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Explore Perfectly Competitive Labor and Firm Markets, MRC, MRP, and decision-making for hiring workers. Practical examples to grasp concepts.
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Perfectly Competitive Labor Market and Firm Market Firm SL Wage Wage ? $10 DL Q Q 5000
Marginal Resource Cost = Marginal Resource Cost (MRC) The additional cost of an additional resource (worker). In perfectly competitive labor markets the MRC equals the wage set by the market and is constant. Ex: The MRC of an unskilled worker is $8.75. Another way to calculate MRC is:
Marginal Revenue Product = Marginal Revenue Product The additional revenue generated by an additional worker (resource). In perfectly competitive product markets the MRP equals the marginal product of the resource times the price of the product. Ex: If the Marginal Product of the 3rd worker is 5 and the price of the good is constant at $20 the MRP is……. $100 Another way to calculate MRP is:
How do you know how many resources (workers) to employ? Continue to hire until… _______ = _________
Perfectly Competitive Labor Market and Firm SL Wage Wage ? WE DL Q Q QE Industry Firm
Side-by-side graph showing Market and Firm SL Wage Wage WE DL Q Q QE Industry Firm
Perfect Competition Product Market vs. Resource Market Price S=MC Product Market Firm _________ Oranges D=MR Q Qe Wage Resource Market Firm _________ Orange Pickers Q
Individual Firms Wage Q
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?
Example: • You hire workers to mow lawns. The wage for each worker is set at $100 a day. • Each lawn mowed earns your firm $50. • If you hire one work, he can mow 4 laws per day. • If you hire two workers, they can mow 5 lawns per day together. • What is the MRC for each worker? • What is the first worker’s MRP? • What is the second worker’s MRP? • How many workers will you hire? • How much are you willing to pay the first worker? • How much will you actually pay the first worker? • What must happen to the wage in the market for you to hire the second worker?
You’re the Boss • You and your partner own a business. • Assume the you are selling the goods in a perfectly competitive PRODUCT market so the price is constant at $10. • Assume that you are hiring workers in a perfectly competitive RESOURCE market so the wage is constant at $15. • Also assume the wage is the ONLY cost. To maximize profit how many workers should you hire?
Use the following data: Price = $10 Wage = $15 Total Product (Output) Workers 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 *Hint* How much is each worker worth?
Use the following data: Price = $10 Wage = $15 Total Product (Output) Units of Labor 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 • What is happening to Total Product? • Why does this occur? • Where are the three stages?
Use the following data: Price = $10 Wage = $15 Total Product (Output) Marginal Product (MP) Units of Labor 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 This shows the PRODUCTIVITY of each worker. Why does productivity decrease?
Use the following data: Price = $10 Wage = $15 Total Product (Output) Marginal Product (MP) Units of Labor Product Price 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 Price constant because we are in a perfectly competitive market.
Use the following data: Price = $10 Wage = $15 Total Product (Output) Marginal Revenue Product Marginal Product (MP) Units of Labor Product Price 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 This shows how much each worker is worth
Use the following data: Price = $10 Wage = $15 Total Product (Output) Marginal Revenue Product Marginal Resource Cost Marginal Product (MP) Units of Labor Product Price 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 How many workers should you hire?
Side-by-side Graphs Use side-by-side graphs to draw a perfectly competitive labor market and firm hiring workers
Wage is set by the market Demand/MRP falls Wage SL Wage SL=MRC WE DL=MRP DL Q Qe Q QE Industry Firm
What happens to the wage and quantity in the market and firm if new workers enter the industry? SL Wage Wage SL=MRC WE DL=MRP DL Q Qe Q QE Industry Firm
What happens to the wage and quantity in the market and firm if new workers enter the industry? SL Wage Wage SL1 SL=MRC WE W1 SL1=MRC1 DL=MRP DL Q Qe Q1 Q QE Q1 Industry Firm
Combining Resources Up to this point we have analyzed the use of only one resource. What about when a firm wants to combine different resources?
Least Cost Rule How much additional output does each resource generate per dollar spent? $10 $5 If you only have $35, what combination of robots and workers will maximize output?
Least Cost Rule MPx = MPy $10 $5 Px Py Resource x Resource y If you only have $35, the best combination is 2 robots and 3 workers
Profit Maximizing Rule for Combining Resources 1 MRPx = MRPy = MRCx MRCy This means that the firm is hiring where MRP = MRC for each resource x and y
Practice: What should the firm do – hire more, hire less, or stay put? 1. MRPL = $15; PL = $6; MRPC = $10; PC = $10 2. MRPL = $5; PL = $10; MRPC = $10; PC = $15 3. MRPL = $25; PL = $20; MRPC = $15; PC = $15 4. MRPL = $12; PL = $12; MRPC = $50; PC = $40 5. MRPL = $20; PL = $15; MRPC = $100; PC =$40
