Unit V: Factor Markets ***Factors = Resources = Inputs*** Length: 2 Weeks Chapters: 27 and 28 Assignments: Problem Set #5 Final Exam ½ Unit V: Factor.

Unit V: Factor Markets***Factors = Resources = Inputs***

Length: 2 WeeksChapters: 27 and 28Assignments:

Problem Set #5Final Exam

½ Unit V: Factor Markets ½ Everything ElseMany AP and former exam questions

The Demand for Resources

27C H A P T E R

DEMAND FOR RESOURCES

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? Etc.

Example 2: An increase in the demand for computers

increases the demand for…

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

Demand for specific resources depend on two things:

1. The resource’s productivityEx: Highly productive workers and

resources are preferred to unproductive resources

2. The additional revenue resulting from each additional resourceEx: Each worker is worth the additional revenue they generate.

Simulation!

Analyzing Demand

You’re the Boss• You and your partner own a business.• Assume the you are selling the goods in a

PERFECTLY COMPEATIVE PRODUCT MARKET so the price is constant at $10.

• Assume that you are hiring workers in a PERFECTLY COMPEATIVE LABOR 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?

WorkersTotal

Product(Output)

Use the following data:

0

1

2

3

4

5

6

7

0

7

17

24

27

29

30

27

*Hint* How much is each worker worth?

Wage = $20Price = $10

Units ofLabor

TotalProduct(Output)

Use the following data:

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 the three stages?

Wage = $20Price = $10

Units ofLabor

TotalProduct(Output)

Use the following data:

0

1

2

3

4

5

6

7

0

7

17

24

27

29

30

27

Wage = $20Price = $10

MarginalProduct

(MP)

-

7

10

7

3

2

1

-3

This shows the PRODUCTIVITY of

each worker.

Why does productivity decrease?

Units ofLabor

TotalProduct(Output)

Use the following data:

0

1

2

3

4

5

6

7

0

7

17

24

27

29

30

27

Wage = $20Price = $10

MarginalProduct

(MP)

-

7

10

7

3

2

1

-3

ProductPrice

0

10

10

10

10

10

10

10

Price constant because we are

in a perfectly competitive

market

Units ofLabor

TotalProduct(Output)

Use the following data:

0

1

2

3

4

5

6

7

0

7

17

24

27

29

30

27

Wage = $20Price = $10

MarginalProduct

(MP)

-

7

10

7

3

2

1

-3

ProductPrice

0

10

10

10

10

10

10

10

AdditionalRevenue

per worker

0

70

100

70

30

20

10

-30

Shows how

much each

worker is worth

Units ofLabor

TotalProduct(Output)

Use the following data:

0

1

2

3

4

5

6

7

0

7

17

24

27

29

30

27

Wage = $20Price = $10

MarginalProduct

(MP)

-

7

10

7

3

2

1

-3

ProductPrice

0

10

10

10

10

10

10

10

AdditionalRevenue

per worker

0

70

100

70

30

20

10

-30

AdditionalCost for each

worker

0

20

20

20

20

20

20

20

How many should we hire?

0

20

20

20

20

20

20

20

Units ofLabor

TotalProduct(Output)

Use the following data:

0

1

2

3

4

5

6

7

0

70

170

240

270

290

30

27

Wage = $20Price = $10

MarginalProduct

(MP)

-

70

100

70

30

20

1

-3

ProductPrice

0

10

10

10

10

10

10

10

0

700

1000

700

300

200

10

-30

Each worker is

worth more

Demand for specific resources depend on two things:

1. The resource’s productivity2. The additional revenue resulting from

each additional resource

AdditionalCost

per worker

AdditionalRevenue

per worker

Units ofLabor

TotalProduct(Output)

Use the following data:

0

1

2

3

4

5

6

7

0

7

17

24

27

29

30

27

Wage = $20Price = $10

MarginalProduct

(MP)

-

7

10

7

3

2

1

-3

ProductPrice

0

10

10

10

10

10

10

10

AdditionalRevenue

per worker

0

70

100

70

30

20

10

-30

AdditionalCost

per worker

0

20

20

20

20

20

20

20

How would this change if the demand for the good

increased significantly?1.Price of the good would

increase2.Value of each worker would

increase

Units ofLabor

TotalProduct(Output)

Use the following data:

0

1

2

3

4

5

6

7

0

7

17

24

27

29

30

27

Wage = $20Price = $100

MarginalProduct

(MP)

-

7

10

7

3

2

1

-3

ProductPrice

0

100

100

100

100

100

100

100

AdditionalRevenue

per worker

Units ofLabor

TotalProduct(Output)

Use the following data:

0

1

2

3

4

5

6

7

0

7

17

24

27

29

30

27

Wage = $20Price = $100

MarginalProduct

(MP)

-

7

10

7

3

2

1

-3

ProductPrice

0

100

100

100

100

100

100

100

AdditionalRevenue

per worker

0

700

1000

700

300

200

100

-300

Each worker is

worth more!!

THIS ISDERIVED DEMAND

Units ofLabor

TotalProduct(Output)

Use the following data:

0

1

2

3

4

5

6

7

0

7

17

24

27

29

30

27

Wage = $20Price = $10

MarginalProduct

(MP)

-

7

10

7

3

2

1

-3

ProductPrice

0

10

10

10

10

10

10

10

AdditionalRevenue

per worker

0

70

100

70

30

20

10

-30

AdditionalCost

per worker

0

20

20

20

20

20

20

20

How would this change if the productivity of each worker

increased?1.Marginal Product would increase2.Value of each worker would

increase

Units ofLabor

TotalProduct(Output)

Use the following data:

0

1

2

3

4

5

6

7

0

70

170

240

270

290

300

270

Wage = $20Price = $10

MarginalProduct

(MP)

-

70

100

70

30

20

10

-30

ProductPrice

0

10

10

10

10

10

10

10

AdditionalRevenue

per worker

0

700

1000

700

300

200

100

-300

Each worker is

worth more!

More demand for the

resource

MRP and MRC

MARGINAL REVENUE PRODUCT (MRP)The additional revenue generated by an additional worker.

In perfectly competitive product markets the MRP equals the marginal product of the resource times the price of the product.

Ex: If the MP of the 3rd worker is 5 and the price of the good is constant at $20 the MRP is…….

$100

Another way to calculate MRP is:

MarginalRevenueProduct

=Change in

Total Revenue

Change inResource Quantity

MARGINAL RESOURCE COST (MRC)The additional cost of an additional worker.

In perfectly competitive labor markets the MRC equals the wage set by the market.

Ex: The MRC of an unskilled worker is $6.75.

Another way to calculate MRC is:

MarginalRevenueProduct

=Change in

Total Revenue

Change inResource Quantity

Continue to hire until…

MRP = MRC

How do you know how many resources (workers) to employ?

Identifying the Demand Curve for Resources

Units ofLabor

TotalProduct(Output)

Yesterday's Activity

0

1

2

3

4

5

6

7

0

7

17

24

27

29

30

27

Wage = $20Price = $10

MarginalProduct

(MP)

-

7

10

7

3

2

1

-3

ProductPrice

0

10

10

10

10

10

10

10

MRP

0

70

100

70

30

20

10

-30

Shows how

much each

worker is worth

Conclusions: • According to the chart, if wage rate (MRC) was $100

how many workers will they hire? • What if wage rate is $70? $30 $20? $10?

As wage falls, quantity demanded risesAs wage rises, quantity demanded falls

In the perfectly competitive labor market, the falling portion of MRP is the firm’s resource demand curve.

Each point on the curve indicates the number of workers the firm is willing and able to hire at different wages.

Demand and MRP

Units ofLabor

TotalProduct(Output)

Use the following data:

0

1

2

3

4

5

6

7

0

7

17

24

27

29

30

27

Wage = $20Price = $10

MarginalProduct

(MP)

-

7

10

7

3

2

1

-3

ProductPrice

0

10

10

10

10

10

10

10

MRP

0

70

100

70

30

20

10

-30

Resource Demand Schedule

Plot the resource demand curve

Wage Rate

Q

$100

80

60

40

20

D=MRP

Quantity of Workers

Demand=MRP

1 2 3 4 5 6 7 8

This shows the quantity of workers that will be hired

at different wages

Wage Rate

Q

$100

80

60

40

20

D=MRP

Quantity of Workers

Demand=MRP

1 2 3 4 5 6 7 8

Why is it downward sloping?

Because of the law of diminishing marginal

returns.

Wage Rate

Q

$100

80

60

40

20

D=MRP

Quantity of Workers

Demand=MRP

1 2 3 4 5 6 7 8

Each worker is less productive and therefore

is worth less than the previous

Shifters of Demand

3 DETERMINANTS (SHIFTERS) OF RESOURCE DEMAND

1.) Changes in Product Demand• Price increase of the product increases MRP

and demand for the resource (and vice versa)

2.) Changes in Productivity• Technological Advances increase Marginal

Product and therefore MRP/Demand (and vice versa)

3.) Changes in Price of Other Resources• Substitutes• EX: What happens to the demand for assembly line

workers in price of robots falls?

• Compliments• Ex: What happens to the demand for software writing

programs if the wage paid to software engineers falls?

DETERMINANTS OF RESOURCE DEMAND

Identify the Resource and Shifter (ceteris peribus)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 lumber4. 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.

DETERMINANTS OF RESOURCE DEMAND

Identify the Resource and Shifter (ceteris peribus)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 lumber4. 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.

Increase

Increase

DecreaseDecrease

Increase

Increase

Revisiting Current Trends Top 5 Fasting Growing Jobs (2000-2010)

1. Computer Software Engineers, Applications2. Computer Support Specialists3. Computer Software Engineers, Systems4. Computer Systems Administrators5. Data Communications Analyst

Top 5 Fastest Declining Jobs1. Railroad Switch Operators2. Shoe Machine Operators3. Telephone Operators4. Radio Mechanics5. Loan Interviewers

“You’ve got to learn computers!”

Drawing the Demand for Resources

In the perfectly competitive labor market, the falling portion of MRP is the firm’s resource demand curve.

Each point on the curve indicates the number of workers the firm is willing and able to hire at different wages.

Example: According to the chart, if wage rate (MRC) was $100 how many workers will they hire?

What if wage rate is $90? $70 $60? $40?

Plot the demand curve for these workers

Demand and MRP

Wage Rate

Q

$100

80

60

40

20

D=MRP

Quantity of Workers

Demand=MRP

1 2 3 4 5 6 7 8

This shows the quantity of workers that will be hired

at different wages

Wage Rate

Q

$100

80

60

40

20

D=MRP

Quantity of Workers

Demand=MRP

1 2 3 4 5 6 7 8

It is downward sloping because of the law of diminishing marginal

returns

Perfectly Competitive

Labor Markets

HELP

WANTED

28C H A P T E R

PURELY COMPETITIVELABOR MARKET

Characteristics:•Many Firms hiring workers

•No one firm large enough to manipulate the market.

•Identical Skills•Firms are “Wage Takers”

Firms can hire as many workers as it needs at a wage set by the industry

How does this compare to supply and demand for products?

Firms Supply and Individuals Demand

Quantity

PriceSupply =

Marginal Cost

Demand =Marginal Benefit

Who demands labor?•FIRMS demand labor•Demand for labor shows the quantities of workers that firms will hire at different wage rates. •Market Demand for Labor is the sum of each firm’s MRP.

d = MRP

Quantity of Workers

Wage •As wage falls, Qd increases•As wage increases, Qd falls

Who supplies labor?•Individuals supply labor•Supply of labor is the number of workers that are willing to work at different wage rates•Higher wages give workers incentives to leave other industries or give up leisure activities.

Quantity of Workers

Wage

•As wage increases, Qs increases•As wage decreases, Qs decreases

Labor Supply

EquilibriumWage (the price of labor) is set by the market

EX: Supply and Demand for Carpenters

Quantity of Workers

Wage Labor Supply

Labor Demand =MRP

$30hr

Draw and label both at wage set at $10

Labor Market

S

D = MRP( mrp’s)

Wc

(1000)

Individual Firm

S = MRC

d = mrp

Wc

Quantity of Labor

Wa

ge

Ra

te (

do

llars

)

Quantity of Labor

($10)

(5)

$10

Side-by-side graph showing Market and Firm

Draw and label both at wage set at $10

Labor Market

S

D = MRP( mrp’s)

Wc

(1000)

Individual Firm

S = MRC

d = mrp

Wc

Quantity of Labor

Wa

ge

Ra

te (

do

llars

)

Quantity of Labor

($10)

(5)

$10

Side-by-side graph showing Market and Firm

Marginal ResourceCost (MRC) will be

constant and equal tothe wage set by

the market

Draw and label both at wage set at $10

Labor Market

S

D = MRP( mrp’s)

Wc

(1000)

Individual Firm

S = MRC

d = mrp

Wc

Quantity of Labor

Wa

ge

Ra

te (

do

llars

)

Quantity of Labor

($10)

(5)

$10

Side-by-side graph showing Market and Firm

All workers will supply their labor

at the wage set by the market ($10).

LaborCosts

Where is Labor Costs?Wage x Number of Workers

Labor Market

S

D = MRP( mrp’s)

Wc

(1000)

Individual Firm

S = MRC

d = mrp

Wc

Quantity of Labor

Wa

ge

Ra

te (

do

llars

)

Quantity of Labor

($10)

(5)

$10 $10 $10 $10 $10 $10

Total Labor Cost = Wage Rate x # of

workers

LaborCosts

Labor Market

S

D = MRP( mrp’s)

Wc

(1000)

Individual Firm

S = MRC

d = mrp

Wc

Quantity of Labor

Wa

ge

Ra

te (

do

llars

)

Quantity of Labor

($10)

(5)

$10 $10 $10 $10 $10 $10

Total Revenue (Sum of MRP for each

worker)

Where is Total Revenue?Sum of each individual worker’s MRP

LaborCosts

PURELY COMPETITIVE LABORMARKET EQUILIBRIUM

Labor Market

S

D = MRP( mrp’s)

Wc

(1000)

Individual Firm

S = MRC

d = mrp

Wc

Quantity of Labor

Wa

ge

Ra

te (

do

llars

)

Quantity of Labor

($10)

(5)

$10 $10 $10 $10 $10 $10

Since TR=TC in perfect competition,

this area is…

Non-LaborCosts

Minimum Wage

S

Wage

Q Labor

D

Fast Food CooksHigh supply leads to low wage

$10

876

$5432

106 7 8 9

Not enough to live on, so…

S

Wage

Q Labor

D

Fast Food Cooks $10

876

$5432

106 7 8 9

Government sets up a “WAGE FLOOR”

Where?

S

Wage

Q Labor

D

Minimum Wage

$10

876

$5432

106 7 8 9

Above Equilibrium

$6.75

S

Wage

Q Labor

D

Minimum Wage

$10

876

$5432

10 11 126 7 8 9

What’s the result?Q demanded falls

$6.75

Surplus (Unemployment)

Q supplied increases

Analyzing Labor

Use the concept of derived demand to explain this cartoon

Supply and Demand Resource Demand Shifters (Based on MRP)

1. Demand (price) of the product2. Productivity of the resource3. Price of related resources

Resource Supply Shifters1. Number of qualified workers

• Education, training, & abilities required2. Government regulation/licensingEx: 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?

Why do some occupations get paid more than others?

With your partner...Use supply and demand analysis to explain why surgeons earn an average salary of $137,050 and

gardeners earn $13,560.

Quantity of Workers

Wag

e Rate

SL

DL

Supply and Demand For Surgeons Supply and Demand For Gardeners

Quantity of Workers

Wag

e Rate

SL

DL

What are other 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 to poor to move so they accept a lower wage

• Unions •Collective bargaining and threats to strike often lead to higher that equilibrium wages

• Wage Discrimination-•Some people get paid differently for doing the same job based on race or gender (Very illegal!).

PURELY COMPETITIVE LABOR MARKETS

VS.IMPERFECTLY

COMPETITIVE LABOR MARKETS

Tell the person next to you what they look like and why

Labor Market

S

D = MRP( mrp’s)

Wc

(1000)

Individual Firm

S = MRC

d = mrp

Wc

Quantity of Labor

Wa

ge

Ra

te (

do

llars

)

Quantity of Labor

($10)

(5)

$10

Perfectly Competitive Market and Firm

Imperfect Competition:

Monopsonies

MONOPSONY MODEL (A Monopoly for Labor)

1. Only one firm hiring a type of labor • Instead of a single seller, there is a single buyer2. The type of labor is relatively immobile3. Firm is a “Wage Maker”• To hire additional workers this firm MUST increase

the wage.Examples:1. Central American Sweat Shops2. Midwest small town with a large Car Plant3. NCAA

Characteristics:

Assume that this firm CAN’T wage discriminate and must pay each worker the same wage.

Acme Coal Mining Co.Wage rate (per hour)

Number ofWorkers

Marginal Resource Cost

$4.00 0  

4.50 1  

5.00 2  

5.50 3  

6.00 4  

7.00 5  

8.00 6  

9.00 7  

10.00 8  

Assume that this firm CAN’T wage discriminate and must pay each worker the same wage.

Acme Coal Mining Co.Wage rate (per hour)

Number ofWorkers

Marginal Resource Cost

$4.00 0  -

4.50 1  $4.50

5.00 2  5.50

5.50 3  6.50

6.00 4  7.50

7.00 5 11

8.00 6  13

9.00 7  15

10.00 8  17

MRC doesn’t equal wage

Wa

ge

Ra

te (

do

llars

)S

Quantity of Labor

MONOPSONISTICLABOR MARKET

SL-The number of workers that are willing to work at

different wage rates

Wa

ge

Ra

te (

do

llars

)S

Quantity of Labor

MONOPSONISTICLABOR MARKET

Since firm is a “wage maker,” the MRC lies above the

supply curve.

Wa

ge

Ra

te (

do

llars

)

MRP

S

Wm

Quantity of Labor

MRC

Qm

MONOPSONISTICLABOR MARKET

MRP = MRC

Wage workers

are willing to work for

Wa

ge

Ra

te (

do

llars

)

MRP

S

Wm

Quantity of Labor

MRC

Wc

Qm Qc

The competitivesolution would

result in a higherwage and greater

employment.

MONOPSONISTICLABOR MARKET

Wa

ge

Ra

te (

do

llars

)

MRP

S

Wm

Quantity of Labor

MRC

Wc

Qm Qc

The competitivesolution would

result in a higherwage and greater

employment

MONOPSONISTICLABOR MARKET

Monopsonists maximizeprofits by hiring a smaller

number of workers andpaying a less-than-

competitive wage rate.

Labor UnionsOrganizations that seek to unify workers and

use collective bargaining to negotiate and secure their benefits.

Two Types of UnionsCraft (Trade) Unions-

•Unifies workers in a specific career field. •Limits supply of qualified workers •Examples: Teachers, Lawyer, Carpenters, Doctors, Plumbers, etc.

Industrial Unions-•Unifies workers in specific industries regardless of job. •By getting all workers, the union can more effectively negotiate with management•Examples: Steelworkers, automobile workers, supermarket workers, etc.

5 Goals of UnionsAll goals revolve around

increasing wagesWhat are the only two ways to increase

wages?

Wag

e R

ate

(do

llar

s)

D1

S

Quantity of Labor

Wc

Qc

Increase Demand for Union Labor

Wu

Qu

Wag

e R

ate

(do

llar

s)

D1

S

Quantity of Labor

Wc

Qc

D2

Increase Demand for Union Labor

How do Unions Increase Demand?

Goals1. Getting Consumers to buy only Union Products

Ex: Advertising the quality of union/domestic products

2. Lobbying government officials to increase demandEx: 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 non-union workers

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

S1

Limit Supply of Qualified Workers

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

QcQu

S1

S2

Limit Supply of Qualified Workers

How do Unions Decrease Supply?

Goals4. Lobbying government to increase licensing for

specific careers (Often used by craft unions).Ex: Cosmetologist seek to increase requirements

and mandatory training, limiting supply

5. Getting all workers to supply their labor at a higher than equilibrium wage. (Often used by industrial unions) .Ex: Steelworker threaten to strike unless wage

increase by 15%.

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

QcQu

D

Organizing virtually all workers and demanding higher wages they control the supply curve for labor

S

Qe