Dominican Republic GDP 5 800 Costa Rican GDP

• • • Dominican Republic GDP- $5, 800 Costa Rican- GDP Per Capita- $12, 600 United State- GDP Per Capita -$53, 000 Average Hourly Salary Construction-Dominican Republic- $3. 00 Average Hourly Salary Tour Guide Costa Rica- $8. 00 1

Factor Market • 1)What factors influence how much an individual earns? What determines a wage? ? – Or, why do some jobs earn more than others? • 2) Do employees have the power to set wages? – When? For what industries? • 3)Do employers have the power to set wages? – When? For what industries? • 4) What are some examples of fair wage disparity? What are some examples of unfair wage disparity? 2

The Factor Market 3

Factors of Production • A Factor of Production can continuously earn income while producing more goods • 2 Types of Factors • 1) Physical Capital- Buildings, Machines • 2) Human Capital- People, Education, Training- Human Capital will be the focus of this chapter! 4

Factors of Production • What is the difference between chocolate chips and a baker in the production of cookies? 5

The Factor Market • The Factor Market has two major differences from the product market. • 1) The Factor Market is where a majority of people earn their income (trillions of dollars in the US) • 2) Demand in the Factor Market is derived 6

FACTOR DEMAND (LABOR DEMAND) 7

Factor Demand Example 1: If there was a significant increase in the demand for pizza, how would this change the demand for its factors of production? Example 2: An increase in the demand for health care increases the demand for what factors? 8

Factor Demand Derived Demand. The demand for factors (resources) is determined (derived) by the products they help produce. 9

DEMAND OF LABOR 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. 10

Who demands labor? • FIRMS demand labor. • Demand for labor shows the quantities of workers that firms will hire at different wage rates. • Firms will only pay employees a wage equal to or less than that employees productivity. Wage • As wage falls, Qd increases. • As wage increases, Qd falls. DL Quantity of Workers 11

Marginal Product • Let’s review… what is marginal product • Marginal product is how much additional product an additional worker provides • Or Change in Product/Change in Inputs 12

How much value does my Marginal Product have? • Hard with students • Easier with more tangible items • Let’s think cookies • If a bakery hires me and I make 10 additional cookies that sell for 2 dollars each. – My marginal product’s value is $20 or my product makes $20 of marginal revenue. The bakery would pay me up to $20 • If Mr. Brooks is hired and makes 5 cookies that sell for 2 dollars each. – • His marginal product’s value is $10 or his product makes $10 of marginal revenue. The bakery would pay Mr. Silver up to $10.

Marginal Revenue Product( AKA Value of the Marginal Product of Labor • The additional revenue generated by an additional worker (resource). • Marginal Revenue Product =Marginal Product x Price of Product • Employers will never pay an employee more than his or her MRP 14

Marginal Revenue Product( AKA Value of the Marginal Product of Labor If the Marginal Product of the 3 rd worker is 5 and the price of the good is constant at $20 the MRP is……. Another way to calculate MRP is: Marginal Revenue Product = Change in Total Revenue Change in Inputs 15

Cupcake Wars • Each team has 10 seconds to write the word “cupcake” as many times as possible. Each time cupcake is written the firm earns $10. • How much will I pay my employees? 16

Cupcake Wars Calculate MPL and MRP Quantity Labor Total Product Marginal MRP @ $10 Product of Price Labor

GRAPHING TIME • Graph your Marginal Revenue Product. • X axis- Quantity of Labor • Y axis- Wage Rate • If I paid employees $20 per round how many employees would I hire? 18

Cup Cake Wars Why does the MRP eventually fall? • Diminishing Marginal Returns. • Fixed resources means each worker will eventually add less than the previous workers.

Cup Cake Wars 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. • MRP= Demand for Labor

The MRP of a resource equals the Demand. 21

With your partner. . . Use supply and demand analysis to explain why surgeons earn an average salary of $137, 050 and cashiers earn $11, 000. How could wages change for either profession?

With your partner. . . Use supply and demand analysis to explain why surgeons earn an average salary of $137, 050 and cashiers earn $15, 000. How could wages change for either profession? Supply and Demand For Surgeons Supply and Demand For Fast Food Cashiers SL Wage Rate DL Quantity of Workers SL DL Quantity of Workers

Industry in Equilibrium Wage (the price of labor) is set by the market. EX: Supply and Demand for Fast Food Workers Wage Labor Supply $8. 75 hr THE Labor Demand = MRP WAGE RATE Quantity of Workers 24

Perfectly Competitive Labor Market and Firm SL Wage ? WE QE Industry DL Q Q Firm

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

Marginal Factor Cost (MFC)- The Wage Rate • 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 MFC of a minimum wage worker is $8. 75. Another way to calculate MFC is: Marginal Factor Cost = Change in Total Cost Change in Inputs 34

How do you know how many resources (workers) to employ? Continue to hire until… MRP = MFC (Wage Rate) Consider that this also occurs when MR=MC 35

Factor 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 36

Drawing the Demand Curve for Factors 37

Demand=MRP Why is it downward sloping? Because of the law of diminishing marginal returns Each additional factor is less productive and therefore is worth less than the previous one Wage Rate $100 80 60 40 20 D=MRP 1 2 3 4 5 6 7 8 Q Quantity of Workers 38

What happens if demand for the product increases? Wage Rate $100 MRP increases causing demand to shift right 80 60 40 D 1=MRP 1 20 D=MRP 1 2 3 4 5 6 7 8 Q Quantity of Workers 39

Question? • What could be factors that shift the MRP (Factor Demand)? 40

3 Shifters of Factor Demand 1. ) Changes in the Demand for the Product (Change in Price) • Price increase of the product increases MRP and demand for the factor. (and vice versa) 2. ) Changes in Productivity • Technological Advances increase Marginal Product and therefore MRP/Demand. 3. ) Changes in Price of Other Factors • 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 for nails if the price of lumber increases significantly? 41

Use the following data: Units of Labor 0 1 2 3 4 5 How 6 7 Total Product (Output) Price = $10 Wage = $20 Marginal Product Price (MP) Marginal Revenue Product Additional Cost per worker 0 0 7 10 7 70 20 10 10 17 100 20 7 10 24 70 20 3 10 27 30 20 10 if the 29 this 2 change 20 demand 20 would 30 10 20 for the 1 good 10 increased -3 10 27 -30 20 significantly? 1. Price of the good would increase. 42

Use the following data: Units of Labor Total Product (Output) 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 Price = $100 Wage = $20 Marginal Product Price (MP) 7 10 7 3 2 1 -3 Marginal Revenue Product 0 100 100 43

Use the following data: Units of Labor Total Product (Output) 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 Price = $100 Wage = $20 Marginal Product Price (MP) 7 10 7 3 2 1 -3 0 100 100 Marginal Revenue Product 0 700 1000 700 300 200 100 -300 Each worker is worth more!! THIS IS DERIVED DEMAND. 44

3 Shifters of Resource Demand Identify the Resource and Shifter (ceteris paribus): 1. Increase in demand for microprocessors leads to a(n) ____ in the demand for processor assemblers. 2. Increase in the price for plastic piping causes the demand for copper piping to _____. 3. Increase in demand for small homes (compared to big homes) leads to a(n) _____ the demand for lumber. 4. For shipping companies, _____ in price of trains leads to decrease in demand for trucks. 5. Decrease in price of sugar leads to a(n) _____ in the demand for aluminum for soda producers. 6. Substantial increase in education and training leads to an ______ in demand for skilled labor. 47

3 Shifters of Resource Demand Identify the Resource and Shifter (ceteris paribus): 1. Increase in demand for microprocessors leads to a(n) ____ increase in the demand for processor assemblers. 2. Increase in the price for plastic piping causes the demand for copper piping to _____. increase 3. Increase in demand for small homes (compared to big decrease the demand for lumber. homes) leads to a(n) _____ 4. For shipping companies, _____ decrease in price of trains leads to decrease in demand for trucks. 5. Decrease in price of sugar leads to a(n) _____ in increase the demand for aluminum for soda producers. 6. Substantial increase in education and training leads to an ______ increase in demand for skilled labor. 48

Factor Supply (Labor Supply) 49

SUPPLY OF LABOR 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 (Usually) DIRECT (or positive) relationship between wage and quantity of labor supplied. 50

Labor Supply • Supply of labor is the number of workers that are willing to work at different wage rates. • Higher wages can give workers incentives to leave other industries or give up leisure activities (Activities done outside of work) Labor Supply Wage • As wage increases, Qs increases. • As wage decreases, Qs decreases. Quantity of Workers 51

Questions • What could be shifters of factor supply (workers) (MRC)? 52

Factor Supply Shifters for Labor 1. Number of qualified workers • Education, training, & abilities required • Immigration 2. Government regulation/licensing Ex: What if waiters had to obtain a license to serve food? Immigration policies 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?

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

Monopsony • One buyer of labor • When does this occur? • Their supply curve is the industry supply curve. • One firm is now a wage setter (factor cost setter) instead of wage taker (factor cost taker) 66

Examples of Monopsony • Mining Companies in mining towns • The US Military • Walmart in small towns? 67

Wage Quantity 4 0 5 1 6 2 7 3 8 4 $ S 8 7 6 5 1 2 3 4 L In this example the one individual will work when the wage is 5, and so on. 68

Wage Quantity Total Resource Cost Marginal Resource Cost 4 0 0 N/A 5 1 5 5 6 2 12 7 7 3 21 9 8 4 32 11 $ MRC S 8 7 6 5 1 2 3 4 E Marginal Factor Cost is now different than labor supply , it’s higher! Meaning the employer can gain additional workers at additional cost. The employer can choose the wage rate! 69

Where would a monopsony produce • Quantity-MRP=MRC • But what wage would people be willing to accept at that quantity • The monopsonist will move down to the supply curvehiring fewer people at a lower wage – creating deadweight. 70

Monopsony- Inefficient Labor Market • Deadweight created • Fewer jobs at lower wages

Combining Resources Up to this point we have analyzed the use of only one resource. What about when a firm wants to combine different resources?

Least Cost Rule $10 How much additional output does each resource generate per dollar spent? $5 # Times Going MP MP/PR MP MP/PW (Robots) (Price. R =$10) (Workers) (Price. W =$5) 1 st 30 3 20 4 2 nd 20 2 15 3 3 rd 10 1 10 2 4 th 5 . 50 5 1 If you only have $35, what combination of robots and workers will maximize output?

Least Cost Rule $10 Resource k MPk = MPL Pk PL $5 Resource L # Times Going MP MP/PR MP MP/PW (Robots) (Price. R =$10) (Workers) (Price. W =$5) 1 st 30 3 20 4 2 nd 20 2 15 3 3 rd 10 1 10 2 4 th 5 . 50 5 1 If you only have $35, the best combination is 2 robots and 3 workers

Profit Maximizing Rule for a Combing Resources MRPk = MRPL = MRCk MRCL 1 This means that the firm is hiring where MRP = MRC for each resource k and L

Practice: What should the firm do – hire more, hire less, or stay put? 1. MRPL = $15; PL = $6; MRPC = $10; PC = $10 MORE STAY PUT 2. MRPL = $5; PL = $10; MRPC = $10; PC = $15 LESS 3. MRPL = $25; PL = $20; MRPC = $15; PC = $15 MORE STAY PUT 4. MRPL = $12; MRPC = $50; PC = $40 STAY PUT MORE 5. MRPL = $20; PL = $15; MRPC = $100; PC =$40 MORE

2010 Practice FRQ 77

Work and Wages 79

What are some 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 (Market Power) • Collective bargaining and threats to strike often lead to higher than equilibrium wages • Wage Discrimination • Some people get paid differently for doing the same job based on race or gender (Very illegal!).

Other reasons for wage disparity • • Compensating differentials Differences in talent Differences in the quality of human capital Idea of “efficiency wage” • Marginal productivity theory of income distribution 81

Wage Disparities in Practice 82

Earnings Differentials by Education, Gender, and Ethnicity, 2002 83

“Glass Ceilings”

Why do people with only high school degrees make less money on average? Employers assume they have low productivity and will generate less additional revenue. 86

Does having an education mean that you will automatically have a higher income? 87

Real Life Application Top 5 Fastest Growing Jobs (2000 -2010) 1. 2. 3. 4. 5. Computer Software Engineers, Applications Computer Support Specialists Computer Software Engineers, Systems Computer Systems Administrators Data Communications Analyst Top 5 Fastest Declining Jobs 1. 2. 3. 4. 5. Railroad Switch Operators Shoe Machine Operators Telephone Operators Radio Mechanics Loan Interviewers WHY? “You’ve got to learn computers!” 88

Real Life Application 89

Video: Did You Know? 90