Micro Economics
Q1.The demand of labor is said to be derived demand. What is the meaning of derived demand? How does this concept help to determine the demand of labor?
Ans. A firm demands an input in order to produce a commodity demanded by consumers. So, the demand for an input is a Derived demand. If the input is labor then the demand for labor is derived demand as firms employ them in the production process which contributes to their revenue and profits .The demand for labor is determined form the principle of profit maximization. The demand for additional amount of labor depends on the Marginal revenue product and the marginal cost. The extra income is given by the marginal product (MP) of labor times the marginal revenue (MR) of the firm. This is the Marginal revenue product (MRP). In a perfectly competitive market labor will be employed where the MRP equals to Marginal Cost. The MRP curve is taken as labor demand curve.
Q2. What are some of the factors that determine the supply of labor in a market? What significant factors have changed supply of labor over the last twenty years?
Ans. The supply of labor in a microeconomic theory shows how many hours of work will be supplied by an individual at different wage rates. The supply of labor depends on the size of population and on the labor participation rate. The most important factors that have changed the supply of labors over the last twenty years are the increased immigration, slow population growth, and population aging.
Q3. How does a firm determine its prices and the quantity of labor required in the resource market during the specific period?
Ans. If perfect completion prevails in the market then the price of labor is determined by firm by taking the price of the factor and determines the quantity demanded at that price form the principle of profit maximization. It shows how many units of labor will be demanded at different prices of the labor. That means if the extra units of labor is hired to produce extra unit of output so that it adds to total revenue and to the total cost. So the firm will hire labor till marginal productivity of labor exceeds the marginal expenditure on labor. This is how price and quantity of labor is determined in the resource market during the specific period.
Q4.Why do income inequalities exist? How have income inequalities changed from 1980 to present?
Ans. Welfare economics studies the conditions for economic efficiency in the production of output and in the exchange of commodities and for the equity distribution of income. But too much equity harms the society so a change that benefits some and make others losers in monetary units is good for the society. This is the reason income inequality or wealth gap exist in a society. If one is better off the other is bound to be worse off. So there are two point in a income distribution curve. This gap between the rich and the poor is wider in U.S. than any other industrial country and has increased after 1980. The factors for this increased gap are globalization where different countries of labors are coming and the labors residing in U.S are losing their job , immigration have reduced the wages , the technological change in the whole world has created highly skilled labors and increased the competition , gender changes where women have stared earning and the family income has increased.
Q5. What is the role of the U.S. government , in terms of dealing with the problem of income inequalities? What are the arguments, for and against , government involved in this area?
Ans. The government have taken some of the measures to decrease this inequality as increased inequality slower the economic growth. For the welfare of people the government
Has levied high taxes for high income groups. In 2001 U.S federal taxes rates have started at 15 percent and increased to 39 percent. For the unemployed and low income groups federal government has provided insurance, welfare programs, public assistance programs. . It has also controlled the inflation and implemented various economic policies to reduce this gap.
Q6.Why do nations trade? What is meant by the term "comparative advantage"? Could a nation be better off economically, if it practiced an isolation policy?
Nations trade to have general equilibrium of production and exchange. The term "comparative advantage" in international trade is defined as the gain of one nation has comparative advantage over another in producing a specific good at a relatively lower opportunity cost. A nation cannot be better off economically if practiced in isolation due to the fact that countries do not have adequate resources to satisfy their own needs and desires. In order to satisfy themselves and for economic growth they engage in trade
Q7.The United States has had a significant trade imbalance for several years. What are the problems associated with having a negative trade balance? What can be done to correct the imbalance?
Ans. Trade deficit occurs when the country's imports exceeds exports. This makes the trade balance negative. The trade deficit creates the standard of living high but there are some of the reasons of trade deficit. In U.S economy trade deficit occurred due to capital in flow for several years and the reasons are foreign barriers who create problem to the imports of goods and services. The lack of industrial competitiveness of the U.S. economy also creates trade deficits. The slowdown of the Asian economics makes the deficit larger for United States. The imbalance has been avoided by devaluing the dollar against some key currencies. Coordinating with macroeconomic policies of developed nations. Reducing the foreign barriers , promoting labor rights helped to correct the negative imbalance of United States.
Q8. How are exchange rates determined? What is the significance of currency devaluations to the home country? To other countries?
Ans. The rate at which one currency is exchanged for another currency is called the exchange rate. This is determine by he price of one unit of the foreign currency in terms of the domestic currency. In a flexible exchange rate system between U.S dollar($) and the euro(€) the currency of the 12-nation European Monetary Union (EMU) is determined by the intersection of market demand and supply of euros. If the U.S. demand for euros is negatively inclined indicating that the lower exchange rate , the greater the quantity of euros demanded by the U.S.. The reason is that the lower the exchange rate , the cheaper is it for U.S to import from and invest in the EMU and thus greater the demand for euros by U.S and vice versa if the U.S supply of euros is positively inclined.
Works Cited
Salvatore, Dominick. Microeconomics. : Oxford University Press, 2003.
. “Wage rates and the Supply and Demand for labour" www.economics.utoronto.ca/jfloyd/modules/sadl.html
Liaz, Meir, "How to set prices in a Manufacturing Firm"
www.bizmove.com/marketing/m2y1.htm
"United States Balance of Trade"- "Trading Economics" www.tradingeconomics.com/united-states
Mussa, Michael, "The Theory of Exchange Rate Determination" www.nber.org/chapters/c6829.pdf
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