| Adjustment Costs | The costs that firms incur as they adjust the size of their work force. There are two types of adjustment costs: variable and fixed adjustment costs.
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| Average Product | Output per unit of labor. It is found by dividing total product by the number of labor units. It may also be measured for a given level of output by the slope of a straight line drawn from the origin to the point on the total product curve for that given level of output.
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| Capital-Skill Complementarity Hypothesis | The hypothesis that an increase in the price of capital reduces the demand for skilled workers and increases the demand for unskilled workers.
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| Cross-Elasticity of Factor Demand | A measure of the responsiveness of the quantity of factor i to a change in the price of factor j. Specifically, the percentage change in the demand for input i resulting from a one percent change in the wage of input j.
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| Demand Curve for Labor | A curve showing the relationship between wages and the quantity of workers demanded.
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| Elasticity of Labor Demand | A responsiveness of the quantity of labor demanded to a change in the wage rate. Specifically, the percentage change in the quantity of labor demand resulting from a one percent change in the wage.
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| Elasticity of Substitution | A measure of the responsiveness of the capital-labor ratio to a change in the price of labor relative to capital. Specifically, the percentage change in the capital/labor ratio resulting from a one percent change in the relative price of labor.
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| Equilibrium | The wage and employment levels that "equates" the number of hours that workers wish to allocate to their jobs with the number of employee-hours that firms wish to hire.
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| Instrument, Instrumental Variable |
in econometrics, a variable that shifts one of the curves and not the other.
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| Isocost | A curve showing the possible combinations of labor and capital which can be purchased with a given outlay, given the prices of capital and labor.
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| Isoquant | A curve showing the possible combinations of labor and capital that are capable of producing the same level of output.
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| Law of Diminishing Returns | The principle that, if technology is unchanged, combining additional units of a variable input with one or more fixed inputs yields a marginal return to the variable input that must eventually decline.
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| Marginal Cost | The change in costs that result from the production of an additional unit of output.
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| Marginal Product | The change in the total product which results from increasing an input by one unit.
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| Marginal Productivity Condition |
a “hiring rule” that tells firms when to stop hiring, the requirement that firms hire workers up to the point where the value of marginal product of labor equals the wage.
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| Marginal Productivity Condition | The rule that specifies when the firm should stop hiring in order to maximize profit. In a competitive market, firms hire workers up to the point where the value of the marginal product of labor equals the wage.
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| Marginal Rate of Technical Substitution | The amount by which capital must decline when labor is increased by one unit along an isoquant: the absolute value of the slope of an isoquant.
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| Marginal Revenue | The additional revenue obtained from selling an additional unit of output.
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| Marshall's Rules of Derived Demand | The summary of the relationship between the elasticity of labor demand in the industry and four factors regarding markets and technology. Specifically, the demand for labor is predicted to be more elastic: (1) the greater the substitutability between labor and capital (i.e., the larger the elasticity of substitution), (2) the more responsive is the demand for the product (i.e., the larger is the elasticity of demand for the product), (3) the greater the share of labor costs in total costs, and (4) the greater the responsiveness of capital to the price of capital (i.e., the larger is the elasticity of the supply of capital).
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| Method of Instrumental Variables |
method to estimate the labor demand elasticity.
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| Perfect Complements | Occurs when the isoquant between any two inputs is a L-shaped (i.e., right-angled). It implies there are no substitution opportunities between the two inputs. For example, in a pizza delivery business a driver and a car may be perfect complements, because adding another car without another driver or adding another driver without another car will not change the number pizzas delivered. In this case, one driver must be matched with one car in order to produce a delivery.
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| Perfect Substitutes | Occurs when the isoquant between any two inputs is linear. It implies that one input (e.g., labor) can be substituted at a constant rate for the other input (e.g., capital). For example, a deck of a house could be produced with red wood timber or oak timber. Thus, because the two woods have similar construction properties, a foot of red wood timber could be substituted for oak timber at a constant rate of one to one.
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| Perfectly Competitive Firm | A perfectly competitive firm is a sufficiently small producer and employer that it is a price taker. In other words, the output price is not affected by how much the firm sells nor is the price of its inputs (e.g., labor and capital) affected by the number of units the firm employs.
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| Production Function | The relationship between the quantities of the various inputs and the corresponding output, assuming the inputs are combined in a technically efficient manner. It describes the technology that the firm uses in the production process.
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| Scale Effect | The change in the firm's inputs resulting from the expansion of the firm's production.
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| Substitution Effect | The change in employment resulting from a change in the wage, holding output constant. It implies that the firm always substitutes toward the input that has become relatively cheaper.
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| Value of Average Product | Measures the dollar value of the output per worker. For example, the average product of employment is equal to p*APE.
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| Value of Marginal Product | Measures the dollar revenue increase generated by an additional unit of the input. For example, the marginal product of employment is equal to p*MPE
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