IV



Economics Mr. Kirchberg

Module 7: “The Role of Labor”

Myth: New technology destroys jobs and leads to

higher unemployment

I. New technology & jobs

A. Changes the workplace

B. Changes people’s training and duties

II. Determination of Wages

A. Productivity

1. Level of goods/services a person or entity

can produce in a given time period

2. U.S. is a world leader

(currently $54,401.30 per person annually)

B. Derived Demand

1. Demand for a product or resource based on

that portion’s contribution to the final product

2. Consumer/Customer determines the value

of one’s labor

Ex. LeBron a. Wages depend upon one’s production

James b. Consumer demand = higher wages

3. Choice (for producers/employers)

a. More money to a good worker

or several cheaper workers

b. Technology

i. Can mean more productivity (usually)

ii. Possible better wages

iii. Shifts the labor demand

curve to the right Hourly

(1) Lower production Wage

costs

(2) Higher profits = greater Workers/Day

supply

iv. Possible lower prices for consumers

C. Standard of Living

1. Improved productivity = Better standard of living

2. Technology leads the way

a. Can cause worker displacement

b. Education has become more important as

productivity increased

III. Supply & Demand for Labor

A. Wages are prices (determined by supply & demand)

B. Have supply and demand curves

1. Wage above equilibrium

a. Short lived

b. Many people demanding

such jobs surplus

2. Wage below equilibrium

a. Shortage of workers

b. Pay is too low and will be forced up

3. Wages are determined by competition

a. Wage earners compete

b. Employers compete

A c. Businesses compete over wages

N C. Labor Unions

A 1. Organized Workers

C a. Better Wages

H b. Better working conditions

R c. Better benefits/perquisites

O 2. Types of Unions

N a. Craft Unions

I i. Workers with similar skills

S ii. Different industries

M iii. Different employers

?? iv. Ex.: Welders, steamfitters …

b. Industrial Unions

i. Many different skilled workers

ii. Work in the same industry

iii. Ex.: Autoworkers

3. Unions as monopolizers

a. Often constrains workers to

certain industries

b. Seek & attain protection w/gov’t regulations

c. Use traditional methods to exclude

i. Apprenticeship

ii. Dues

iii. Equipment (training)

iv. Nepotism

d. Intentionally short-supply workers

i. To drive up wages

ii. Bargain for more benefits/perqs.

iii. Shift the labor supply curve to

the left $

bene.

no. of

workers

4. Collective Bargaining (organized negotiations)

a. Done to raise wages & related items

b. Pushes equilibrium into surplus

(Demand for good jobs)

Ex. i. Surplus the unlucky must search

Teachers elsewhere

ii. Lucky few get the jobs

iii. Unions avoid dislocated or

unemployed members (layoffs)

iv. Union’s wages shift the product’s

demand curve to the left

(higher prices for products)

(1) Productivity must rise too

but (2) Insured union jobs cut productivity

(3) Unions contribute to

unemployment (overall)

IV. Investment in Human Capital

A. Incomes rise as people’s productivity rises

B. Income

1. Money received in exchange for work

or use of one’s property

a. Resources to produce income

i. Knowledge

ii. Investments

iii. Property (incl.: rental property &

money in the bank)

b. Opportunity to use one’s resources

i. Discrimination can affect this

ii. Location

iii. Socio-economic background

2. 74-75% of all income is wages

3. Determinants of the productivity of labor

a. Personal characteristics

(Intelligence, motivation, self-discipline,

friendliness & ability to be responsible)

b. People’s level of education/training

C. Capital Goods (buildings, tools, technology & machines)

1. Amt. Per worker (avg.)

(1947 = $26,000 and in 1991 = $54,000)

2. Determined by employers and employees

a. Technology (typewriters to PCs)

b. Technology has increased productivity

3. Human Capital

a. Knowledge & skills

b. More education = more earning power

c. Greater human capital = greater productivity

d. Trend towards higher levels of skill

i. Shortage = higher wages

ii. Surplus = lower wages

(usually lower skills)

iii. Greater demand

for colleges & = higher tuition

tech schools

D. Total Income is finite at any given moment as

discerned by David Ricardo (2001 = $9.78 tril.)

“Iron Law 1. Distribution of income

of Wages” a. Wages (74-75% of income)

b. Factors of Producing Income

i. Resources yield interest

ii. Buying stock and loaning money

iii. Capital goods yield rent

iv. Proprietor’s income (8%)

(yielded by individual proprietors)

2. Lorenz Curve (always bends upwards)

a. Represents the % Line of

curve of income of equality

distribution income Lorenz

b. Income distribution Curve

is unequal % of households

i. Bottom 40% gets only 13.4% of

all income

ii. Top 20% has 46.5% of all income

(a growing sector due to BAD investing?)

c. U.S. is more equal in income

distribution than other nations

d. People tend to move up and down thru.

various levels of income thru. their lives

Module 8:

“The Role of the Consumer”

Myth: It pays to comparison shop

I. Money Managing

A. Comparison Shopping

1. Not always wise

(Opp. cost, time, gas, cash, & frustration)

2. “A deal” can be costly in the end

B. Financial Goal Setting

1. Setting a time, an amount of money

and purpose of expenditure(s)

2. Set long- and short-term goals

3. Household budget (monthly)

a. Gross income = total money received

b. Net income = after taxes & deductions

c. Fixed expenses ( rent or insurance

d. Variable expenses ( clothing, day-to-day

e. Economizing ( getting more out of a

limited income

i. Variable expenses can be cut

ii. Increase income

iii. Change one’s lifestyle

C. Federal Agencies that aid consumers

1. Federal Trade Commission (FTC)

a. Keeps the marketplace open & competitive

b. Goes after false advertising, bad

labeling or bilking

2. U.S. Justice Dept. goes after monopolies

Taxes 3. States’ Attorney General Offices maintain

State state market regulations (Office of Weights

Dept. of & Measures)

Revenue 4. Consumer Product Safety Commission

a. Sets product standards

b. Removes unsafe products & gets refunds

5. Food & Drug Administration

a. Oversees: Food, drugs, cosmetics,

and medical services

b. Includes false advertising & mislabeling

6. Department of Transportation (DOT)

a. Oversees all forms of transport

b. Insures safety, price regulation

and good customer service

II. Consumer Credit

A. “Purchasing on Credit”

1. Benefit now, pay later

2. Interest is paying for borrowed money

B. Types of Credit

1. Charge Account

a. Higher rates (15-20%)

b. Sometimes includes an annual fee

c. Many types require paying the whole

bill at time of statement (1)

d. Revolving accounts only need a minimum

sum paid at time of statement (2)

2. Installment Account (loan in payments)

a. Major purchases (cars, appliances…)

b. Home mortgage is one type

3. Financial Institutions

a. Banks, savings banks and “savings & loans”

i. Make loans to those with good credit

ii. Cash loans as well

b. Credit Unions

i. Loans to members

ii. Membership thru. business, union, etc.

iii. Least expensive ( nonprofit organization

c. Finance Companies

i. Loan money to almost anyone

for almost anything

ii. Very high interest rates (30%!)

4. Credit Bureau

a. Clearinghouse for consumer debt info.

b. Provide the “4 C’s of credit”

i. Character (deadbeat?)

ii. Capacity to repay (income/resources)

iii. Capital (liquid assets)

iv. Collateral (property/chattel – to be seized)

5. Equal Credit Opportunity Act

(prevents discrimination)

6. Fair Credit Reporting Act

a. No misinformation on people’s

credit may be knowingly divulged

b. Consumers may inspect their own files

(one time per year is free) “Credit Rating Exercise”

7. Credit Card Interest

a. High to cover risk

b. Problems: default & theft

c. Consumers and retailers pay for

the convenience

d. Truth in Lending Act

i. Must disclose rates, finance

charges and penalties

(APR) ii. In terms of Annual Percentage Rate

e. A contract is mandatory

f. Shop for the best package to fit you

III. Savings, Investing & Borrowing

A. Types of Accounts

1. Demand deposits = checking/debit

a. Payee (gets checks) demand payments

b. Payer’s account is deducted

c. Banks/Savings Banks often offer interest

d. Negotiable Order of Withdrawal (NOW)

i. Type of demand acct. – pays interest

ii. Usually a minimum balance required

2. Savings Account (passbook)

a. Usually No checks

b. Withdrawal or demand is possible

(“passbook” = little book (Card) to the customer)

3. Money Market

a. Minimum balance required

b. Higher rate of interest paid ( higher than

a NOW (Negotiable Order of Withdrawal)

or passbook account

4. CD or Certificate of Deposit

a. Penalty for early withdrawal

(6, 12, 18, 24, & 36 month)

b. Longer the period ( higher the interest

5. Stocks = shares of ownership

(never a guaranteed (Common v. Preferred)

pay-out) a. Earn money from increased stock value

b. “Blue Chip Stock” = low risk

c. Securities & Exchange Commission (SEC)

i. Oversees stock and bond sales

ii. Allows no false information

iii. No insider information

6. Treasury Bonds (T-Bonds) (Timeline)

a. Two types and 10-30 years

b. Pay only federal income tax on interest

c. Series EE Savings Bonds

Electronic (sometimes called “Patriot Bonds”)

Versions of i. Sold at full face (par) value (paper)

Each Sold ii. Held until mature (electronic)

At full Par (Rates adjusted every 6 mos.)

d. Series I Bonds sold at full value and accrues

interest for up to 30 years

(Interest Rate adjusts to inflation—points above)

e. Discounted bonds

i. Sold at a reduced price

ii. To encourage sales

iii. To gain immediate profit

f. Treasury bills (T-bills)

i. Sold at par or discounted

ii. 1-6 month maturity (may be 1 year)

g. Treasury Notes (T-Notes)

i. Mature 2, 3, 5 or 10 years

ii. $1000 to $10,000 denominations

iii. Earn interest every 6 months

h. Most nations issue bonds

7. Corporate and Municipal Bonds

Junk Bonds: a. Usually safer than stock and rated

Also called “High b. Can be discounted

Yield” or “Speculative c. Municipal: Issued by state and local

Bonds” gov’ts (10-40 yrs.)

Rated BB or lower d. Issued to pay for large project

3-4% higher return (corporate expansion, roads, hospitals,

schools & so on)

e. Tax free earnings on municipal bonds

8. Mutual Fund

a. Investors pool money to buy “diversified units”

b. Handled by professional investment managers

c. Shared profits and losses

9. Individual Retirement Account (IRA)

a. For retirement

b. No taxes paid on income till retirement

401 k c. Roth IRA ( taxed up front & may borrow

403b (gov't employees) money from it before retirement (Pay self back!)

B. Large Expenditures

1. Automobile

a. Is it necessary?

b. Alternatives?

2. New Car Purchase

a. Total Cost = sticker price, taxes, licensing,

insurance, maintenance, gas,

parking, title, …warranties?

b. Depreciation? (Hidden Cost of a Capital Expenditure)

c. Time of year when buying

3. Used Car Purchase

a. Kelley Blue Book – value

b. More costly to maintain than “new”

c. Less availability of warranties

d. Lower insurance rates

e. Lower payments, cost and taxes

f. Consult Consumer Reports or Road & Track

4. Negotiations are expected

a. Dealer’s minimum cost

i. Consumer Reports or

ii. Edmund’s New Car Prices (now used as well)

b. Shop around and take time!

C. Housing

1. Single-Family Unit

a. Best for room and independence

b. Most expensive

2. Apartment

a. Studio to luxury townhouse

b. Written lease – ALWAYS!

i. Rights/Responsibilities of both

renter and landlord (contract)

ii. Specific time (term)

iii. Security deposit (often required)

iv. Utilities, furniture(?), Water(?) &

heat(?) ( Are they included in rent?

3. Condominium

a. Owned outright – mortgage?

b. Monthly fee for maintenance

c. Small house or apartment in appearance

4. Cooperative Apartment

a. Renters share and operate the building

b. Permission needed to rent (sublet),

sell or remodel

5. Renting vs. Owning

a. Renting

i. More mobility

ii. No down payment or mortgage

iii. No property taxes

iv. Often no upkeep

b. Owning

i. Investment ( Home Equity

(1) Home Equity = that which one owns

outright & can borrow against

(2) Home Equity = collateral for loans

ii. Freedom to move?????

iii. Tax benefits

iv. Privacy!!!!!

6. Other considerations

a. Time of commute

b. Home Equity accumulation usually takes time

c. Yard????

d. Amount of responsibility

e. Permanence/ Commitment level???

f. Property taxes

g. Cost of purchasing

i. Closing costs

ii. “Points”

iii. Cost of the mortgage (Interest!)

7. Mortgages (fixed or variable rate)

a. Fixed Annual Percentage Rate (APR is based

Principal = Actual upon the “prime rate” or “discount rate” + % points)

Amount Borrowed i. 10 – 50 yrs.

ii. Payments never change Quiz

b. Variable rate (APR) mortgage

i. Definite rules with a “cap” (maximum

point change allowed), but changes occur

during the life of a mortgage

ii. May offer low introductory rates

iii. Will adjust to prime or discount rate c. Graduated payment

i. Interest rates rise gradually over time

ii. Assumption of a higher future salary

d. Balloon payment may terminate any of the

abovementioned (very large last payment)

i. Allows for a low introductory APR

ii. Save to pay the final payment

iii. May refinance to pay final payment

IV. Insurance (Protection against loss)

A. Spreads out risks/costs

1. Unlucky few benefit from the many

2. Homeowners/Renters insurance covers a lot

B. Auto Insurance

1. Liability is required in most states (WI Law!)

2. Six types of protection

a. Bodily Injury

i. Pays for death or injury if you’re at fault

ii. Pays for others driving your auto

b. Property Damage Liability

i. Covers damage done by your car

(including farm animals)

ii. No-fault insurance (Your own insurance

pays for damages despite who is blamed)

c. Medical Payments

i. To you as owner of the vehicle & your

passengers (despite who is at fault)

ii. May offer protection, if hurt by

another vehicle

d. Uninsured Motorist

i. Pays for other if at fault & w/o insurance

ii. Not needed in states with no fault insurance

e. Collision

i. Fixes your car if responsible

ii. Includes deductible ($50-$500 out-of-pocket)

f. Comprehensive

i. Covers all other sorts of

miscellaneous damages

ii. Includes deductible ($50-$500 usually)

g. Road Emergency Insurance

i. Towing, Auto Rental

ii. Housing (Hotel/Motel)

iii. Bail Insurance

C. What is needed?

1. Bodily injury and property damage coverage

2. Three-part minimum (Ex: 10/20/25)

a. Part One: Maximum paid for 1 person’s

death or medical

b. Part Two: Maximum paid for all medical

needs combined

c. Part Three: Maximum paid for

property damage

3. States have minimum liability coverage

requirements (WI incl.)

4. Good Idea: Extra medical and uninsured

motorist coverage

5. Collision and Comprehensive

coverage – Is the car worth it?

D. Always Comparison Shop!

1. Best’s Insurance Reports

(Gives ratings in a letter format – Ex. A, A+, B)

2. Check with the state insurance department

(Coverage available for the uninsurable – very bad risks)

3. Avoid small claims to keep your premiums

low!!!!!!!

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