labor demand curve of a company The total quantity demanded by each level of wage (sum of the quantities demanded by each level of wage).
2 Topic 5 Introduction to microeconomics Clara Castells LABOR SUPPLY The workers will be willing to work provided the wage compensates them for what they might otherwise do with their time.
The monetary value of devoting working time to other uses is called the reservation wage (it is an example of opportunity cost*).
*the opportunity cost of a resource is the monetary value of using this resource with another option but at its best use. (Here: what could you do best instead of working).
Labor supply curve: total amount of labor supplied at any wage level (number of employees whose reservation wage is equal or less than the wage level).
Not all workers will be employed, so we distinguish between: - Voluntary unemployment: number of people who are unemployed because they are not willing to work at the average wage offered in the market.
They do not work because their reservation wage is higher than the market wage.
-Involuntary unemployment: the number of people who are unemployed and would be willing to work at the average market wage, but cannot find jobs. Their reservation wage is below the market wage, but they cannot find work.
COMPETITIVE EQUILIBRIUM OF THE LABOR MARKET Intersection of supply and demand.
3 Topic 5 Introduction to microeconomics Clara Castells Workers’ surplus= Salary - Reservation wage EFFECTS OF A MINIMUM WAGE If the minimum wage < w*, it has no effect Let min w > w*, involuntary unemployment appears and involuntary unemployment grows more than employment falls.
*Who wins and who loses with a minimum wage? Losers: - Companies must pay a higher minimum salary without having raised the income of their production.
Workers who have lost their jobs, who now receive their reservation wage which is below the wages they received before.
Winners: - Employed workers. If they were working, they receive a wage increase. If they were not working, they receive a higher wage than their reservation wage.
As there are more workers willing to work at the new wage than available jobs, we do not know who will get a job.
MINIMUM AND MAXIMUM PRICES Minimum price of a good is the lowest price at which the law allows the good to be bought or sold.
4 Topic 5 Introduction to microeconomics Clara Castells If minimum price < p*, it has no effect.
If minimum price > p*, the quantity supplied is greater than the demanded.
The difference is known as excess supply For sellers, a minimum price means selling at a higher price, but a lower amount.
The profit from selling at a higher price will be greater or less depending on the slope/elasticity of the demand curve.
A more elastic demand implies a greater fall in the quantity sold.
5 Topic 5 Introduction to microeconomics Clara Castells Main concepts of this topic: - Marginal product, marginal value product.
Labor productivity or value of the average product.
Company and market labor demand.
Voluntary and involuntary unemployment.
Excess supply and excess demand.