Economics 0401

              Vocabulary List: Definitions-Part 1

 

01. SCARCITY: This occurs when relatively unlimited human wants exceed the ability of limited resources to satisfy those wants.

 

02. OPPORTUNITY COST: The value of the next best alternative given up in order to accomplish a certain goal.

 

03. RATIONALITY: Individuals weigh the benefits and costs of their actions all other things held constant and act when benefits exceed cost but refrain from acting when costs exceed benefits.

 

04. VOLUNTARY EXCHANGE: Provided that a seller of a good or service owns whatever is to be exchanged and the two parties to a potential exchange can bargain over the exchange price (a) exchange will occur if both parties benefit from the exchange, or (b) exchange will not occur if one party does not benefit from the exchange. NOTE: Exchange is voluntary when both parties consent to the exchange or (b) when either party is free to turn down an offer of exchange.  

 

05. COERCED EXCHANGE: When one party to a potential exchange can force an exchange using the force of law as long as such an exchange is beneficial to him. The other party will typically lose from the exchange, and so would not have consented to the exchange if given the freedom to refuse the offer. Such exchanges generally generate negative unintended consequences.

 

06. BARGAINING POWER: There are two types of bargaining power.

(a) Competitive bargaining power occurs when exchange is voluntary while the division of the gains from trade depend on the bargaining experience of each party. (b) Monopolistic bargaining power occurs when an exchange can be forced conferring all the gains from trade on one party and all the losses on the non-consenting party.

 

07. EXPLOITATION: In labor markets, this occurs when buyers can force sellers to accept a wage below their productivity or sellers can force buyers to pay a wage above their productivity.

 

 

08. RESIDUAL CLAIMANTS: The party in a firm which has the right to the stream of revenues which remain after all fixed claims (such as labor and raw materials suppliers) on the firm’s revenues have been paid. Since the size of the residual revenue stream depends on how productive the fixed claimants are in generating revenues for the firm the residual claimant has a strong incentive to monitor the behavior of the fixed claimants. 

 

09. LAW OF DEMAND FOR LABOR: The quantity demanded of labor varies inversely with the wage rate, all other things held constant.

 

10. DEMAND PRICE OF LABOR: The maximum wage that an employer is willing to pay a given worker, based on an estimate of that worker’s productivity.

 

11. OUTPUT (SCALE) EFFECT: The change in employment which occurs because of a change in the firm’s output. This change in output is caused by a change in the wage rate which causes the firm’s cost of production and the desired level of output to change.

 

12. SUBSTITUTION EFFECT (As It Relates to Production): The change in employment resulting solely from a change in the relative price of labor, output being held constant.

 

13. SHIFTS IN THE DEMAND FOR LABOR:  Changes in the factors that are held constant will cause a shift in the demand curve as opposed to a movement along the demand curve. These changes include changes in the product demand, prices of other inputs (substitutes or complements), productivity, and the number of employers.

 

14. DERIVED DEMAND: The notion that the demand curves for labor and other productive services are derived from the demand for the product they are used to produce.

 

15. LAW OF SUPPLY FOR LABOR: The quantity supplied of labor varies directly with the wage, all other things held constant.

 

16. SUPPLY PRICE OF LABOR: The lowest wage at which a given worker is willing to supply labor to a particular market. This wage is determined by the opportunity cost to that worker of supplying his labor services to that market instead of his next best alternative.

17.  SHIFTS IN THE SUPPLY OF LABOR: Changes in the things held constant will cause shifts in the labor supply curve, as opposed to a movement along the curve. These changes include (a) other wage rates, (b) non-wage income, (c) preferences for work versus leisure, (d) non-wage aspects of jobs, and (e) the number of qualified labor suppliers.

 

18. EQUILIBRIUM: Occurs when the quantity demanded of labor equals the quantity supplied of labor at a given wage.

 

19. DISEQUILIBRIUM: There are two cases: (1) Case 1: Excess Supply (ES) occurs when w > we, ES = LS – LD >  0, and wages have a tendency to fall as unemployed workers lower their wage offers in order become employed. (2) Case 2: Excess Demand (ED) occurs when w < we, ED = LD – LS > 0, and wages have a tendency to rise as employers try to fill their vacant positions.

 

20. SOCIAL WELFARE MAXIMUM (SWM): This occurs when the sum of the gains from trade for workers and employers is a maximum. In the absence of any market failures this occurs at the market equilibrium.

 

21.  WELFARE LOSS (WL): This occurs because either (a) too few workers are employed relative to the number of workers employed at the social welfare maximum (with workers being diverted to other markets where they have lower valued uses) or (b) too many workers are employed relative to the number of workers employed at the social welfare maximum (with workers being employed in a lower valued use in the given market).   

 

22. LAW OF DIMINISHING MARGINAL RETURNS (LDMR): The principle that if technology is unchanged, as more units of a variable resource are combined with one or more fixed resources, the marginal product of the variable resource must eventually decline.

 

23. MARGINAL PRODUCT (MP): The change in output that results from changing labor input by one unit.

     MP = ΔQ/ΔL

 

24. MARGINAL REVENUE PRODUCT (MRPL): The change in the total revenue that results from changing labor input by one unit.

     MRPL = ΔTR/ΔL

 

 

25. GROSS SUBSTITUTES: Inputs such that when the price of one changes, the demand for the other changes in the same direction because the substitution effect exceeds the output effect.

 

26. GROSS COMPLEMENTS: Inputs such that when the price of one changes, the demand for the other changes in the opposite direction because the output effect exceeds the substitution effect.

 

27. OWN-WAGE ELASTICITY OF DEMAND (eD): A measure of the responsiveness of the quantity of labor demanded to a change in the wage rate.

 

eD = - %ΔL/%Δw

 

28.  CROSS ELASTICITY OF DEMAND: A measure of the responsiveness of the quantity demanded of input i to the change in the price of input j.

 

     eijD = %ΔLi/%ΔPj

 

(a)    eijD > 0 inputs i and j are gross substitutes.

 

(b)    eijD < 0 inputs I and j are gross complements.

 

28. TOTAL WAGE BILL: The total wage cost to the firm; the wage rate multiplied by the quantity of labor hours employed.

 

29. TOTAL WAGE BILL RULES: Rules for determining the elasticity of labor demand. Labor demand is elastic if a change in the wage rate causes the total wage bill to move in the opposite direction. Labor demand is inelastic if a change in the wage rate causes the total wage bill to move in the same direction.

 

30. DETERMINANTS OF ELASTICITY OF DEMAND FOR LABOR: These include: product demand, ease of substituting other inputs, the elasticity of supply of other inputs, and the share of labor cost in the total costs of the firm.

 

31.  MINIMUM WAGE: A wage floor where a legally established minimum rate of pay is specified for labor employed in covered occupations.

 

32. GENERAL TRAINING: Skills that can enhance a worker’s productivity with a wide variety of employers.

33.  SPECIFIC TRAINING: Skills that can enhance a worker’s productivity with only one employer.