Wage and Price Setting

Business organisation which employs people, purchases inputs to produce market goods and services and sets prices greater than the cost of production

A legal document or understanding that specifies a set of action that parties to the contract must undertake. Contracts for products sold in markets permanently transfer ownership of the good from the seller to the buyer. Contracts for labour temporarily transfer authority over a person's activities from the employee to the manger or owner

A type of employment in which the worker is paid a fixed amount for each product made

Employees fear getting fired when they are paid more than their reservation option (they recieve employment). Employment rent is the cost of job loss which includes lost income while searching for a job, costs required to start a new job, loss of non-wage benefits, social costs

Value of next best option (other employment or unemployment benefits)

Wage - reservation wage - disutility

Large cost of job loss leading to worker putting in more effort to reduce the chance of getting fired. Firm can raise wages to increase the cost of job loss

Shows the optimal amount of effort workers will exert for each wage offered

Wages set higher than the reservation wage so workers will care about losing the job and provide more effort

Being out of work, but preferring to have a job at the wages and working conditions that otherwise identical employed workers have

Changes in the utility of the things that the wage can buy, the disutility of effort, the reservation wage, the probability of getting fired at each effort level

Cost advantages - large firms can purchase inputs on more favourable terms because they have greater bargaining power when negotioting with suppliers. Demand advantages - network effects (value of output rises with number of users

Show how total production costs vary with quanitity produced

Calculated as the slope of the ray from the origin to a given point on the cost function

The effect on total cost of producing one additional unit of output. Calculated as the slope of the cost function at a given point.

AC>MC - AC is decreasing. AC<MC - AC is increasing. The MC curve always intersects the AC curve at iots lowest point

Quantity that consumers will buy at each price

Show price-quantity combinations that give the same profit

Change in revenue from selling an additional unit (net effect of decreasing price and increasing quantity sold)

Arises when one firm can produce at lower average costs that two or more firms