Bec doms ppt on pricing in resource markets

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Pricing in Resource Markets

Resource markets Resource demand The labor market

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Factor/Resource markets

Factors of production: land labor capital entrepreneurship

factor prices determined in resource markets

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resources markets

same concepts of demand and supply now applied to factors of production

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resource demand

producer will demand an additional unit of resource if

MR of resource > MC of

resource

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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

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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

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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

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rule for resource demand

firm hires additional resources until MRC = MRP

cost of the extra resource =

extra revenue from the resource

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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…..

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The Market for Resources

resource demand downward sloping producers less willing, able to buy resources at

higher prices

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

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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

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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

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examples

increase demand for healthcare increase demand for nurses increase demand for syringes

higher-skilled labor increases demand for labor

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price of other resources if price of substitute resource falls

-- substitute cheaper resource

-- demand for original resource shifts left

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example

bank ATMs vs bank tellers ATM costs falls

-- demand for bank tellers falls

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example

office buildings skyscrapers in Manhattan 3 stories in Oswego

why? cost of land vs. cost of construction

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if price of complement resource falls

-- use more of both resources

-- demand for original resource shifts right

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example

price of trucks (18-wheeler) fall increase demand for truck drivers

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note

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

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technology decrease demand for some types of labor increase demand for other types of labor

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example

better/cheaper computer technology increases demand for programmers decrease demand for architects

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resource supply upward sloping suppliers more willing, able to provide resources

at higher prices

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Q res.

P res.S

D

P*

Q*

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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

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The Labor Market

Labor supply Labor demand Earnings differences

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Labor Supply

time is a scarce resource market work (for pay) nonmarket work (not for pay)

(cleaning, studying) leisure (for fun)

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work and utility

work is a disutility but allows you to buy stuff or to enjoy stuff

(clean house, dinner, good grades)

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

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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

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two effects: substitution effect income effect

Effect of a wage increase

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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

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income effect

as wages rise income rises consumer more of what you like:

-- stuff, leisure

Qs of labor falls as wages rise

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if substitution effect > income effect labor supply is upward sloping

if substitution effect < income effect labor supply is downward sloping

which is it?

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labor supply

economists observe upward sloping for most wages downward sloping at very high wages

backward-bending supply curve

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wage

Q labor

S

subst. > inc. effect

subst. < inc. effect

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Changes in market labor supply

adult population births rates, immigration increase will shift labor supply right

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preferences willingness of groups to work women have increasingly entered labor force

-- shift labor supply right

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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

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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

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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

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example: car wash

price of car wash = $3 car washes per hour

Q labor TP MP MRP

0 01 5

2 93 124 145 15

54

3

21

1512

9

63

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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

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if MRP > wage hire more labor and still add to profit

if MRP < wage last units labor taking away from profit, hire less

labor

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wage

Q labor

15

12

9

6

3

1 2 3 4 5

LD

if wage = $9

hire 3 units labor

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wage

Q labor

15

12

9

6

3

1 2 3 4 5

LD

wage = $6,hire 4

wage = $12,hire 2

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Earnings differences

based on both demand-side and supply side factors

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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

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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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Efficiency wage theory

Higher pay leads to better productivity Why?

Better morale, lower turnover “Cherry pick” the best workers Workers do not want to risk losing job

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Non-wage job characteristics

Risk/danger Working conditions Work is meaningful or glamorousHolding all else constant, dangerous jobs pay more jobs with higher layoff probability pay more

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geography

wages higher in U.S. encourages immigration

teacher’s salaries vary significantly by state wages lower in South than Northeast

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discrimination

age, race, gender wage differentials remain EVEN after

controlling for other factors occupation education/experience risk

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unionization

union workers earn more than nonunion workers doing the same jobs janitors auto workers teachers