Standard 1
Understand the fundamental concepts
relevant to the development of a
market economy
SS.912.E.1.9
Describe how the earnings of workers
are determined
Simple answer: supply and
demand determine wages
Firms demand labor services
People supply labor services
Also, don’t ignore opportunity costs
Example: babysitter
Why do firms hire people?
The demand for resources is a derived
demand- it is dependent on the demand
for the product
More specifically, why do firms hire
people?
If the firm already has 20 employees, why
hire one more?
Because that employee’s marginal
production adds to total production
Example: 20 employees produce 50 units,
21 employees produce 55 units, the
marginal productivity of the 21st worker is 5
units
Would you hire the 21st worker?
From the previous example, what if
those 5 new units sold for $10 each
and the worker cost $40?
Marginal revenue (MR) = $10
Marginal product (MP) = 5
Marginal revenue product (MRP) = $50
Marginal cost (MC) = $40
Decision rule for the firm: hire people as
long as MRP > MC of worker
If you were currently working for
$25 an hour, would you be willing
to work more for $30 an hour?
The resource supply curve is upward
sloping: higher wages increase quantity
supplied
An individual person would work more OR
more people would be willing to work
when wages increase
S & D graph:
Short answer question:
Explain why it might make perfect
economic sense to pay a professional
athlete $20 million per year.
Other considerations
Union contracts
Monopsony power- a single or limited
number of sellers (i.e. workers)
Compensating wage differentials
Differences in productivity
Compensating Wage Differential
Video: Night at the Museum
As an employer, you may have to offer
higher (or lower) wages due to:
Environment
Risk
Location
Differences in productivity
Video: Monsters, Inc.