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Chapter 25: Pricing in Resource Markets

Chapter 25: Pricing in Resource Markets. Resource markets Resource demand The labor market. Factor/Resource markets. Factors of production: land labor capital entrepreneurship factor prices determined in resource markets. resources markets. same concepts of demand and supply

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Chapter 25: Pricing in Resource Markets

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  1. Chapter 25: Pricing in Resource Markets • Resource markets • Resource demand • The labor market

  2. Factor/Resource markets • Factors of production: • land • labor • capital • entrepreneurship • factor prices determined in resource markets

  3. resources markets • same concepts of demand and supply • now applied to factors of production

  4. resource demand • producer will demand an additional unit of resource if MR of resource MC of resource >

  5. example: Wal Mart • labor market • 1 more clerk costs $400 per week • 1 more clerk increases revenue by $500 week • hire 1 more clerk? • Yes! $500 > $400

  6. example: lawn service • capital market • larger, faster mower costs extra $400/wk. • but mow more lawns, extra $600/wk. in revenue • buy the mower? • Yes! $600 > $400

  7. terms • marginal revenue product (MRP) • extra revenue from one more unit of resource • marginal resource cost (MRC) • extra cost for one more unit of resource

  8. rule for resource demand • firm hires additional resources until • MRC = MRP cost of the extra resource = extra revenue from the resource

  9. resource supply • you will supply your resources to the “best” option • highest paying (if all else equal) • nonmonetary factors are important • firms must compensate when jobs are dirty, dangerous, illegal…..

  10. The Market for Resources • resource demand • downward sloping • producers less willing, able to buy resources at higher prices

  11. resource demand is a DERIVED demand • it depends on the demand for the final product

  12. examples • demand for nurses • depends on demand for healthcare • demand for steel • depends on demand for cars • demand for plywood • depends on demand for houses

  13. Shifts in demand for a resource • demand for final product • if product demand rises, MRP rises • resource demand shifts right • productivity of resource • better resource, higher MP & MRP • resource demand shifts right

  14. examples • increase demand for healthcare • increase demand for nurses • increase demand for syringes • higher-skilled labor • increases demand for labor

  15. price of other resources • if price of substitute resource falls -- substitute cheaper resource -- demand for original resource shifts left

  16. example • bank • ATMs vs bank tellers • ATM costs falls -- demand for bank tellers falls

  17. example • office buildings • skyscrapers in Manhattan • 3 stories in Oswego • why? • cost of land vs. cost of construction

  18. if price of complement resource falls -- use more of both resources -- demand for original resource shifts right

  19. example • price of trucks (18-wheeler) fall • increase demand for truck drivers

  20. note • sometimes resources are BOTH substitutes and complements: • computers do some clerical functions AND • need clerical workers to operate them

  21. technology • decrease demand for some types of labor • increase demand for other types of labor

  22. example • better/cheaper computer technology • increases demand for programmers • decrease demand for architects

  23. resource supply • upward sloping • suppliers more willing, able to provide resources at higher prices

  24. P res. S P* D Q res. Q*

  25. resource prices • tend to equalize across alternative uses • carpenters for houses • carpenters for furniture • UNLESS other nonmonetary differences • economics professors vs. business economists • land in Manhattan vs. land in Oswego

  26. The Labor Market • Labor supply • Labor demand • Earnings differences

  27. Labor Supply • time is a scarce resource • market work (for pay) • nonmarket work (not for pay) (cleaning, studying) • leisure (for fun)

  28. work and utility • work is a disutility • but allows you to buy stuff • or to enjoy stuff (clean house, dinner, good grades)

  29. tradeoff between consumption & leisure • work to buy stuff or to make stuff • but working leaves less time for leisure

  30. implications • higher wages = higher opp. cost of leisure, nonmarket work • most surgeons don’t mow their lawn • many college sports stars head to the draft early

  31. Effect of a wage increase • two effects: • substitution effect • income effect

  32. substitution effect • as wage rises • opp. cost of other time uses rises • spend more time on market work • Qs of labor rises as wages rise

  33. income effect • as wages rise • income rises • consumer more of what you like: -- stuff, leisure • Qs of labor falls as wages rise

  34. if substitution effect > income effect • labor supply is upward sloping • if substitution effect < income effect • labor supply is downward sloping • which is it?

  35. labor supply • economists observe • upward sloping for most wages • downward sloping at very high wages • backward-bending supply curve

  36. S wage Q labor subst. < inc. effect subst. > inc. effect

  37. Changes in market labor supply • adult population • births rates, immigration • increase will shift labor supply right

  38. preferences • willingness of groups to work • women have increasingly entered labor force -- shift labor supply right

  39. skills, education, training • education increases opp. cost of not working for pay -- labor supply increases with education • increase HS, college graduation -- increase supply high-skill labor -- decrease supply low-skill labor

  40. other sources of income • nonwage income lowers labor supply • less labor supply among those over 50 with the growth of pensions, disability • less labor supply among women with high-earning husbands

  41. Labor demand • firm’s demand for labor • car wash • perfectly competitive • marginal revenue product (MRP) • change in total revenue when one more unit of labor is hired

  42. 5 4 3 2 1 example: car wash • price of car wash = $3 • car washes per hour Q labor TP MP MRP 0 0 1 5 15 12 2 9 3 12 9 6 4 14 5 15 3

  43. how much labor to hire • MC of one more unit of labor • marginal resource cost (MRC) • wage • MR of one more unit of labor • MRP • hire until MRP = wage

  44. if MRP > wage • hire more labor and still add to profit • if MRP < wage • last units labor taking away from profit, hire less labor

  45. wage LD Q labor 15 12 9 6 3 if wage = $9 hire 3 units labor 1 2 3 4 5

  46. wage wage = $12, hire 2 wage = $6, hire 4 LD Q labor 15 12 9 6 3 1 2 3 4 5

  47. Earnings differences • based on both demand-side and supply side factors

  48. Human Capital • Skill set • Education, training, experience • increases MP of labor & labor demand • cost of education means supply of skilled labor lower relative to unskilled labor • result is a higher market wage

  49. ability/talent • Human capital, but hard to measure • the best athletes, most popular movies stars, CEOs command HUGE salary premium over others

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