Economics: Theory Through Applications
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Chapter 9
Growing Jobs
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Learning Objectives
•
What is a production function?
•
How does a firm decide how much to produce?
•
What factors determine a firm’s labor demand?
•
What is the difference between a fixed cost and a variable cost?
•
What factors determine if a firm should remain in business?
•
What is a sunk cost?
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Learning Objectives
•
What is the process of matching workers and vacancies?
•
What is the optimal strategy to follow when looking for a job?
•
How are wages determined in labor markets?
•
What government policies impact job creation and destruction?
•
What are the effects of trade on job creation and destruction?
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Figure 9.1 - Walmart Fact Sheet
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Figure 9.2 - Walmart: Growing Jobs?
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Figure 9.3 - US Net Job Creation from 2000
to 2009
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Figure 9.4 - Labor Market Equilibrium
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Figure 9.5 - The Technology of a Firm
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A Production Function That Uses Only Labor
Output  Productivity  Hours of labor input
Output  0.2  Hours of labor input
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Table 9.1 - Production Function for
Housecleaning
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Figure 9.6 - A Linear Production Function
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A Production Function That Uses Only Labor
Marginal product of labor 
Change in output
Change in labor input
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Table 9.2 - Production Function for Coffee
with a Diminishing Marginal Product of Labor
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A Production Function That Uses Only Labor
Marginal product of labor 
Change in output
63.2  59.2 4

  0.8
Change in labor input
40  35
5
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Figure 9.7 - A Production Function with a
Diminishing Marginal Product of Labor
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The Cost Function
Output  0.2  Number of hours of labor input
Cost of one clean house  5 hours  $10 per hour  $50
Hours of labor input 
Output
Productivity
Cost of production  Wage  Hours of labor input 
Wage
 Output
Productivity
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Figure 9.8 - The Cost Function
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Figure 9.9 - The Cost Function with a
Decreasing Marginal Productivity of Labor
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Figure 9.10 - The Marginal Cost Function
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Marginal Cost
Marginal cost 
Wage
Marginal product of labor
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The Price/Output Decision
Marginal revenue  Marginal cost
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Figure 9.11 - Output and Price Decisions of a
Profit-Maximizing Firm
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Figure 9.12 - The Effect of a Change in
Marginal Cost on a Firm’s Choice of Output
and Employment
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Figure 9.13 - The Demand for Labor
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Figure 9.14 - The Effect of a Change in
Demand on a Firm’s Choice of Output and
Employment
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Exit
Total costs  Fixed costs  Variable costs
Total costs  14, 000  10  Quantity
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Table 9.3 - Monthly Costs of Production
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Figure 9.15 - Total Costs, Fixed Costs, and
Variable Costs
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The Exit Decision
Profit  Total revenues  Total costs  Total revenues  Variable costs  Fixed costs
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Table 9.4 - Demand and Profit before
Walmart Comes to Town
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Table 9.5 - Demand and Profit after Walmart
Comes to Town
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The Exit Decision
Discounted present value of expected future profits  Value of recoverable assets
1
3
Expected profit   $6, 000  ´ (- $1, 200)  $1,500 - $1, 200  $300
4
4
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Entry
Discounted present value of expected future profits  Entry costs
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Figure 9.16 - The Valuation of a Job
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Key Terms
•
Factors of production: The inputs used in a firm’s production process,
primarily physical capital, labor hours, raw materials, and technology
•
Technology: A means of producing output from inputs
•
Production function: A description of how much output a firm can
produce as it varies its inputs
•
Marginal product of labor: The amount of extra output produced from
one extra hour of labor input
•
Diminishing marginal product of labor: The idea that each additional
hour of labor input contributes a smaller and smaller amount to output
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Key Terms
•
Fixed costs: Costs that are the same at all levels of production
•
Variable costs: Costs that vary with the level of production
•
Total costs: The sum of fixed costs and variable costs
•
Fixed operating costs: Costs incurred regularly during the normal
operation of a business
•
Recoverable asset: An asset you can resell for at least its purchase price
•
Entry costs: The one-time fixed costs that a firm must incur when
establishing a business
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Key Terms
•
Sunk cost: A cost that, once incurred, cannot be recovered
•
Recoverable cost: A cost that, once incurred, can be recovered
•
Sunk cost fallacy: The mistake of including sunk costs in future-looking
decisions, even though they should properly be ignored
•
Opportunity cost: What you must give up to carry out an action
•
Reservation wage: The lowest wage that a searching worker will accept
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Key Takeaways
•
A firm produces a quantity such that the marginal cost of producing an
extra unit of output equals the marginal revenue from selling that extra
unit of output
•
The demand for labor depends on the level of productivity, the demand
for a firm’s product, and the cost of labor compared to the cost of other
inputs in the production process
•
A fixed cost is paid regardless of the level of output produced; a variable
cost depends on the level of output produced
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Key Takeaways
•
A firm should exit when the discounted present value of its future profits
decreases below the value it can receive from selling its assets
•
A sunk cost is a cost that cannot be recovered, such as the cost of entry
– This cost should have no effect on the decision to exit
•
The search process brings together workers and vacancies of firms
– This process lies behind the supply and demand curves for labor
•
For many searches, it is best to follow a reservation wage strategy: accept
a job if and only if the wage exceeds the reservation wage
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Key Takeaways
•
Wages are determined through a bargaining process
– Sometimes this is through a take-it-or-leave-it offer of the firm
– Often there is bargaining between a firm and its workers (or their union) to
share the surplus of the employment relationship
•
In the United States, firms are able to close plants if they choose to do sothis is not the case in all countries
•
The government promotes small businesses, viewing them as a source of
job creation
•
The reduction of trade barriers creates new jobs and destroys others
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