•
•
•
•
•
Dominican Republic GDP- $5,800
Costa Rican- GDP Per Capita- $12,600
United State- GDP Per Capita -$53,000
Average Hourly Salary Construction-Dominican Republic- $3.00
Average Hourly Salary Tour Guide Costa Rica- $8.00
1
Factor Market
• 1)What factors influence how much an individual
earns? What determines a wage??
– Or, why do some jobs earn more than others?
• 2) Do employees have the power to set wages?
– When? For what industries?
• 3)Do employers have the power to set wages?
– When? For what industries?
• 4) What are some examples of fair wage disparity?
What are some examples of unfair wage disparity?
2
The Factor Market
3
Factors of Production
• A Factor of Production can continuously
earn income while producing more goods
• 2 Types of Factors
• 1) Physical Capital- Buildings, Machines
• 2) Human Capital- People, Education,
Training- Human Capital will be the focus
of this chapter!
4
Factors of Production
• What is the difference between chocolate
chips and a baker in the production of
cookies?
5
The Factor Market
• The Factor Market has
two major differences
from the product market .
• 1) The Factor Market is
where a majority of people
earn their income (trillions
of dollars in the US)
• 2) Demand in the Factor
Market is derived
6
FACTOR DEMAND (LABOR
DEMAND)
7
Factor Demand
Example 1:
If there was a significant increase in the demand
for pizza, how would this change the demand
for its factors of production?
Example 2:
An increase in the demand for health care
increases the demand for what factors?
8
Factor Demand
Derived DemandThe demand for factors (resources) is
determined (derived) by the products
they help produce.
9
DEMAND OF LABOR
What is Demand for Labor?
Demand is the different quantities of workers that
businesses are willing and able to hire at different
wages.
What is the Law of Demand for Labor?
There is an INVERSE relationship between wage and
quantity of labor demanded.
10
Who demands labor?
•FIRMS demand labor.
•Demand for labor shows the quantities of
workers that firms will hire at different wage
rates.
•Firms will only pay employees a wage equal to or
less than that employees productivity.
Wage
•As wage falls, Qd increases.
•As wage increases, Qd falls.
DL
Quantity of Workers
11
Marginal Product
• Let’s review… what is marginal product
• Marginal product is how much additional
product an additional worker provides
• Or Change in Product/Change in Inputs
12
How much value does my
Marginal Product have?
• Hard with students
• Easier with more tangible items
• Let’s think cookies
•
If a bakery hires me and I make 10 additional cookies that sell for
2 dollars each.
–
My marginal product’s value is $20 or my product makes $20 of marginal
revenue. The bakery would pay me up to $20
• If Mr. Brooks is hired and makes 5 cookies that sell for 2 dollars
each.
–
•
His marginal product’s value is $10 or his product makes $10 of marginal
revenue. The bakery would pay Mr. Silver up to $10.
Marginal Revenue Product( AKA Value
of the Marginal Product of Labor
• The additional revenue generated by an additional
worker (resource).
• Marginal Revenue Product =Marginal Product x
Price of Product
• Employers will never pay an employee more than his
or her MRP
14
Marginal Revenue Product( AKA Value
of the Marginal Product of Labor
If the Marginal Product of the 3rd worker is 5 and the price of the
good is constant at $20 the MRP is…….
Another way to calculate MRP is:
Marginal
Revenue
Product
=
Change in
Total Revenue
Change in
Inputs
15
Cupcake Wars
• Each team has 10
seconds to write the
word “cupcake” as
many times as
possible. Each time
cupcake is written the
firm earns $10 .
• How much will I pay
my employees?
16
Cupcake Wars
Calculate MPL and MRP
Quantity
Labor
Total Product
Marginal
Product of
Labor
MRP @ $10
Price
GRAPHING TIME
• Graph your Marginal Revenue Product.
• X axis- Quantity of Labor
• Y axis- Wage Rate
• If I paid employees $20 per round how
many employees would I hire?
18
Cup Cake Wars
Why does the MRP eventually fall?
• Diminishing Marginal Returns.
• Fixed resources means each worker will
eventually add less than the previous workers.
Cup Cake Wars
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.
• MRP= Demand for Labor
The MRP of a resource equals
the Demand.
21
With your partner...
Use supply and demand analysis to explain why surgeons
earn an average salary of $137,050 and cashiers earn
$11,000. How could wages change for either
profession?
With your partner...
Use supply and demand analysis to explain why surgeons
earn an average salary of $137,050 and cashiers earn
$15,000. How could wages change for either
profession?
Supply and Demand For Surgeons
Supply and Demand For Fast Food
Cashiers
SL
Wage Rate
Wage Rate
Quantity of Workers
SL
DL
DL
Quantity of Workers
Industry in Equilibrium
Wage (the price of labor) is set by the market.
EX: Supply and Demand for Fast Food Workers
Wage
Labor Supply
$8.75hr
THE
Labor Demand =
MRP
WAGE RATE
Quantity of Workers
24
Perfectly Competitive
Labor Market and Firm
SL
Wage
Wage
?
WE
QE
Industry
DL
Q
Q
Firm
Side-by-side graph showing
Market and Firm
SL
Wage
Wage
SL=MFC
WE
QE
Industry
DL
Q
DL=MRP
Qe
Firm
Q
Marginal Factor Cost (MFC)- The Wage Rate
• The additional cost of an additional resource
(worker).
• In perfectly competitive labor markets the
MRC equals the wage set by the market and is
constant. Ex: The MFC of a minimum wage
worker is $8.75.
Another way to calculate MFC is:
Marginal
Factor
Cost
=
Change in
Total Cost
Change in
Inputs
34
How do you know how many resources
(workers) to employ?
Continue to hire until…
MRP = MFC (Wage Rate)
Consider that this also occurs when
MR=MC
35
Factor Markets
Perfect
Competition
Monopsony
Perfectly Competitive Labor Market
Characteristics:
•Many small firms are hiring workers
•No one firm is large enough to manipulate the
market.
•Many workers with identical skills
•Wage is constant
•Workers are wage takers
•Firms can hire as many workers as they want
at a wage set by the industry
36
Drawing the
Demand Curve for
Factors
37
Demand=MRP
Why is it downward sloping?
Because of the law of
diminishing marginal
returns
Each additional factor is
less productive and
therefore is worth less
than the previous one
Wage Rate
$100
80
60
40
20
D=MRP
1
2
3
4
5
6
7
8
Q
Quantity of Workers
38
What happens if demand for the product
increases?
Wage Rate
$100
MRP increases causing
demand to shift right
80
60
40
D1=MRP1
20
D=MRP
1
2
3
4
5
6
7
8
Q
Quantity of Workers
39
Question?
• What could be factors that shift the MRP
(Factor Demand)?
40
3 Shifters of Factor Demand
1.) Changes in the Demand for the Product (Change in
Price)
• Price increase of the product increases MRP and
demand for the factor. (and vice versa)
2.) Changes in Productivity
• Technological Advances increase Marginal Product
and therefore MRP/Demand.
3.) Changes in Price of Other Factors
• Substitute Resources
• Ex: What happens to the demand for assembly line workers
if price of robots falls?
• Complementary Resources
• Ex: What happens to the demand for nails if the price of
lumber increases significantly?
41
Use the following data:
Units of
Labor
Total
Product
(Output)
Price = $10 Wage = $20
Marginal
Product
Product
Price
(MP)
Marginal
Revenue
Product
Additional
Cost
per worker
0
0
0
0
0
7
10
1
7
70
20
10
10
2
17
100
20
7
10
3
24
70
20
3
10
4
27
30
20
2 change
10 if the
5
29
20 demand
20
How
would
this
1
10
6
30
10
20
for the good increased significantly?
-3
10
71. Price27of the good
-30
20
would
increase.
2. Value of each worker would increase.
42
Use the following data:
Units of
Labor
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Price = $100 Wage = $20
Marginal
Product
Product
Price
(MP)
7
10
7
3
2
1
-3
Marginal
Revenue
Product
0
100
100
100
100
100
100
100
43
Use the following data:
Units of
Labor
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Price = $100 Wage = $20
Marginal
Product
Product
Price
(MP)
7
10
7
3
2
1
-3
0
100
100
100
100
100
100
100
Marginal
Revenue
Product
0
700
1000
700
300
200
100
-300
Each
worker is
worth
more!!
THIS IS
DERIVED
DEMAND.
44
3 Shifters of Resource Demand
Identify the Resource and Shifter (ceteris paribus):
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 lumber.
4. 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.
47
3 Shifters of Resource Demand
Identify the Resource and Shifter (ceteris paribus):
1. Increase in demand for microprocessors leads to a(n)
________
increase in the demand for processor assemblers.
2. Increase in the price for plastic piping causes the
demand for copper piping to _________.
increase
3. Increase in demand for small homes (compared to big
decrease the demand for lumber.
homes) leads to a(n) _________
4. For shipping companies, __________
decrease in price of trains
leads to decrease in demand for trucks.
5. Decrease in price of sugar leads to a(n) __________
in
increase
the demand for aluminum for soda producers.
6. Substantial increase in education and training leads to
an ___________
increase in demand for skilled labor.
48
Factor Supply (Labor Supply)
49
SUPPLY OF LABOR
What is Supply for Labor?
Supply is the different quantities of individuals that are
willing and able to sell their labor at different wages.
What is the Law of Supply for Labor?
There is (Usually) DIRECT (or positive) relationship
between wage and quantity of labor supplied.
50
Labor Supply
•Supply of labor is the number of workers that
are willing to work at different wage rates.
•Higher wages can give workers incentives to
leave other industries or give up leisure
activities (Activities done outside of work)
Labor Supply
Wage
•As wage increases, Qs increases.
•As wage decreases, Qs decreases.
Quantity of Workers
51
Questions
• What could be shifters of factor supply
(workers) (MRC)?
52
Factor Supply Shifters
Supply Shifters for Labor
1. Number of qualified workers
• Education, training, & abilities required
• Immigration
2. Government regulation/licensing
Ex: What if waiters had to obtain a license to serve food?
Immigration policies
3. Personal values regarding leisure time and societal
roles.
Ex: Why did the US Labor supply increase during WWII?
Why do some occupations get paid more
than others?
Side-by-side graph showing
Market and Firm
SL
Wage
Wage
SL=MRC
WE
QE
Industry
DL
Q
DL=MRP
Qe
Firm
Q
Monopsony
• One buyer of labor
• When does this occur?
• Their supply curve is the industry supply
curve.
• One firm is now a wage setter (factor cost
setter) instead of wage taker (factor cost
taker)
66
Examples of Monopsony
• Mining Companies in
mining towns
• The US Military
• Walmart in small
towns?
67
Wage
Quantity
4
0
5
1
6
2
7
3
8
4
$
S
8
7
6
5
1 2 3 4
L
In this example the one individual will work when the
wage is 5, and so on.
68
Wage
Quantity
Total
Resource
Cost
Marginal
Resource
Cost
4
0
0
N/A
5
1
5
5
6
2
12
7
7
3
21
9
8
4
32
11
$
MRC
S
8
7
6
5
1 2 3 4
E
Marginal Factor Cost is now different than labor
supply , it’s higher!
Meaning the employer can gain additional workers at
additional cost.
The employer can choose the wage rate!
69
Where would a monopsony
produce
• Quantity-MRP=MRC
• But what wage would people
be willing to accept at that
quantity
• The monopsonist will move
down to the supply curvehiring fewer people at a
lower wage – creating
deadweight.
70
Monopsony- Inefficient Labor
Market
• Deadweight created
• Fewer jobs at lower
wages
Combining Resources
Up to this point we have analyzed the
use of only one resource.
What about when a firm wants to combine
different resources?
Least Cost Rule
$10
How much additional output does each
resource generate per dollar spent?
$5
# Times
Going
MP
MP/PR
MP
MP/PW
(Robots)
(PriceR =$10)
(Workers)
(PriceW =$5)
1st
30
3
20
4
2nd
20
2
15
3
3rd
10
1
10
2
4th
5
.50
5
1
If you only have $35, what combination of robots
and workers will maximize output?
Least Cost Rule
$10
Resource k
MPk = MPL
Pk
PL
$5
Resource L
# Times
Going
MP
MP/PR
MP
MP/PW
(Robots)
(PriceR =$10)
(Workers)
(PriceW =$5)
1st
30
3
20
4
2nd
20
2
15
3
3rd
10
1
10
2
4th
5
.50
5
1
If you only have $35, the best combination is
2 robots and 3 workers
Profit Maximizing Rule for a
Combing Resources
MRPk = MRPL =
MRCk
MRCL
1
This means that the firm is hiring where
MRP = MRC for each resource k and L
Practice: What should the firm do –
hire more, hire less, or stay put?
1. MRPL = $15; PL = $6; MRPC = $10; PC = $10
MORE
STAY PUT
2. MRPL = $5; PL = $10; MRPC = $10; PC = $15
LESS
LESS
3. MRPL = $25; PL = $20; MRPC = $15; PC = $15
MORE
STAY PUT
4. MRPL = $12; PL = $12; MRPC = $50; PC = $40
STAY PUT
MORE
5. MRPL = $20; PL = $15; MRPC = $100; PC =$40
MORE
MORE
2010 Practice FRQ
77
Work and Wages
79
What are some 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 too poor to move so
they accept a lower wage
• Unions (Market Power)
•Collective bargaining and threats to strike often
lead to higher than equilibrium wages
• Wage Discrimination•Some people get paid differently for doing the
same job based on race or gender (Very illegal!).
Other reasons for wage disparity
•
•
•
•
Compensating differentials
Differences in talent
Differences in the quality of human capital
Idea of “efficiency wage”
• Marginal productivity theory of income
distribution
81
Wage Disparities in Practice
82
Earnings Differentials by Education, Gender,
and Ethnicity, 2002
83
“Glass Ceilings”
Why do people with only high school degrees
make less money on average?
Employers assume they have low productivity
and will generate less additional revenue.
86
Does having an education mean that you will
automatically have a higher income?
87
Real Life Application
Top 5 Fastest Growing Jobs (2000-2010)
1.
2.
3.
4.
5.
Computer Software Engineers, Applications
Computer Support Specialists
Computer Software Engineers, Systems
Computer Systems Administrators
Data Communications Analyst
Top 5 Fastest Declining Jobs
1.
2.
3.
4.
5.
Railroad Switch Operators
Shoe Machine Operators
Telephone Operators
Radio Mechanics
Loan Interviewers
WHY?
“You’ve got to learn
computers!”
88
Real Life Application
89
Video: Did You Know?
90