1 / 55

Chapter 10: Pricing in Resource Markets

Chapter 10: 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

shepry
Download Presentation

Chapter 10: Pricing in Resource Markets

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. Chapter 10: 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

More Related