Unit V: Factor
Market
***Factors = Resources = Inputs***
What is Derived Demand?
Example 1:
If there was a significant increase in the
demand for pizza what would happen?
Derived DemandThe demand for resources is
determined (derived) by the
products they help produce.
Firms DEMAND Labor
Workers SUPPLY Labor
Analyzing Demand
MARGINAL REVENUE PRODUCT
(MRP)
The demand for labor equals 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 shoes
and the price of each shoe is constant at $20
the MRP is…….
$100
Analyzing Demand
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.
How do you know how many resources
(workers) to employ?
Continue to hire until…
MRP = MRC
Use the following data:
Workers
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Price = $10 Wage = $20
How many workers
should you hire?
What do you do first?
Use the following data:
Workers
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Price = $10 Wage = $20
1. What is happening to
Total Product?
2. Why does this occur?
3. Where are the three
stages?
Use the following data:
Workers
Total
Product
(Output)
Marginal
Product
(MP)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
7
10
7
3
2
1
-3
Price = $10 Wage = $20
This shows the
PRODUCTIVITY of
each worker.
Why does
productivity
decrease?
Use the following data:
Workers
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Price = $10 Wage = $20
Marginal
Product
Product
Price
(MP)
7
10
7
3
2
1
-3
0
10
10
10
10
10
10
10
Price constant
because we are
in a perfectly
competitive
market
Use the following data:
Workers
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Price = $10 Wage = $20
Marginal
Product
Product
Price
(MP)
7
10
7
3
2
1
-3
0
10
10
10
10
10
10
10
Additional
Revenue
per worker
0
70
100
70
30
20
10
-30
Shows
how
much
each
worker
is worth
Use the following data:
Workers
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Price = $10 Wage = $20
Additional Additional
Marginal
Product Revenue Cost for each
Product
Price
per worker
worker
(MP)
7
10
7
3
2
1
-3
0
10
10
10
10
10
10
10
0
70
100
70
30
20
10
-30
How many should we hire?
0
20
20
20
20
20
20
20
Use the following data:
Workers
Total
Product
(Output)
Price = $10 Wage = $20
Additional
Marginal
Product Revenue
Product
Price
per worker
(MP)
Additional
Cost
per worker
0
0
0
0
0
Demand
for specific
resources
70
10
1
70
700depend
20on
two things:
100
10
2
170
1000
20Each
is
70 productivity
10
3 The240
1.
resource’s
(MP) worker
700
20
worth
2.
additional
30 revenue
10 resulting
4 The270
300 from
20more
additional
20 resource
10 (MRP)
5 each290
200
20
1
10
6
30
10
20
-3
10
7
27
-30
20
Use the following data:
Workers
Total
Product
(Output)
Price = $10 Wage = $20
Additional
Marginal
Product Revenue
Product
Price
per worker
(MP)
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
Use the following data:
Workers
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
Additional
Revenue
per worker
Use the following data:
Workers
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
Additional
Revenue
per worker
0
700
1000
700
300
200
100
-300
Each
worker is
worth
more!!
Demand
for the
resource
increased
THIS IS
DERIVED
DEMAND
Use the following data:
Workers
Total
Product
(Output)
Price = $10 Wage = $20
Additional
Marginal
Product Revenue
Product
Price
per worker
(MP)
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 this10change
5 How
29 would
20if the20
1
10
6
30
10 increased?
20
productivity of each worker
-3
10
27 Product
-30
20
1.7 Marginal
would
increase
2. Value of each worker would increase
Use the following data:
Workers
0
1
2
3
4
5
6
7
Total
Product
(Output)
0
70
170
240
270
290
300
270
Price = $10 Wage = $20
Marginal
Product
Product
Price
(MP)
70
100
70
30
20
10
-30
0
10
10
10
10
10
10
10
Additional
Revenue
per worker
0
700
1000
700
300
200
100
-300
Each
worker is
worth
more!
More
demand
for the
resource
MRP =
Demand Curve
for Resources
Price = $10 Wage = $20
Workers
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Marginal
Product
Product
Price
(MP)
7
10
7
3
2
1
-3
0
10
10
10
10
10
10
10
MRP
0
70
100
70
30
20
10
-30
Shows
how
much
each
worker
is worth
Use the following data:
Workers
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Price = $10 Wage = $20
Marginal
Product
Product
Price
(MP)
7
10
7
3
2
1
-3
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
Demand=MRP
Wage Rate
This shows the quantity of
workers that will be hired
at different wages
$100
80
60
40
20
D=MRP
1
2
3
4
5
6
7
8
Quantity of Workers
Q
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 pizza cooks if the
price of ovens falls?
Perfectly Competitive
Labor Markets
PURELY COMPETITIVE
LABOR 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
Equilibrium
Wage (the price of labor) is set by the market
EX: Supply and Demand for Carpenters
Wage
Labor Supply
$30hr
Labor Demand =
MRP
Quantity of Workers
Side-by-side graph showing Market and Firm
Draw and label both at wage set at $10
Wage Rate (dollars)
S
S = MRC
$10
Wc
($10)
Wc
D = MRP
d = mrp
( mrp’s)
(1000)
(5)
Quantity of Labor
Quantity of Labor
Labor Market
Individual Firm
Side-by-side graph showing Market and Firm
Draw and label both at wage set at $10
Wage Rate (dollars)
S
Wc
Marginal Resource
Cost (MRC) will be
constant and equal to
W
$10
the wage set by
the
market
D
= MRP
c
( mrp’s)
(1000)
S = MRC
($10)
d = mrp
(5)
Quantity of Labor
Quantity of Labor
Labor Market
Individual Firm
Side-by-side graph showing Market and Firm
Draw and label both at wage set at $10
Wage Rate (dollars)
S
Wc
All workers
will supply their labor
W
$10 wage
at the
set
by the market ($10).
c
D = MRP
($10)
d = mrp
( mrp’s)
(1000)
S = MRC
(5)
Quantity of Labor
Quantity of Labor
Labor Market
Individual Firm
Where is Labor Costs?
Wage x Number of Workers
Wage Rate (dollars)
S
Total Labor Cost =
Wage Rate x # of
workers
S = MRC
$10
Wc
($10)
Wc
D = MRP
( mrp’s)
d = mrp
(1000)
(5)
Quantity of Labor
Quantity of Labor
Labor Market
Individual Firm
Minimum Wage
Fast Food Cooks
Wage
$10
High supply leads to low wage
S
8
7
6
$5
Not enough to live on, so…
4
3
2
D
6 7 8 9 10
Q Labor
Wage
$10
Fast Food Cooks
S
8
7
6
Government sets up a
“WAGE FLOOR”
$5
4
Where?
3
2
D
6 7 8 9 10
Q Labor
Minimum Wage Floor
Wage
$10
S
8
$6.75 7
6
Above
Equilibrium
$5
4
3
2
D
6 7 8 9 10
Q Labor
Minimum Wage
Wage
$10
Surplus (Unemployment)
S
8
$6.75 7
6
What’s the result?
Q demanded falls
Q supplied increases
$5
4
3
2
D
6 7 8 9 10 11 12
Q Labor
Analyzing Labor
Why do some occupations get paid more than others?
Supply and Demand
Resource Demand Shifters (Based on MRP)
1. Demand (price) of the product
2. Productivity of the resource
3. Price of related resources
Resource Supply Shifters
1. Number of qualified workers
• Education, training, & abilities required
2. Government regulation/licensing
Ex: What if waiters had to obtain a license to serve food?
Imperfect Competition:
Monopsonies
MONOPSONY MODEL
(A Monopoly for Labor)
Characteristics:
1. Only one firm hiring a type of labor
• Instead of a single seller, there is a single buyer
2. The type of labor is relatively immobile
3. Firm is a “Wage Maker”
• To hire additional workers this firm MUST increase
the wage.
Examples:
1. Central American Sweat Shops
2. Midwest small town with a large Car Plant
3. NCAA
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 of
Workers
$4.00
4.50
5.00
5.50
6.00
7.00
8.00
9.00
10.00
0
1
2
3
4
5
6
7
8
Marginal
Resource Cost
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 of
Workers
Marginal
Resource Cost
$4.00
4.50
5.00
5.50
6.00
7.00
8.00
9.00
10.00
0
1
2
3
4
5
6
7
8
$4.50
5.50
6.50
7.50
11
13
15
17
MRC doesn’t
equal wage
MONOPSONISTIC
LABOR MARKET
Wage Rate (dollars)
S
SL-The number of
workers that are
willing to work at
different wage rates
Quantity of Labor
MONOPSONISTIC
LABOR MARKET
Wage Rate (dollars)
S
Since firm is a
“wage maker,” the
MRC lies above the
supply curve.
Quantity of Labor
MONOPSONISTIC
LABOR MARKET
Wage Rate (dollars)
MRC
S
MRP = MRC
Wm
MRP
Qm
Quantity of Labor
Wage
workers
are willing
to work for
MONOPSONISTIC
LABOR MARKET
Wage Rate (dollars)
MRC
S
The competitive
solution would
result in a higher
wage and greater
employment.
Wc
Wm
MRP
Qm Qc
Quantity of Labor
MONOPSONISTIC
LABOR MARKET
Wage Rate (dollars)
MRC
S
Monopsonists maximize
The competitive
profits by hiring a smaller
solution would
result
number of workers
andin a higher
Wc
wage and greater
paying a less-thanWm
employment
competitive wage rate.
MRP
Qm Qc
Quantity of Labor