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Unit 5: The Resource Market

Unit 5: The Resource Market. 1. Review. Give an example of Derived Demand. Define MRP. Explain the difference between MRP and MR. Why does the MRP fall as more workers are hired? Identify the two ways to calculate MRP. Define MRC. Explain the difference between MRC and MC.

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Unit 5: The Resource Market

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  1. Unit 5: The Resource Market 1

  2. Review • Give an example of Derived Demand. • Define MRP. • Explain the difference between MRP and MR. • Why does the MRP fall as more workers are hired? • Identify the two ways to calculate MRP. • Define MRC. • Explain the difference between MRC and MC. • How does a firm decide how many workers to hire? • Name 10 Colleges

  3. Why do people with only high school degrees make less money on average? Employers assume they have low productivity and will generate less additional revenue. 3

  4. Does having an education mean that you will automatically have a higher income?

  5. Real Life Application • Top 5 Fastest Growing Jobs (2000-2010) • Computer Software Engineers, Applications • Computer Support Specialists • Computer Software Engineers, Systems • Computer Systems Administrators • Data Communications Analyst • Top 5 Fastest Declining Jobs • Railroad Switch Operators • Shoe Machine Operators • Telephone Operators • Radio Mechanics • Loan Interviewers • WHY? “You’ve got to learn computers!”

  6. Real Life Application

  7. Video: Did You Know?

  8. The MRP of a resource equals the Demand.

  9. Drawing the Demand Curve for Resources 9

  10. Yesterday's Activity Price = $10 Wage = $20 Total Product (Output) Marginal Product (MP) Units of Labor Product Price MRP - 7 10 7 3 2 1 -3 0 10 10 10 10 10 10 10 0 70 100 70 30 20 10 -30 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 Shows how many workers a firm is willing and able to hire at different wages.

  11. Use the following data: Price = $10 Wage = $20 Total Product (Output) Marginal Product (MP) Units of Labor Product Price MRP - 7 10 7 3 2 1 -3 0 10 10 10 10 10 10 10 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 0 70 100 70 30 20 10 -30 Demand for this resource Plotting the MRP/Demand curve

  12. Demand=MRP Why is it downward sloping? Because of the law of diminishing marginal returns Wage Rate $100 80 60 40 20 Each additional resource is less productive and therefore is worth less than the previous one D=MRP Q 1 2 3 4 5 6 7 8 Quantity of Workers

  13. Demand=MRP Wage Rate This model applies to land, labor, and capital Notice the inverse relationship between wage and quantity of resources demand $100 80 60 40 20 D=MRP Q 1 2 3 4 5 6 7 8 Quantity of Workers

  14. What happens if demand for the product increases? Wage Rate $100 80 60 40 20 MRP increases causing demand to shift right D1=MRP1 D=MRP Q 1 2 3 4 5 6 7 8 Quantity of Workers 14

  15. 3 Shifters of Resource Demand • 1.) Changes in the Demand for the Product • Price increase of the product increases MRP and demand for the resource. • 2.) Changes in Productivity • Technological Advances increase Marginal Product and therefore MRP/Demand. • 3.) Changes in Price of Other Resources • Substitute Resources • Ex: What happens to the demand for assembly line workers if price of robots falls? • Complementary Resources • Ex: What happens to the demand nails if the price of lumber increases significantly?

  16. Drawing the Demand Curve for Resources 16

  17. Use the following data: Price = $10 Wage = $20 Total Product (Output) Additional Revenue per worker Additional Cost per worker Marginal Product (MP) Units of Labor Product Price - 7 10 7 3 2 1 -3 0 10 10 10 10 10 10 10 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 0 70 100 70 30 20 10 -30 0 20 20 20 20 20 20 20 • How would this change if the demand for the good increased significantly? • Price of the good would increase. • Value of each worker would increase. 17

  18. Use the following data: Price = $100 Wage = $20 Total Product (Output) Additional Revenue per worker Marginal Product (MP) Units of Labor Product Price - 7 10 7 3 2 1 -3 0 100 100 100 100 100 100 100 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 18

  19. Use the following data: Price = $100 Wage = $20 Total Product (Output) Additional Revenue per worker Marginal Product (MP) Units of Labor Product Price - 7 10 7 3 2 1 -3 0 100 100 100 100 100 100 100 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 0 700 1000 700 300 200 100 -300 Each worker is worth more!! THIS IS DERIVED DEMAND. 19

  20. Use the following data: Price = $10 Wage = $20 Total Product (Output) Additional Revenue per worker Additional Cost per worker Marginal Product (MP) Units of Labor Product Price - 7 10 7 3 2 1 -3 0 10 10 10 10 10 10 10 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 0 70 100 70 30 20 10 -30 0 20 20 20 20 20 20 20 • How would this change if the productivity of each worker increased? • Marginal Product would increase. • Value of each worker would increase. 20

  21. Use the following data: Price = $10 Wage = $20 Total Product (Output) Additional Revenue per worker Marginal Product (MP) Units of Labor Product Price - 70 100 70 30 20 10 -30 0 10 10 10 10 10 10 10 0 1 2 3 4 5 6 7 0 70 170 240 270 290 300 270 0 700 1000 700 300 200 100 -300 Each worker is worth more! More demand for the resource. 21

  22. 3 Shifters of Resource Demand • Identify the Resource and Shifter (ceteris paribus): • Increase in demand for microprocessors leads to a(n) ________ in the demand for processor assemblers. • Increase in the price for plastic piping causes the demand for copper piping to _________. • Increase in demand for small homes (compared to big homes) leads to a(n) _________ the demand for lumber. • For shipping companies, __________ in price of trains leads to decrease in demand for trucks. • Decrease in price of sugar leads to a(n) __________ in the demand for aluminum for soda producers. • Substantial increase in education and training leads to an ___________ in demand for skilled labor.

  23. 3 Shifters of Resource Demand • Identify the Resource and Shifter (ceteris paribus): • Increase in demand for microprocessors leads to a(n) ________ in the demand for processor assemblers. • Increase in the price for plastic piping causes the demand for copper piping to _________. • Increase in demand for small homes (compared to big homes) leads to a(n) _________ the demand for lumber. • For shipping companies, __________ in price of trains leads to decrease in demand for trucks. • Decrease in price of sugar leads to a(n) __________ in the demand for aluminum for soda producers. • Substantial increase in education and training leads to an ___________ in demand for skilled labor. increase increase decrease decrease increase increase

  24. Resource Supply Shifters • Supply Shifters for Labor • Number of qualified workers • Education, training, & abilities required • Government regulation/licensing • Ex: What if waiters had to obtain a license to serve food? • 3. Personal values regarding leisure time and societal roles. • Ex: Why did the US Labor supply increase during WWII? Why do some occupations get paid more than others?

  25. With your partner... Use supply and demand analysis to explain why surgeons earn an average salary of $137,050 and gardeners earn $13,560. Supply and Demand For Surgeons Supply and Demand For Gardeners SL Wage Rate Wage Rate SL DL DL Quantity of Workers Quantity of Workers

  26. What are other reasons for differences in wage? • Labor Market Imperfections- • Insufficient/misleading job information- • This prevents workers from seeking better employment. • Geographical Immobility- • Many people are reluctant or too poor to move so they accept a lower wage • Unions (Market Power) • Collective bargaining and threats to strike often lead to higher than equilibrium wages • Wage Discrimination- • Some people get paid differently for doing the same job based on race or gender (Very illegal!).

  27. From our Textbook • Compensating differentials • Differences in talent • Differences in the quality of human capital • Idea of “efficiency wage” • Marginal productivity theory of income distribution

  28. Marginal Productivity Theory of Income Distribution • Idea that wages are in equilibrium based on the marginal resource cost of the “last” worker hired • Wages are in equilibrium when MRPL = MRCL • But there are problems with this argument

  29. Problems with the Marginal Productivity Theory of Income Distribution • There are income gaps between groups of people who really should be paid the same • Do the wage differences really reflect differences in marginal productivity? • Theory gives a moral justification for the distribution of income. What percentage of our national income does the top 1% control?

  30. “Glass Ceilings”

  31. 2010 Practice FRQ 31

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