1 / 68

Unit 5: The Resource Market

Unit 5: The Resource Market. (aka: The Factor Market or Input Market). Resource Markets. Perfect Competition. Monopsony. Perfectly Competitive Labor Market. Characteristics: Many small firms are hiring workers No one firm is large enough to manipulate the market.

fitzgerald-walsh
Download Presentation

Unit 5: The Resource Market

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Unit 5: The Resource Market (aka: The Factor Market or Input Market)

  2. Resource Markets Perfect Competition Monopsony Perfectly Competitive Labor Market • Characteristics: • Many small firms are hiring workers • No one firm is large enough to manipulate the market. • Many workers with identical skills • Wage is constant • Workers are wage takers • Firms can hire as many workers as they want at a wage set by the industry 2

  3. Perfectly Competitive Labor Market and Firm SL Wage Wage ? $10 DL Q Q 5000 Firm Industry

  4. Resource Demand Example 1: If there was a significant increase in the demand for pizza, how would this affect the demand for cheese? Cows? Milking Machines? Veterinarians? Vet Schools? Etc. Example 2: An increase in the demand for cars increases the demand for… Derived Demand- The demand for resources is determined (derived) by the products they help produce. 4

  5. Change in Total Cost Marginal Resource Cost = Change in Inputs 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:

  6. Change in Total Revenue Marginal Revenue Product = Change in Inputs 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:

  7. The Push-Up Machine • Supply • Supply and demand in the INDUSTRY GRAPH has resulted in a equilibrium wage of $10. • How much MUST each worker work for? • Why not ask for more? Why not less? • Demand • If each push up generates $1 worth of energy what is the MRP for each worker? • How much is each worker worth to the firm?

  8. The Push-Up Machine • Why does the MRP eventually fall? • Diminishing Marginal Returns. • Fixed resources means each worker will eventually add less than the previous workers. • The MRP determines the demand for labor • The firm is willing and able to pay each worker up to the amount they generate. • Each worker is worth the amount of money they generate for the firm.

  9. How do you know how many resources (workers) to employ? Continue to hire until… MRP = MRC

  10. Side-by-side graph showing Market and Firm SL Wage Wage SL=MRC WE DL=MRP DL Q Qe Q QE Industry Firm

  11. Industry Graph 11

  12. DEMAND RE-DEFINED • What is Demand for Labor? • Demand is the different quantities of workers that businesses are willing and able to hire at different wages. • What is the Law of Demand for Labor? • There is an INVERSE relationship between wage and quantity of labor demanded. • What is Supply for Labor? • Supply is the different quantities of individuals that are willing and able to sell their labor at different wages. • What is the Law of Supply for Labor? • There is a DIRECT (or positive) relationship between wage and quantity of labor supplied. • Workers have trade-off between work and leisure 12

  13. Where do you get the Market Demand? McDonalds Burger King Other Firms Market P P P P $8 $8 $8 $8 D D D D Q Q Q Q 3 2 25 30

  14. Who demands labor? • FIRMS demand labor. • Demand for labor shows the quantities of workers that firms will hire at different wage rates. • Market Demand for Labor is the sum of each firm’s MRP. • As wage falls, Qd increases. • As wage increases, Qd falls. Wage DL Quantity of Workers 14

  15. Who supplies labor? • Individuals supply labor. • Supply of labor is the number of workers that are willing to work at different wage rates. • Higher wages give workers incentives to leave other industries or give up leisure activities. Labor Supply Wage • As wage increases, Qs increases. • As wage decreases, Qs decreases. Quantity of Workers 15

  16. Equilibrium Wage (the price of labor) is set by the market. EX: Supply and Demand for Carpenters Wage Labor Supply $30hr Labor Demand = MRP Quantity of Workers 16

  17. Individual Firms Wage SL=MRC DL=MRP Qe Q 17

  18. 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? 18

  19. 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 $20. • Also assume the wage is the ONLY cost. • To maximize profit how many workers should you hire? 19

  20. Use the following data: Price = $10 Wage = $20 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? 20

  21. Use the following data: Price = $10 Wage = $20 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? 21

  22. Use the following data: Price = $10 Wage = $20 Total Product (Output) Marginal Product (MP) Units of Labor - 7 10 7 3 2 1 -3 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? 22

  23. Use the following data: Price = $10 Wage = $20 Total Product (Output) 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 Price constant because we are in a perfectly competitive market. 23

  24. Use the following data: Price = $10 Wage = $20 Total Product (Output) Marginal Revenue Product 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 This shows how much each worker is worth 24

  25. Use the following data: Price = $10 Wage = $20 Total Product (Output) Marginal Revenue Product Marginal Resource Cost 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 many workers should you hire? 25

  26. Drawing the Demand Curve for Resources 26

  27. 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. 27

  28. 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 28

  29. 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 29

  30. 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 30

  31. 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 31

  32. 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? 32

  33. Drawing the Demand Curve for Resources 33

  34. 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. 34

  35. 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 35

  36. 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. 36

  37. 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. 37

  38. 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. 38

  39. 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. 39

  40. 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 40

  41. 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?

  42. 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

  43. 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 • Collective bargaining and threats to strike often lead to higher that equilibrium wages • Wage Discrimination- • Some people get paid differently for doing the same job based on race or gender (Very illegal!).

  44. Use side-by-side graphs to draw a perfectly competitive labor market and firm hiring workers 44

  45. Wage is set by the market Demand/MRP falls SL Wage Wage SL=MRC WE DL=MRP DL Q Qe Q QE Industry Firm

  46. 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

  47. 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

  48. Minimum Wage Assume the government was interest in increasing the federal minimum wage to $12 an hour Do you support this new law? Why or why not 48

  49. Fast Food Cooks Wage S $12 $8 $6 The government wants to “help” workers because the equilibrium wage is too low D 5 6 7 8 9 10 11 12 Q Labor 49

  50. Fast Food Cooks Wage S $12 $8 $6 Government sets up a “WAGE FLOOR.” Where? D 5 6 7 8 9 10 11 12 Q Labor 50

More Related