Economics: Theory Through Applications

1. Economics: Theory Through Applications

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3. Chapter 9Growing Jobs

4. 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?

5. 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?

6. Figure 9.1 - Walmart Fact Sheet

7. Figure 9.2 - Walmart: Growing Jobs?

8. Figure 9.3 - US Net Job Creation from 2000 to 2009

9. Figure 9.4 - Labor Market Equilibrium

10. Figure 9.5 - The Technology of a Firm

11. A Production Function That Uses Only Labor

12. Table 9.1 - Production Function for Housecleaning

13. Figure 9.6 - A Linear Production Function

14. A Production Function That Uses Only Labor

15. Table 9.2 - Production Function for Coffee with a Diminishing Marginal Product of Labor

16. A Production Function That Uses Only Labor

17. Figure 9.7 - A Production Function with a Diminishing Marginal Product of Labor

18. The Cost Function

19. Figure 9.8 - The Cost Function

20. Figure 9.9 - The Cost Function with a Decreasing Marginal Productivity of Labor

21. Figure 9.10 - The Marginal Cost Function

22. Marginal Cost

23. The Price/Output Decision

24. Figure 9.11 - Output and Price Decisions of a Profit-Maximizing Firm

25. Figure 9.12 - The Effect of a Change in Marginal Cost on a Firm’s Choice of Output and Employment

26. Figure 9.13 - The Demand for Labor

27. Figure 9.14 - The Effect of a Change in Demand on a Firm’s Choice of Output and Employment

28. Exit

29. Table 9.3 - Monthly Costs of Production

30. Figure 9.15 - Total Costs, Fixed Costs, and Variable Costs

31. The Exit Decision

32. Table 9.4 - Demand and Profit before Walmart Comes to Town

33. Table 9.5 - Demand and Profit after Walmart Comes to Town

34. The Exit Decision

35. Entry

36. Figure 9.16 - The Valuation of a Job

37. 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

38. 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

39. 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

40. 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

41. 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

42. 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 so-this 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