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Unit Three: Resource Markets

Unit Three: Resource Markets. Topic: Resource Demand and Wage Determination. Learning Targets. I will be able to determine how each of the two types of resource markets make decisions on hiring and paying resources.

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Unit Three: Resource Markets

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  1. Unit Three: Resource Markets Topic: Resource Demand and Wage Determination

  2. Learning Targets • I will be able to determine how each of the two types of resource markets make decisions on hiring and paying resources. • I will be able to explain some of the problems associated with the hiring and paying of resources.

  3. Hiring Resources - Things to Know • Assume that the firm is hiring and selling products in a purely competitive situation. • The firm is a wage-taker (cannot influence resource price). • The demand for resources is a derived demand. It is derived from the products that the resources help produce. • The derived demand depends on the productivity of the resource and the market value (price) of the good it is producing.

  4. Resource Demand • Def: the hiring of resources by firms. • Determinants (things that shift the curve): • Change in product demand • Change in productivity of workers • Change in prices of other resources • Change in occupational employment trends

  5. Practice For each of the following, state whether the demand for labor used to produce wheat will increase or decrease. • The demand for wheat increases. • The amount of land per worker increases. • A new machine can produce more wheat than the workers can.

  6. Marginal Revenue Product (MRP) • Remember: MP is the additional output resulting from the addition of a unit of a resource (labor). • Def: how much a resource adds to TR for a firm. • MRP factors in the concept of derived demand (through marginal revenue). • MRP = ∆ TR / unit ∆ resource quantity • Or MRP = P x MP

  7. MRP (cont’d) • What does this mean? • If I hire you, how much do you add to my total revenue? If the price of the product is $10 and you add 3 units (your MP is 3), then your MRP is $30. • MRP is the demand curve for the resource (downward-sloping because of the law of diminishing marginal returns).

  8. Practice • With three units of a resource, 18 units of wheat can be produced. When a 4th worker is added, total product increases to 22. If the price of wheat is $2 per unit, then what is the MRP of the 4th worker? • With two units of a resource, 5 units of apples can be produced. When a 3rd worker is added, 10 units can be produced. If the price of apples is $5 per unit, then what is the MRP of the 3rd worker?

  9. Marginal Resource Cost (MRC) • Also known as marginal factor cost (MFC) • Def: the total amount that each unit of a resource adds to a firm’s TC. • MRC = ∆ TC / unit ∆ resource quantity • What does this mean? • If I hire you, how much do you add to my TC? If your wage is $5/hr, then you add $5/hr. • MRC is the supply curve for the firm.

  10. Profit-Maximizing Rule for Hiring Resources • MRP = MRC is the rule for hiring one resource. • For hiring multiple resources (say, labor and capital): 1 = MRPL / PL = MRPC / PC

  11. Least-Cost Rule for Hiring Resources • The last dollar spent on each resource is equal. • The rule is: MPL / PL = MPC / PC

  12. Practice • MRP of labor = $15; P of labor = $5; MRP of capital = $9; P of capital = $3. How can this firm maximize profit? • MP of labor = 10; P of labor = $1; MP of capital = 5; P of capital = $1. What should this firm do to minimize cost?

  13. Wage Determination • Two different market models: • Purely competitive – many firms competing to hire a specific type of labor; qualified workers have identical skills; firms and workers are wage-takers. • Monopsony – single employer of labor has substantial hiring power (ex. single buyer of a particular type of labor, immobility because of geography); wage-maker (varies with the number of workers employed).

  14. Purely Competitive Resource Market • Rule: MRP = MRC Textile Industry Textile Firm S Wage rate Wage rate We MRC = S MRP = D D Qe Q of Labor Qe Q of Labor

  15. Monopsony Resource Market • Rule: MRP = MRC Notice: MRC is above S because monopsony must increase wages to attract workers. MRC Wage rate S We MRP = D Qe Q of Labor

  16. Wages: Nominal vs. Real • Nominal wages – amount of money received per hour, day, month, year, etc. (nominal income). • Real wages – quantity of goods and services that can be obtained with nominal wages (purchasing power or real income).

  17. Principal-Agent Problem • Relates to the differences in interests of “the bosses” or principals (CEOs, shareholders, etc.) and the people (agents) they hire. • Firms (principals) hire workers (agents) to produce and make a profit; both groups’ goals are to see the firm thrive and make money. • BUT – agents may “shirk” the company in their own interest so principals must offer incentives to prevent the behavior.

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