Unit 5 Resource Market aka The Factor Market

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

Use the concept of DERIVED DEMAND to explain this cartoon What about SUPPLY? 2

Shifter Review 3 Resource Demand Shifters (Based on MRP) 1. Demand (price) of the product 2. Productivity of the resource 3. Price of related resources 3 Resource Supply Shifters 1. Number of qualified workers Education, training, & abilities required 2. Government regulation/licensing Ex: What if waiters had to obtain a license to serve food? 3. Personal values and traditions regarding leisure time and societal rolls. Ex: Why did the US Labor supply increase during WWII? 3

Resource Markets Imperfect Competition: Perfect Competition Monopsony Characteristics: Ø One firm hiring workers ü The firm is large enough to manipulate the market Ø Workers are relatively immobile Ø Firm is wage maker ü To hire additional workers the firm must increase wage Examples: • Central American Sweat Shops • Midwest small town with a large Car Plant • NCAA 4

Assume that this firm CAN NOT wage discriminate and must pay each worker the same wage. Ko’s Coal Mining Co. Wage rate (per hour) Number of Workers Total Resource Cost Marginal Resource Cost $4. 00 0 $0 - 4. 50 1 4. 50 $4. 50 5. 00 2 10. 00 5. 50 3 16. 50 6. 00 4 24. 00 7. 50 7. 00 5 35. 00 11 8. 00 6 48. 00 13 9. 00 7 63. 00 15 10. 00 8 80. 00 17 MRC Wage

Monopsony If the firm can’t wage discriminate, where is MRC? Wage MRC SL=wage WE DL=MRP QE Quantity for Labor

Labor Unions Their goal is to increasing wages and benefits

How do Unions Increase Wages? 1. Convince Consumers to buy only Union Products Ex: Advertising the quality of union/domestic products 2. Lobbying government officials to increase demand Ex: Teacher’s Union petitions governor to increase spending. 3. Increase the price of substitute resources Ex: Unions support increases in minimum wage so employers are less likely to seek nonunion workers

Labor Markets

The Effects of Unions in Monopsony 1. The Union is successful in requiring that new teachers have to pass a state competency test to be employed. 2. The Labor Union successfully conducts a national advertisement to get people to buy union products. 3. The Union educates workers in new methods of production, which leads to increased productivity. 4. The union promotes national legislation to increase tariffs placed on foreign products. 5. The Labor Unions bargains for and wins an increase in the wage rate above the equilibrium wage rate. 6. The labor union signs an agreement that employers can only hire union members.

SL 1 SL DL QL Wage SL DL DL 1 QL Wage SL DL QL SL 1 SL Wage 1. The Union is successful in requiring that new teachers have to pass a state competency test to be employed. 2. The Labor Union successfully conducts a national advertisement to get people to buy union products. 3. The Union educates workers in new methods of production, which leads to increased productivity. 4. The union promotes national legislation to increase tariffs placed on foreign products. 5. The Labor Unions bargains for and wins an increase in the wage rate above the equilibrium wage rate. 6. The labor union signs an agreement that employers can only hire union members. Wage The Effects of Unions in Competitive Labor Market DL QL

Labor Markets and Globalization

Why is Globalization Happening? • Globalization is the result of firms seeking lowest costs. Firms are seeking greater profits. • Parts are made in China because labor is significantly cheaper. What is Outsourcing? • Outsourcing is when firms send jobs overseas. What types of jobs are outsourced? • For many years it was only unskilled jobs, but now other skilled jobs are sent overseas.

Advantages and Disadvantages Ø Increases U. S. unemployment Ø Less US tax revenue generated from workers and corporations means less public benefits Ø Foreign workers don’t receive same protections as US workers Advantages Ø Lowers prices for nearly all goods and services Ø Decreases world unemployment Ø Improves quality of life and decreases poverty in less developed countries

Wage($) 2011 AP Micro. Econ FRQ Form B #3 Marginal Factor Cost 25 20 17. 5 15 12. 5 10 25 50 100 150 200 Woodland is a small town in which everyone works for Tree. Mart, the Supply of Labor local lumber company. Tree. Mart is a monopsonist in the labor market and a perfect competitor in the lumber market. In the short run, labor is the only variable input. The labor market for Tree. Mart is given in the graph. Marginal Revenue Product Quantity of Labor 250 300 a) Identify the profit-maximizing quantity of labor for Tree. Mart. 100 units b) Identify the wage rate Tree. Mart pays to hire the profit-maximizing quantity of labor. $10 c) Identify the quantity of labor hired in each of the following situations. (i) Tree. Mart operates in a competitive labor market. 200 units (ii) The government imposes a minimum wage of $12. 5. Explain. 150 units MFC curve becomes horizontal at the minimum wage up to a quantity of 150.

2010 AP Micro. Econ FRQ Form B #2 Number of Workers Marginal Revenue Product Per Day 1 $450 2 $500 3 $450 4 $400 5 $300 6 $100 The table above gives the short-run marginal revenue product of labor per day for a perfectly competitive firm. The firm is currently selling its product at the market price of $5. a) Calculate the marginal (physical) product of the third worker. b) Define the law of diminishing marginal returns and explain why it occurs. c) Diminishing marginal returns first occur with the hiring of which worker for the firm? d) What is the highest daily wage that the firm is willing to pay to hire the fifth worker? e) What will happen to the demand for labor if the market price of the product increases? Explain.

2010 AP Micro. Econ FRQ Form B #2 The table gives the short-run marginal revenue product of labor per day for a perfectly competitive firm. Number of Workers Marginal Revenue Product Per Day The firm is currently selling its product at the market price of $5. 1 $450 2 $500 3 $450 4 $400 5 $300 a) Calculate the marginal (physical) product of the third worker. $450/$5 per unit = 90 units b) Define the law of diminishing marginal 6 $100 returns and explain why it occurs. 1. as more and more units of a variable input are added to a fixed input, the output increases at a decreasing rate. 2. the overuse of the fixed input. c) Diminishing marginal returns first occur with the hiring of which worker for the firm? The hiring of the third worker. d) What is the highest daily wage that the firm is willing to pay to hire the fifth worker? $300. e) What will happen to the demand for labor if the market price of the product increases? Explain. The demand for labor will increase because the increase in the product price raises the marginal revenue product of labor.

2008 AP Micro. Econ FRQ Form B #3 3. GW Company produces and sells hats in a perfectly competitive market at a price of $2 per hat. Assume that labor is the only variable input and the wage rate is $15 per unit of labor per day. The table below shows GW’s short-run production function for hats. Number Of Workers Per Day Output Of Hats Per Day 0 1 2 3 4 5 6 0 10 26 36 44 49 52 (a) After which worker do diminishing marginal returns begin? (b) Calculate the marginal physical product of the fifth worker. (c) Calculate the marginal revenue product of the third worker. (d) How many workers will GW hire to maximize profit? (e) If GW Company has fixed costs equal to $20, what will be the company’s short-run economic profits from hiring two workers? (f) If the price of hats increases, what will happen to the number of workers hired in the short run? Explain.

2010 AP Micro. Econ FRQ Form A #2 2. The John Lamb Company, a profit-maximizing firm producing widgets, is in a perfectly competitive widget market. Assume John Lamb employs a fixed number of employees and rents a machine for a variable number of hours from a perfectly competitive market. (a) Using correctly labeled side-by-side graphs of the factor market for machines and the John Lamb Company, show each of the following. (i) The equilibrium rental price of machines in the factor market, labeled as PR (ii) John Lamb’s equilibrium rental quantity of machines, labeled as QL (b) Assume that the popularity of widgets declines, decreasing the demand for widgets. What will happen to each of the following? (i) Marginal product curve for machine-hours (ii) Marginal revenue product curve for machine-hours. Explain. (c) John Lamb is employing the cost-minimizing combination of inputs. The marginal product of labor is 28 widgets per worker hour and the wage rate is $14 per hour. The marginal product of the machine is 60 widgets per machine-hour. What is the hourly rental price of a machine?