Unit 5 Resource Market aka The FactorInputLabor Market

Unit 5 Resource Market (aka: The Factor/Input/Labor Market) 2

Resource Market Producers Demand In co me Households Supply s s o e Re C c so r u ur o s ce e s R t$ The Circular Flow Model Businesses Go od s& so serv ld ic. Product es R (N even ot Pro ue fit ) es Individual c i v r e s Market ods & hased Go Purc ng Producers Supply Households Demand i nd e Sp

Resource Markets Perfectly Competitive Labor Market Perfect Competition Monopsony 1. Number of firms: Ø Many small firms are hiring workers Ø No firm is large enough to manipulate the market. 2. Wage maker? Wage taker? Ø Workers are wage takers Ø Firms can hire as many workers as they want at a wage set by the industry 3. Wages rate: Ø Wage is constant 4. Workers’ skills: Ø Many workers with identical skills 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 teachers? Etc. Example 2: An increase in the demand for cars increases the demand for… Derived Demand: The DEMAND for resources (workers) is determined (derived) by the products they help to produce. 5

Industry Demand for Labor u What is Demand for Labor (DL)? Demand is the different quantities of workers that businesses are willing and able to hire at different wages. à Market Demand for Labor is the sum of every firm’s MRP. u What is the Law of Demand for Labor? There is an INVERSE relationship between wage and quantity of labor demanded. Wage Ø As wage , Qd . Demand (D ) for Labor L FIRMS demand labor. Quantity of (Q ) L Workers 6

Industry Supply for Labor u What is Supply for Labor (SL)? Supply is the different quantities of individuals that are willing and able to sell their labor at different wages. u What is the Law of Supply for Labor? There is a DIRECT or POSITIVE relationship between wage and quantity of labor supplied. Wage Supply for Labor (SL) INDIVIDUALS supply labor. Ø As wage , Qs . Quantity of (Q ) L Workers 7

Marginal Resource Cost (MRC) • The additional cost of an additional resource (worker). • MRC is the WAGE. ² Another way to calculate MRC is: Marginal Resource Cost = Δ Total Cost Δ Inputs 8

Marginal Revenue Product (MRP) • The additional revenue generated by an additional worker (resource). marginal price of • MRP = product X the product. ² Another way to calculate MRP is: Marginal Revenue Product = Δ Total Revenue Δ Inputs 9

How do you know how many resources (workers) to employ? Continue to hire until… MRP = MRC (≥ ) 10

Where to get the Market Demand ? Industry Market Wage QLDem $12 1 $12 0 $12 9 $12 10 $10 2 $10 17 $10 20 $9 3 $9 25 $9 30 $6 5 $6 3 $6 42 $6 50 $4 7 $4 5 $4 68 $4 80 Wage $9 $9 DL 3 QL DL 2 QL Wage $9 $9 DL 25 QL DL 30 QL

Perfectly Competitive Labor Market and Firm Industry SL Wage $12 2800 DL QL ? 28 SL=MRC DL=MRP QL

Example: u You hire workers to mow lawns. The wage for each worker is set at $100 a day. u Each lawn mowed earns your firm $50. u If you hire 1 worker, he can mow 4 lawns per day. u If you hire 2 workers, they can mow 5 lawns per day together. 1. 2. 3. 4. 5. 6. 7. 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? 13

You’re the Boss • You 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? 14

Wage = $20 / Price = $10 Units of Labor Total Product (Output) 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 *Hint* How much is each worker worth? 15

Wage = $20 / Price = $10 Units of Labor Total Product (Output) 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 1. What is happening to Total Product? 2. Why does this occur? 3. Where are three stages? 16

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

Wage = $20 / Price = $10 Units of Labor Total Product (Output) Marginal Product (MP) Product Price Marginal Revenue Product (MRP) 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 7 10 7 3 2 1 -3 0 10 10 0 70 100 70 30 20 10 -30 This shows how much each worker is worth How many workers should you hire? 18

Wage = $20 / Price = $10 Units of Labor Total Product (Output) Marginal Product (MP) Product Price Marginal Revenue Product (MRP) 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 7 10 7 3 2 1 -3 0 10 10 0 70 100 70 30 20 10 -30 Marginal Resource Cost (MRC) 0 20 20 How many workers should you hire? 19

Push-Up Machine 20

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 4 ft x 7 ft box). • Let’s start hiring workers (Each worker must make sound effects) 21

The Push-Up Machine Calculate MP and MRP Quantity Labor Total Product Marginal Product MRP @ $1 Price

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?

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.