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Maximizing Profits with Resource Markets & Pricing

Explore the concept of derived demand and supply in resource markets, and learn how firms determine the value of marginal products. Understand the factors that affect wages and why actual wages may differ from the value of marginal product.

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Maximizing Profits with Resource Markets & Pricing

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  1. Are you paid what you are worth?Anybody you know who is “overpaid”?

  2. Resource Markets & Pricing • Still ‘Supply & Demand’ • Difference: • Firms Demand • Households Supply

  3. Derived Demand • Firms Demand • Motivation: Maximize Profits • No inherent desire or need for resource • Product market issues may affect demand

  4. Derived Demand & Supply • Households Supply • Motivation:Maximize Utility • Depends on $ Opportunity Cost • derived from households' utility maximization • Utility received may be a form of “payment”

  5. Should A Firm Hire Another Worker? • Yes, if it adds to profits: • Worker adds to physical output: • Marginal Product • Value of Marginal Product when sold: • MP x Price = Marginal Revenue Product (MRP) • a.k.a. Value of Marginal Produce • MRP is the marginal benefit • Cost of hiring the worker (worker’s wage) is marginal cost – called Marginal Resource Cost (MRC) • IF MRP > MRC  yes, hire the worker • Keep hiring until MRP = MRC

  6. Marginal Revenue Product and Marginal Resource Cost Profit Maximization when the quantity of resource purchased results in: MRP = MRC

  7. Shifts in Demand for Resources • Anything that changes MR, MRP, or MRC: • Changes in Prices of other resources • Complements • Substitutes • Changes in Technology • Changes in Demand for Final Product

  8. Wages & “Economic Rents” • Total Returns to Resources • Total Payment: = P x Q • Resource Opportunity Costs • Next highest paying use or opportunity • Economic Rent is payment greater than opportunity cost • “Unearned” or “unnecessary” payment

  9. Why Actual Wages Differ From Value of Marginal Product • Market Power • Sellers’ Power: • Unionization • Unique Skills or Inelastic Supply • Licensing

  10. Why Actual Wages Differ From Value of Marginal Product • Market Power • Buyers’ Power: • Monopsony • Bargaining Power • Superior Information

  11. Why Actual Wages Differ From Value of Marginal Product • Non-Market Reasons: • Discrimination • Efficiency Wages • Compensating Differentials • Risk • Image • Conditions • Security

  12. Good hours, excellent pay, fun place to work, paid, training, mean boss. Oh well, four out of five isn’t bad.-- Help wanted ad, PA newspaper, 1994

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