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Unit 5 Resource Market

Unit 5 Resource Market. (aka: The Factor Market or Input Market). Resource Market. Producers Demand Households Supply. Income. Cost $. Resources. Resources. The Circular Flow Model. Goods & services sold. Goods & services Purchased. Businesses. Individual. Product Market.

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Unit 5 Resource Market

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

  2. Resource Market Producers Demand Households Supply Income Cost $ Resources Resources The Circular Flow Model Goods & services sold Goods & services Purchased Businesses Individual Product Market Spending Revenue (Not Profit) Producers Supply Households Demand

  3. Resource Markets Perfectly Competitive Labor Market Perfect Competition Monopsony • Characteristics: • Many small firms are hiring workers • No 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 4

  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 to produce. 5

  5. Marginal Resource Cost Δ Total Cost = Δ Inputs Marginal Resource Cost (MRC) • The additional cost of an additional resource (worker). • Another way to calculate MRC is:

  6. Marginal Revenue Product (MRP) The additional revenue generated by an additional worker (resource). Another way to calculate MRP is: Marginal Revenue Product Δ Total Revenue = Δ Inputs

  7. Push-Up Machine

  8. The Push-Up Machine • I am the inventor of a new generator that converts human push ups into safe and clean electrical energy. • Each push up generative $1 worth of energy. • Supply and demand in the labor market has resulted in a equilibrium wage of $10 (MRC) • The supply curve for the firm is perfectly elastic at $10…how much will you work for? • Assuming identical skills, hire the first worker (do push ups in a 4ft x 7ft box). • Let’s start hiring workers (Each worker must make sound effects)

  9. The Push-Up Machine Calculate MP and MRP

  10. 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?

  11. 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.

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

  13. Industry Graph Industry SL Wage WE DL Q QE 14

  14. IndustryDemand & Supply for Labor • What is Demand for Labor? • Demand is the different quantities of workers that businessesare 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 ableto sell their labor at different wages. • What is the Law of Supply for Labor? • There is a DIRECTor POSITIVE relationship between wage and quantity of labor supplied. 15

  15. Where to get the Market Demand? Industry Market Wage Wage Wage Wage $9 $9 $9 $9 DL DL DL DL QL QL QL 3 2 30 QL 25

  16. Who demands labor? • FIRMS demand labor. • Market Demand for Labor is the sum of each firm’s MRP. Wage • As wage falls, Qdincreases. • As wage increases, Qd falls. Labor Demand (DL) Quantity of Workers 17

  17. Who supplies labor? • Individuals supply labor. • Higher wages give workers incentives to leave other industries or give up leisure activities. Wage Labor Supply (SL) • As wage increases, Qs increases. • As wage decreases, Qs decreases. Quantity of Workers 18

  18. Equilibrium Wage (the price of labor) is set by the market. EX: Supply and Demand for Carpenters SL Wage $30/hr DL=MRP Quantity of Workers 19

  19. Individual Firms Graph Wage SL=MRC DL=MRP Qe Q 20

  20. Perfectly Competitive Labor Market and Firm Industry Firm SLabor Wage Wage ? WE DLabor Q Q QE

  21. Side-by-side graph showing Resource Market and Firm Industry Firm SL Wage Wage SL=MRC WR DL=MRP DL Q Q Qe QR

  22. 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 1 worker, he can mow 4 laws per day. • If you hire 2 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? 23

  23. 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? 24

  24. Wage = $20 / Price = $10 Total Product (Output) Units of Labor 0 7 17 24 27 29 30 27 0 1 2 3 4 5 6 7 *Hint* How much is each worker worth? 25

  25. Wage = $20 / Price = $10 Total Product (Output) Units of Labor 0 7 17 24 27 29 30 27 0 1 2 3 4 5 6 7 • What is happening to Total Product? • Why does this occur? • Where are the three stages? 26

  26. Wage = $20 / Price = $10 Marginal Product (MP) Total Product (Output) Units of Labor Product Price 0 7 17 24 27 29 30 27 - 7 10 7 3 2 1 -3 0 10 10 10 10 10 10 10 0 1 2 3 4 5 6 7 Price constant because we are in a perfectly competitive market. How many workers should you hire? 27

  27. Wage = $20 / Price = $10 Marginal Revenue Product (MRP) Marginal Product (MP) Total Product (Output) Units of Labor Product Price 0 7 17 24 27 29 30 27 - 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 This shows how much each worker is worth How many workers should you hire? 28

  28. Wage = $20 / Price = $10 Marginal Revenue Product (MRP) Marginal Resource Cost (MRC) Marginal Product (MP) Total Product (Output) Units of Labor Product Price 0 7 17 24 27 29 30 27 - 7 10 7 3 2 1 -3 0 10 10 10 10 10 10 10 0 70 100 70 30 20 10 -30 0 20 20 20 20 20 20 20 0 1 2 3 4 5 6 7 How many workers should you hire? 29

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