SCHILLER – CHAPTER 30: THE LABOR MARKET
Students should master each of the following concepts and subject matter areas in the text
chapter:
The characteristics of the competitive labor market
The relationship between wage rates and the quantity supplied of labor
The characteristics of the labor supply curve
Why the labor supply curve eventually slopes in a “backward-bending” manner
The role that leisure plays in the decision to make hours of work available in a labor market
The role that “marginal utility of income” plays in the decision to work
The relationship between wage rates and the quantity demanded of labor
Why the labor demand curve slopes downwards
Explanation: Why the demand for labor by the firm is a “derived” demand.
The relationship between the demand for labor and the demand for product that the labor
produces
Definition and calculation of a unit of labor’s Marginal Physical Product (MPP)
Explanation: Why the MPP of labor represents an upper limit to a firm’s willingness to pay labor
any particular wage rate
Definition and calculation (formula) of a unit of labor’s Marginal Revenue Product (MRP)
How product price changes affect MRP
Definition and calculation of a unit of labor’s Marginal Resource Cost (MRC) AKA Marginal
Factor Cost (MFC)
Explanation: Why the wage rate paid to labor is the same as the MRC (or MFC) of labor
How the “hiring rule” for labor compares MRP and MRC
The impact on the firm’s profits when MRP is greater than MFC (or MRC)
The “statistical behavior” of labor’s Marginal Physical Product (MPP)
How/why the Law of Diminishing Returns explains the behavior of labor’s MPP ( increasing the
amount of labor used leaves the labor with less capital/and other resources to work with and
MPP eventually declines)
How changes in wage rates affect the “profit maximizing quantity of workers hired” by the firm
How changes in product prices affect the “profit maximizing quantity of workers hired” by the
firm
The factors that impact labor productivity (MPP)
How changes in MPP affect labor’s MRP and the “profit maximizing quantity of workers hired”
by the firm
How wage rates are established in a labor market.
The mechanics of the minimum wage and how it affects the labor market
How the profit maximizing firm decides among a number of choices involving alternative types
of resources used in production
The mechanics of the “cost efficiency” of alternative resources used in production.