Unit 5: The
Resource Market
(aka: The Factor Market or Input Market)
1
Review
1. Who demands in the Resource Market?
2. Who supplies in the Resource Market?
3. Define Derived Demand
The demand for resources is determined
(derived) by the products they help
produce.
4. Identify the Shifters of Resource
Demand
1. Derived Demand
2. Productivity of the Resources
3. Price of related resources
Use side-by-side graphs to draw a
perfectly competitive labor market
and firm hiring workers
3
Wage is set by the market
Demand/MRP falls
SL
Wage
Wage
SL=MRC
WE
QE
Industry
DL
Q
DL=MRP
Qe
Firm
Q
What happens to the wage and quantity in the
market and firm if new workers enter the
industry?
SL
Wage
Wage
SL=MRC
WE
QE
Industry
DL
Q
DL=MRP
Qe
Firm
Q
What happens to the wage and quantity in the
market and firm if new workers enter the
industry?
SL
Wage
Wage
SL1
SL=MRC
WE
W1
SL1=MRC1
QE Q1
Industry
DL
Q
DL=MRP
Qe Q1
Firm
Q
Minimum Wage
Assume the government was interest in
increasing the federal minimum wage to
$15 an hour
Do you support this new law?
Why or why not
7
Challenge
Draw a graph of the labor market, and
show the establishment of a minimum
wage. What happened?
8
Wage
Fast Food Cooks
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
9
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
10
Minimum Wage
Wage
S
$15
Above
Equilibrium!
$8
$6
D
5 6 7 8 9 10 11 12
Q Labor
11
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
12
Check In
What makes a minimum wage good? Bad?
13
Is increasing minimum wage
good or bad?
GOOD IDEAWe don’t want poor people living in the street, so
we should make sure they have enough to live on.
BAD IDEAIncreasing minimum wage too much leads to
more unemployment and higher prices.
14
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
Remember the prime goal of a seller: to use the best
combination of resources to maximize profits.
Least Cost Rule: Sellers maximize utility just like
consumers when they purchase things.
Least Cost Rule
$10
How much additional output does each
resource generate per dollar spent?
Quantity
$5
MP
MP/PR
MP
MP/PW
(Robots)
(PriceR =$10)
(Workers)
(PriceW =$5)
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 combination of robots
and workers will maximize output?
Least Cost Rule
$10
Resource x
Quantity
MPx = MPy
Px
Py
$5
Resource y
MP
MP/PR
MP
MP/PW
(Robots)
(PriceR =$10)
(Workers)
(PriceW =$5)
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
Least Cost Rule
$15
Resource x
Quantity
MPx = MPy
Px
Py
$10
Resource y
MP
MP/PT
MP
MP/PF
(Tractors)
(PriceR =$15)
(Farmers)
(PriceW =$10)
1
60
30
2
45
20
3
30
10
4
15
5
If you only have $65, what is the best
combination?
Profit Maximizing Rule for a
Combing Resources
MRPx = MRPy =
MRCx
MRCy
1
This means that the firm is hiring where
MRP = MRC for each resource x and y
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