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AU - ECON 200 - Class Notes - Week 4

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AU - ECON 200 - Class Notes - Week 4

School: American University
Department: Economics
Course: Principles of Microeconomics
Professor: O Ozay
Term: Spring 2019
Tags:
Name: Week 4 micro notes
Description: Supply and demand, human capitol, discrimination, compensating differential, workplace conditions
Uploaded: 02/11/2019
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background image Assumption: labor markets are competitive, physical capital is fixed in the short run,
all workers and jobs are identical 
Marginal product of labor- additional output that results from the addition of more 
resources if all other factors remain the same (fixed capital causes diminishing MPL-
The inclusion of more resources leads to a smaller margin with each addition), MPL 
determines labor demand 
Shifting labor demand depends on output price, productivity, and total number of 
worker hours that firms are willing to offer at given wage levels (Higher labor 
demand  higher wage, and vice versa)
Shifting labor supply depends on labor force participation (willingness or not), 
migration (location of firms), and opportunity costs 
Supply & demand both determines wages  Hourly wage correlates directly to hourly productivity index (you produce more, you 
get paid more)
What happens when we buy goods made by low wage labor? Iphone example: Demand increased by a lot when iphone came out, so Chinese 
factories that assembled phones had to raise wage otherwise there would be a 
shortage of labor to assemble the phones, Chinese farming industry also had to 
raise wages to compete with rise of manufacturing industry in China and get 
workers to stay by lowering opportunity cost 
Buying manufactured goods raises factory wages, but also wages in other sectors 
(buying an iphone does not contribute to or increase poverty in china)
Overall standard of living in China was raised because corporations took advantage 
of cheap labor and increased manufacturing and created a market for goods to be 
sold (higher demand for factory labor). Therefore, wages and standard of living rose 
(boycotting goods produced by Chinese factory workers with extremely low wages 
does not help them because it decreases the demand for their labor, and their 
wages go down)
Human Capital- knowledge and skills from education, training, and experience (how 
productive/ valuable a person is dictates how much people are willing to pay)
Positive correlation between adult height and adult income? Teen self-esteem, not 
adult height, may encourage human capital accumulation (people who are taller 
teens get treated better and develop more self-esteem which they carry into 
adulthood have more human capital because they are more willing to be outgoing 
and productive) 
Instructors who are viewed as better looking receive higher ratings  Part 2 
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background image Compensating Differential- difference in wage not caused by differences in 
productivity or skill, but by differences of workplace being considered desirable or 
not (sex workers in India who require condoms vs. those who don’t- those who don’t
have a more dangerous condition, therefore they charge more)
Working conditions  Safe conditions are costly to employers bc they have to pay for safety upgrades  If people don’t want to work in dangerous conditions, they will leave, causing a 
labor shortage, which causes the wages to rise in the dangerous conditions due to 
supply and demand dangerous conditions are also costly to employer bc they have
to pay the compensating differential wage increase to employees
If safety upgrade costs less than the compensating differential, then safety is 
profitable and if the compensating differential costs less than the safety upgrades, 
keeping the dangerous conditions is more profitable (altruism is not the goal even 
when people do make safety upgrades, profit always is)
Factory conditions in China are so much worse because many people would rather 
have the higher wage in dangerous conditions since there are so many poor people 
at only subsistence level, which is why the unsafe practices continue (passing 
legislation to force safety conditions takes away the choice from workers to choose 
safety or a higher wage bc forcing safety upgrades when that is not the more 
profitable option for a business forces wages down) 
As people get wealthier, demand for normal goods start to increase, including safety
(people with higher wages and more experience demand safer conditions and more 
leave dangerous conditions, which lowers supply of workers further compensating 
differential increases as workers become wealthier bc it costs more to make them 
stay), more safety is profitable as compensating differential rises
Economic growth and profit seeking improve working conditions because economic 
growth creates wealth, which makes safety more profitable and leads to more 
safety upgrades  reason why American working conditions are so much safer than 
China (much more overall wealth in America, so compensating differential often 
costs more than safety upgrades that keep wages the same)
OSHA is not the reason for safer working conditions in America because number of 
workplace deaths was falling before OSHA was created and the fines from OSHA are
much less than cost of compensating differentials, which means employers are not 
making their workplaces safer bc of OSHA but bc they don’t want to pay 
compensating differentials 
Preference Based Discrimination (relax assumptions that people are motivated by 
money only)- preferring one group over another, even if productivity is the same 
Discrimination by employers- employers pay more to favored workers than equally 
productive disfavored workers
People who only hire favored group are deliberately paying more for your workforce,
companies make lower profits by only hiring favored workers, which makes them a 

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School: American University
Department: Economics
Course: Principles of Microeconomics
Professor: O Ozay
Term: Spring 2019
Tags:
Name: Week 4 micro notes
Description: Supply and demand, human capitol, discrimination, compensating differential, workplace conditions
Uploaded: 02/11/2019
3 Pages 49 Views 39 Unlocks
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  • Notes, Study Guides, Flashcards + More!
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