ECO 1003Handouts for

Chapters 11-12-14

Chapter 11(Why) Are Women Paid Less?Unemployment• During economic downturns or recessions, industrial plants run at less than their total capacity. When there is unemployment of labor and capital, we are not producing all that we can.

Chapter 11(Why) Are Women Paid Less?DEFINING AND MEASURING UNEMPLOYMENT• employed Any person 16 years old or older (1) who works for pay, either for someone else or in his or her own business for 1 or more hours per week; (2) who works without pay for 15 or more hours per week in a family enterprise; or (3) who has a job but has been temporarily absent, with or without pay

Chapter 11(Why) Are Women Paid Less?• unemployed A person 16 years old or older who is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks

• not in the labor force A person who is not looking for work, because he or she either does not want a job or has given up looking

Chapter 11(Why) Are Women Paid Less?• labor force The number of people employed plus the number of unemployed

• labor force = employed + unemployed

• population = labor force + not in labor force

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Chapter 11(Why) Are Women Paid Less?• unemployment rate The ratio of the number of people

unemployed to the total number of people in the labor force

• labor force participation rate The ratio of the labor force to the total population 16 years old or older

labor force

total populationlabor force participation rate

Chapter 11(Why) Are Women Paid Less?THE COSTS OF UNEMPLOYMENTSome Unemployment Is Inevitable

• When we consider the various costs of unemployment, it is useful to categorize unemployment into three types:

• Frictional unemployment• Structural unemployment• Cyclical unemployment

Chapter 11(Why) Are Women Paid Less?Frictional and Structural Unemployment• frictional unemployment The portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems

• structural unemployment The portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries

Chapter 11(Why) Are Women Paid Less?• natural rate of unemployment The unemployment that occurs as a normal part of the functioning of the economy• Sometimes taken as the sum of frictional unemployment and structural unemployment

• cyclical unemployment The increase in unemployment that occurs during recessions and depressions

Chapter 12The Effects of the Minimum Wage

Chapter 12The Effects of the Minimum Wage• The schedules D and S show the demand and supply of labor.

• In the absence of a minimum wage, equilibrium is at Point B, with wage rate We and employment level Le.

• Imposing a minimum wage of Wm causes quantity supplied to rise to Ls, and reduces quantity demanded to Ld.

• Thus, an excess supply of labor, equal to Ls - Ld, develops.

• This excess supply of labor creates new incentives on both sides of the market.

Chapter 12The Effects of the Minimum Wage• A number of workers (Le - Ld) who previously had jobs will lose them, while some individuals (Ls - Le) who were unwilling to work at a wage of We will be glad to offer themselves to employers at a wage of Wm.

• Individuals from both categories are willing to work for less than Wm, and thus will be willing to devote time, unemployed, looking for a job at the above-equilibrium wage shown by Wm.

• Thus, one consequence of the minimum wage is to raise the unemployment rate among less-skilled workers.

Chapter 12The Effects of the Minimum Wage• Overall, because the minimum wage causes a decline in employment, it also causes an efficiency loss for the economy.

• The magnitude of this efficiency loss is shown by the area ABC in Figure 12-1.

Chapter 14The Underground WorldÜretken Enterprise has developed a new product called C’mon. The market demand and supply for this product is given as Q = 240 - 4P and Q=40+P, respectively.a) What is the equilibrium price and quantity for this product?b) If the government imposed per unit tax of 10 TL per C’mon manufactured, what would be the new equilibrium price of C’mon? Would a per unit tax on C’mon change the revenue received by Üretken Enterprise?Solution:a) Q = 240 - 4P and Q=40+P equilibrium price and quantity240 - 4P=40+P P=40 Q=80b) The tax represents a price increase to the purchaser regardless of the current price. Thus, the supply curve will be adjusted vertically upward by 10Q=40+P P= Q-40New P=q-40+10 P=Q-30 Q=P+30Equilibrium price P+30=240-4PP=22 Q=52As quantity sold has fallen too, revenues would fall

Chapter 14The Underground WorldThe Impact of a Tax•The government wants to impose a $1.00 tax on movies. It can do it two ways:

• Make the producers pay $1.00 for each movie ticket they sell

• Make consumers pay $1.00 when they buy each movie

•In which option are consumers paying more?

Chapter 14The Underground World• The burden of a tax (or the benefit of a subsidy) falls partly on the consumer and partly on the producer

• How the burden is split between the parties depends on the relative elasticities of demand and supply

Chapter 14The Underground WorldThe Effects of a Specific Tax•For simplicity we will consider a specific tax on a good

• Tax of a particular amount per unit sold• Federal and state taxes on gas and cigarettes

•For our example, consider a specific tax of $t per unit sold

•Buyers lose A + B

Chapter 14The Underground World

D

S

B

D

A

C

Quantity

Price

P0

Q0Q1

PS price producers get

Pb price buyers pay

Tax = $1.00 •Government gains A +

D in tax revenue.

•Sellers lose D + C

•The deadweightloss is B + C.

Chapter 14The Underground WorldIncidence of a Specific Tax•Four conditions that must be satisfied after the tax is in place:

1. Quantity sold and buyer’s price, Pb, must be on the demand curve• Buyers only concerned with what they must pay

2. Quantity sold and seller’s price, PS, must be on the supply curve• Sellers only concerned with what they receive

Chapter 14The Underground World• Four conditions that must be satisfied after the

tax is in place (cont.):

3. QD = QS

4. Difference between what consumers pay and what buyers receive is the tax

• If we know the demand and supply curves as well as the tax, we can solve for PB, PS, QD and QS

Chapter 14The Underground World• In the previous example, the tax was shared almost equally by consumers and producers

• If demand is relatively inelastic, however, burden of tax will fall mostly on buyers• Cigarettes

• If supply is relatively inelastic, the burden of tax will fall mostly on sellers

Chapter 14The Underground World

Quantity Quantity

Price Price

S

D S

D

Q0

P0 P0

Q0Q1

Pb

PS

t

Q1

Pb

PS

t

Burden on Buyer Burden on Seller