Microeconomics Unit 5
The Resource Market
Topic 1: Intro to the Resource
Market
Product Market
Resource Market
PRODUCT market
Looks at total production
Households DEMAND products
Firms SUPPLY products
Resource Market
Looks at things that go INTO making
products (land, labor, capital,
entrepreneurship)
Households SUPPLY resources
Firms DEMAND resources
Resource market based on:
Derived Demand
• Derived Demand: The demand for the
resources that go into making a product.
• An increase in the demand for a product will
increase the demand for the resources (land,
labor, capital) used to produce it
Derived demand for cars???
Topic 2: Market Demand for Labor
•FIRMS demand labor.
Wage
•As wage falls, Qd increases.
•As wage increases, Qd falls.
DL
Quantity of Workers
7
Shifts in the Market Demand for
Labor
• Increase = demand
shifts to right
• Decrease = demand
shifts to the left
D
D1
Reasons why demand for Labor will
shift:
1. Change in price of product
P increases = increase in the demand for resource used
to produce product; price decreases = decrease for the
demand for the resource used to produce product
2. Change in productivity (increase in productivity
makes workers more valuable = increase in
demand)
3. Change in price of other resources
4. Change in the demand for the product
Practice: Will the demand for ROOFERS
shift??? If so, what direction???
• 1. There is an increase in the price of houses
• 2. There is a decrease in the wages of roofers
• 3. There is a decrease in the demand for
houses
• 4. There is an increase in the productivity of
roofers
Topic 3: Market supply of Labor
Households supply labor.
Labor Supply
Wage
•As wage increases, Qs increases.
•As wage decreases, Qs decreases.
Quantity of Workers
11
Shifts in Market Supply of Labor
• Increase = supply of
labor shifts to the right
• Decrease = supply of
labor shifts to the left
s1
S
Reasons why the supply of labor
will shift
1. Change in Number of workers
2. Change in Government
regulation/licensing
3. Change in worker attitudes
Leisure time vs. work
Practice: Will the supply of teachers
shift??? If so, which direction???
1. The government passes a law requiring all
teachers to obtain a PH.D
2. More teachers reach retirement age and
retire
3. There is a decrease in the wages paid to
teachers
Topic 4: The labor market
Wage
SL
Change in wages; just a
movement ALONG the
curves!!!! NOT a shift!
Q of
workers
DL
Q
America’s Highest Paying
Jobs 2011
• With data recently released by the
Bureau of Labor Statistics , BLS,
CNBC.com took a look at the most
highly-compensated occupations in
the country, based upon BLS job
definitions.
• 1. Doctors/surgeons
• 6. Architectural engineer
• 2. CEO
•
• 3. Dentists
• 7. Computer and
information systems
manager
• 8. Marketing manager
• 4. Lawyers
• 5. Petroleum engineer
• 9. Financial manager
•
• 10. Pilot
Lowest paying jobs: *BLS
Fast food cooks
Bartender's helper
Food preparation and
serving
Restaurant hostess
Dishwashers
Shampooers.
Amusement/recreation attendant
Cashiers
Ushers
Cafeteria/coffee shop
counter attendant
What are the best and worst jobs???
• Criteria based on: Physical Demands,
Work Environment, Income, Outlook (Job
Growth), and Stress.
Top 10 best and worst jobs 2011
Best Jobs
• Software engineer.
• Mathematician.
• Actuary.
• Statistician.
• Computer systems
analyst.
• Meteorologist.
• Biologist.
• Audiologist.
• Dental hygienist
Worst Jobs
• Roustabout.
• Ironworker.
• Lumberjack.
• Roofer.
• Taxi driver.
• Emergency medical
technician.
• Welder.
• Meter reader.
• Construction worker
Most Dangerous Jobs
1. Bomb Squad Technician
2. Armed Forces
3. Miner
4. Police Officer
5. Alaskan Crab Fishing
6. Firefighter
* career builder survey
Top 10 scary, creepy and just plain
disturbing jobs www.careercast.com
• 1. Field epidemiologist
6. Road kill remover
specialist
• 2. Embalmer
7. Crime scene cleaner
• 3 pest control specialist
8. Reptologist
• 4. Slaughterer
9. Septic tank services
• 5. Arachnologist
10. Forensic entomologist
• Occupations that you think are highly respected:
• Why are some jobs more highly respected than
others?
Most admired jobs
* Forbes
•
•
•
•
•
•
•
•
•
•
1. Firefighter
2. Doctor
3. Nurse
4. Scientist
5. Teacher
6. Military officer
7. Police officer
8. Clergymen
9. Farmer
10. Engineer
Backward bending supply of labor
curve
Reason for backward bending S of
labor
• The Substitution effect states that a higher
wage makes work more attractive than
leisure. Therefore, supply increases.
• The income effect states that a higher wage
means workers can achieve a target income by
working less hours. Therefore, because it is
easier to get enough money they work less.
• When your wage is low, the substitution effect
dominates. As wages increase, the income
effect starts to dominate.
Wage
Topic 5: Minimum Wage
S
$15
$8
The government wants to “help” workers
because the equilibrium wage is too low
$6
D
5 6 7 8 9 10 11 12
Q Labor
27
Wage
Fast Food Cooks
S
$15
$8
Government sets up a
“WAGE FLOOR.”
Where?
$6
D
5 6 7 8 9 10 11 12
Q Labor
28
Minimum Wage
Wage
S
$15
Above Equilibrium!
$8
$6
D
5 6 7 8 9 10 11 12
Q Labor
29
Minimum Wage
Wage
Surplus of workers
(Unemployment)
S
$15
What’s the result?
Q demanded falls.
Q supplied increases.
$8
$6
D
5 6 7 8 9 10 11 12
Q Labor
30
Topic 6: Labor Decisions of the
Individual Firm
• The firm’s demand for labor =
MARGINAL REVENUE PRODUCT
(MRP)
D=MRP
Marginal Revenue Product (MRP)
• Additional revenue of using one more
resource
• The value of the resource to the firm; shows
how much each resource is “worth”
MRP = marginal product X price of item
Complete the table below (price of
product is $2.00)
# of workers
Total product
1
10
2
22
3
35
4
40
Marginal product
Marginal revenue
product
Complete the table below (price of
product is $2.00)
# of workers
Total product
Marginal product
Marginal revenue
product
1
10
10
$20
2
22
12
$24
3
35
13
$26
4
40
5
$10
Stages of return???
• The firm’s supply of labor =
MARGINAL FACTOR COST (MFC)
Marginal FACTOR Cost (MFC)
Additional cost of using one
more resource
Complete the table assuming wage
is $8.00
# of workers
0
1
2
3
4
Total cost
Marginal FACTOR cost
Complete the table assuming the
wage is $8.00
# of workers
Total cost
Marginal FACTOR cost
0
0
0
1
$8
$8
2
$16
$8
3
$24
$8
4
$32
$8
“How much are you worth? “
• 20/20 video
In the resource market: firms
compare the MFC to MRP to
determine resource usage
Maximizing Profit in the labor market
• MRP>MFC Hire
• MRP<MFC Don’t HIRE
• MRP=MFC Hire and stop
Profit maximizing
MRP = MFC
What should the firm do??? Hire
more, less or stay put???
1.
2.
3.
4.
5.
MRP= $12; MFC=$6
MRP=$10; MFC = $10
MRP = $5; MFC = $10
MRP = $45; MFC = $15
MRP = $20; MFC = $40
Complete the following chart. Assume the wage
is $20 and the price of the product is $10
# of workers Total
product
0
0
1
7
2
17
3
24
4
27
5
29
6
30
7
27
Marginal
product
Marginal
revenue
product
Total cost
Marginal
FACTOR cost
Complete the following chart. Assume the wage
is $20 and the price of the product is $10
# of workers Total
product
Marginal
product
Marginal
revenue
product
Total cost
Marginal
FACTOR cost
0
0
0
-
-
-
1
7
7
$70
$20
$20
2
17
10
$100
40
20
3
24
7
$70
60
20
4
27
3
$30
80
20
5
29
2
$20
100
20
6
30
1
$10
120
20
7
27
-3
$-30
140
20
Which worker produced increasing, decreasing
and negative returns?
# of workers Total
products
Marginal
product
Marginal
revenue
product
Total cost
Marginal
FACTOR cost
0
0
0
-
-
-
1
7
7
$70
$20
$20
2
17
10
$100
40
20
3
24
7
$70
60
20
4
27
3
$30
80
20
5
29
2
$20
100
20
6
30
1
$10
120
20
7
27
-3
$-30
140
20
How many workers should this firm hire??? WHY
What is the profit at this number???
# of workers Total
product
Marginal
product
Marginal
revenue
product
Total cost
Marginal
FACTOR cost
0
0
0
-
-
-
1
7
7
$70
$20
$20
2
17
10
$100
40
20
3
24
7
$70
60
20
4
27
3
$30
80
20
5
29
2
$20
100
20
6
30
1
$10
120
20
7
27
-3
$-30
140
20
Topic 7: Economic models of the
labor market
Perfect competition
Monopsony
Regardless of type of firm, all Firms
will hire where MRP=MRC
Topic 8: Perfectly competitive labor
market
1. many small firms competing to hire a specific
type of labor
2. many workers with identical skills
3. wage is set by the market
4. workers are wage takers
- firms can hire as many workers as they want
at a wage set by the industry
5. MFC=W=S
Use side-by-side graph showing labor
market and perfectly competitive firm
SL
Wage
Wage
MFC=W=S
W
Q
Industry
DL
Q
DL=MRP
Q
Firm
Q
There is a decrease in the supply of
workers. Show how this impacts the below
graphs
What happens to wages??? Will the firm
hire more or less workers???
MFC=W=S1
MFC=W=S
Q1
What happens to the wage and quantity in the
market and firm if new workers enter the industry?
SL
Wage
Wage
SL1
MFC=W=S
WE
W1
MFC=W=S
QE Q1
Industry
DL
Q
DL=MRP
Qe Q1
Firm
Q
Topic 9: Monopsony Labor market
1. only one employer in the market
2. firm is a wage maker
3. MFC does NOT equal wage/Supply
Why???must pay higher wages to attract more
workers
Monopsony
• Must pay higher wage to attract more workers
# of workers
Wage
1
$5
2
$6
3
$7
4
$8
5
$9
6
$10
Total cost
Marginal
FACTOR cost
Monopsony
• Must pay higher wage to attract more workers
# of workers
Wage
Total cost
Marginal
FACTOR cost
1
$5
$5
$5
2
$6
$12
$7
3
$7
$21
$9
4
$8
$32
$11
5
$9
$45
$13
6
$10
$60
$15
MRC increases as firm hires more workers
Monopsony
Hires fewer workers and pays lower wage than perfectly competitive market
MFC
Wage
W=SL
Q determined by
MRP=MFC;
wage determined
by Supply
WE
DL=MRP
QE
Topic 10:Combining Resources (land,
labor and capital)
If using multiple resources, a firm
should hire the resource that brings
them the most value; “bang for the
buck”
To find “bang for buck” find the
MP/W
• 1. The cost to hire a worker is $10 at an MP of
20. What is the worker’s MP/wage?
• 2. The cost to rent a machine is $100 at an
MP of 300. What is the machine’s MP/wage?
LEAST COST RULE in labor market
(if using multiple resources)
MP (L) = MP (c )
W(L)
W ( c)
If the two resources are equal in their value,
firm should stay put. If not equal, firm should
hire more of the valuable resource and less of
the least valuable resource
Practice
• The price to hire one more baker is $20 at an
MP of 40. The price to hire one more waitress
is $10 at an MP of 30. If this is a profit
maximizing firm, what should the firm do???
Practice
What should the firm do???
1. MP/W labor is 20, MP/W of machine is 30?
2. MP/W of labor is 10, MP/W of machine is 10?
3. MP/W of labor is 5, MP/W of machine is 2?
4. MP/W of labor is 10, MP/W of machine is 13?
5. MP/W of labor is 3, MP/W of machine is 3?
Budget constraint and combination
of resources
$10
#
$5
MP
MP/w
MP
(Robots)
(Workers)
1
30
20
2
20
15
3
10
10
4
5
5
MP/w
$10
#
$5
MP
MP/w
MP
MP/w
(Workers)
(Robots)
1
30
3
20
4
2
20
2
15
3
3
10
1
10
2
4
5
.50
5
1
If you only have $35, what is the best
combination or resources?
MP/P (robots) = MP/P(worker)
$10
#
$5
MP
MP/w
MP
MP/w
(Workers)
(Robots)
1
30
3
20
4
2
20
2
15
3
3
10
1
10
2
4
5
.50
5
1
If you only have $35, the best combination is 2
robots and 3 workers
Topic 11: 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 in
significantly cheaper.
What is Outsourcing?
• Outsourcing is when firms send jobs overseas.
Against outsourcing
For outsourcing
Advantages and Disadvantages
Disadvantages
• Increases U.S. unemployment
• Less US tax revenue generated from workers
and corporations means less public benefits
• Foreign workers don’t receive same protections
as US workers
Advantages
• Lowers prices for nearly all goods and services
• Decreases world unemployment
• Improves quality of life and decreases poverty
in less developed countries