FACTOR (RESOURCE)
MARKETS
PERFECTLY
COMPETITIVE
RESOURCE MARKET
Land, Labor, and Capital
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2
Resource 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
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Resource Markets
Perfect
Competition
Monopsony
Perfectly Competitive Labor Market
Examples?
• Restaurants
• Retail
• Manual Labor
• Manufacturing
• Phone Centers
• What do you notice about these types of jobs?
• Can someone make money in these
industries?
4
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DEMAND RE-DEFINED
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.
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 a DIRECT (or positive) relationship between
wage and quantity of labor supplied.
Workers have trade-off between work and leisure
5
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Who demands labor?
•FIRMS demand labor.
•Demand for labor shows the quantities of
workers that firms will hire at different wage
rates.
Wage
•As wage falls, Qd
increases.
•As wage increases,
Qd falls.
DL
Quantity of Workers
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6
Who supplies labor?
•Individuals supply labor.
•Supply of labor is the number of workers that
are willing to work at different wage rates.
•Higher wages give workers incentives to leave
other industries or give up leisure activities.
Labor Supply
Wage
•As wage increases, Qs
increases.
•As wage decreases, Qs
decreases
Quantity of Workers
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Equilibrium
Wage (the price of labor) is set by the market.
EX: Supply and Demand for Carpenters
Wage
Labor
Supply
$30hr
Labor
Demand
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ACDC Leadership 2015
Quantity of Workers
8
With a partner...
Use supply and demand analysis to explain why
surgeons earn an average salary of $137,050 and
gardeners earn $13,560.
Supply and Demand For Surgeons
Supply and Demand For Gardeners
SL
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ACDC Leadership 2015
Wage Rate
Wage Rate
Quantity of Workers
SL
DL
DL
Quantity of Workers
SHIFTERS
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10
Resource Demand
Example 1:
If there was a significant increase in the demand
for pizza, how would this affect the demand
for cheese?
Cows? Milking Machines? Veterinarians? Vet
Schools? Etc.
Example 2:
An increase in the demand for cars increases the
demand for…
Derived DemandThe demand for resources is determined
(derived) by the products they help
produce.
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11
Resource Demand is a….
Derived DemandThe demand for resources is
determined (derived) by the
products they help produce.
Choose your college major
wisely.
– more on this later…
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12
3 Shifters of Resource Demand
1.) Changes in the Demand for the Product
• Price increase of the product increases the
demand for the resource.
2.) Changes in Productivity of the Resource
• Technological advances in resources make
the resource more profitable
3.) Changes in Price of Other Resources
• 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 nails if the price of
lumber increases significantly?
13
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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.
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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 in 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.
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Resource Supply Shifters
Supply Shifters for Labor
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?
3. Personal values regarding leisure time and
societal roles.
Ex: Why did the US Labor supply increase during
WWII?
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ACDC Leadership 2015
HOMEWORK
•Read pgs. 312-316
and complete pg.
329 Problems #1-3
•Continue reading
pgs. 317-321
MRP = MRC
Perfectly Competitive Factor Markets
PERFECTLY COMPETITIVE
LABOR MARKET AND
FIRM
Wage
Market SL
Wage
?
$10
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Firm
5000
DL
Q
Q
19
Marginal Revenue Product
The additional revenue generated by an
additional worker (resource).
In perfectly competitive product markets the
MRP equals the marginal product of the resource
times the price of the product.
Ex: If the Marginal Product of the 3rd worker is 5 and
the price of the good is constant at $20 the MRP is…….
$100
Another way to calculate MRP is:
Marginal
Revenue
Product
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ACDC Leadership 2015
=
Change in
Total Revenue
Change in
Inputs
20
Marginal Resource Cost (MRC)
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: What is the MRC of a retail worker in
Cranberry?
$7.25 – Why?
Another way to calculate MRC is:
Marginal
Resource
Cost
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ACDC Leadership 2015
=
Change in
Total Cost
Change in
Inputs
21
You’re the Boss
• You and your partner own a business.
• Assume the you are selling the goods in a
perfectly competitive PRODUCT market so
the price is constant at $10.
• Assume that you are hiring workers in a
perfectly competitive RESOURCE market
so the wage is constant at $15.
• Also assume the wage is the ONLY cost.
To maximize profit how many
workers should you hire?
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22
22
Use the following data:
Workers
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
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ACDC Leadership 2015
Price = $10 Wage = $15
*Hint*
How much is each
worker worth?
23
23
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
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ACDC Leadership 2015
Price = $10 Wage = $15
1. What is happening to
Total Product?
2. Why does this occur?
3. Where are the three
stages?
24
24
Use the following data:
Units of
Labor
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
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ACDC Leadership 2015
Price = $10 Wage = $15
This shows the
PRODUCTIVITY of
each worker.
Why does
productivity
decrease?
25
25
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
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ACDC Leadership 2015
Price = $10 Wage = $15
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.
26
26
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
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ACDC Leadership 2015
Price = $10 Wage = $15
Marginal
Product
Product
Price
(MP)
7
10
7
3
2
1
-3
0
10
10
10
10
10
10
10
Marginal
Revenue
Product
0
70
100
70
30
20
10
-30
This
shows
how
much
each
worker
is worth
27
27
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 = $10 Wage = $15
Marginal
Product
Product
Price
(MP)
7
10
7
3
2
1
-3
0
10
10
10
10
10
10
10
Marginal
Revenue
Product
0
70
100
70
30
20
10
-30
Marginal
Resource
Cost
0
15
15
15
15
15
15
15
How many workers should you hire?
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28
EXTENSION…
•What if the product
produced here was
sold within a
monopolistically
competitive industry?
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
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ACDC Leadership 2015
Price = ?
Wage = $15
Marginal
Product
Product
Price
(MP)
7
10
7
3
2
1
-3
0
10
9
8
7
6
5
4
Price must drop
to increase
output in
monopolistic
competition.
30
30
Use the following data:
Units of
Labor
0
1
2
3
4
5
6
7
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ACDC Leadership 2015
Total
Product
(Output)
Price = ?
Marginal
Product
Product
Price
TR
(MP)
Wage = $15
MRP
0
0
0 0
7
10 70 70
7
This
10
9 153 83
17
shows
7
8 192 39
24
how
much
3
7 189 -3
27
each
2
6 174 -15
29
worker
1
5 150 -24
30
is worth
-3
4 108 -42
27
If the wage continues to be $15 how
31
many workers will the firm hire?
31
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 = $10 Wage = $15
Marginal
Product
Product
Price
(MP)
7
10
7
3
2
1
-3
0
10
9
8
7
6
5
4
Marginal
Revenue
Product
0
70
83
39
-3
-15
-24
-42
Marginal
Resource
Cost
0
15
15
15
15
15
15
15
How many workers should you hire?
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32
SIDE-BY-SIDE
GRAPHS
Use side-by-side graphs to draw a
perfectly competitive labor market
and firm hiring workers
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Wage is set by the market
Demand/MRP falls
SL
Wage
Wage
SL=MRC
WE
QE
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Industry
DL
Q
DL=MRP
Qe
Firm
Q
34
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
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ACDC Leadership 2015
Industry
DL
Q
DL=MRP
Qe
Firm
Q
35
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
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ACDC Leadership 2015
Industry
DL
Q
DL=MRP
Qe Q1
Firm
Q
36
ELASTICITY OF RESOURCE
DEMAND
Erd =
Percentage Change in Resource Quantity
Percentage Change in Resource Price
• Ease of resource substitutability
• High = elastic (answering service vs. doctor)
• Elasticity of product demand
• Direct relationship (wage falls, cost to produce
falls, supply increases, price falls, Qd rises – how much?)
• Ratio of resource cost to total cost
• High = elastic
12-37
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?
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38
LEAST COST RULE
$10
How much additional output does each
resource generate per dollar spent? $5
# of Units
MP
MP/PC
MP
MP/PL
(Capital)
(Price =$10)
(Labor)
(Price =$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?
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39
LEAST COST RULE
$10
Capital - Robots
MPC = MPL
PC
PL
$5
Labor - Workers
# Times
Going
MP
MP/Pc
MP
MP/PL
(Capital)
(Price =$10)
(Labor)
(Price =$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
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Does minimizing
cost at a given
output maximize
profit?
The least cost rule can be used to
minimize cost at any output, but
only one output maximizes profits.
PROFIT MAXIMIZING RULE FOR
COMBINING RESOURCES
MRPx = MRPy =
MRCx
MRCy
1
This means that the firm is hiring where
MRP = MRC for each resource x and y
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42
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
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MORE
43
MARGINAL PRODUCTIVITY THEORY
OF INCOME DISTRIBUTION
• Income is distributed according to value
of service
• Workers
• Resource owners
• Agree?/Disagree?
• Inequality
More on
this next
unit…
• Productive resources unequally distributed
• Market Imperfections
• Not all resource markets are perfectly
competitive
12-44
REAL WAGES
• Long run trend of average
real wages in the U.S.
Real Wage Rate (Dollars)
• Variation across occupations
S2020
S2000
S1900
S1950
D1950
D2000
D2020
D1900
Quantity of Labor
13-45
TRADITIONAL THEORY OF WAGE
DETERMINATION
• Supply and Demand will
determine the prevailing wage in
any market. If your skill set is in low
supply and highly demanded, you
will command a high wage. If
many people can do what you
do, and there is not a great
demand for your skill set, you will
be paid a low wage.
TRADITIONAL THEORY OF WAGE
DETERMINATION
Supply and Demand for Ditch Diggers
W
Supply and Demand for Brain Surgeons
W
S
WE
S
D
WE
D
QL
QL
How does the Traditional Theory of Wage Determination explain the discrepancy
between the earnings of Ditch Diggers and Brain Surgeons?
Perfect Competition
SL
Wage
Wage
SL=MRC
WE
QE
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ACDC Leadership 2015
Industry
DL
Q
DL=MRP
Qe
Firm
Q
49
IMPERFECT COMPETITION:
MONOPSONY
Resource Markets
Perfect
Competition
Monopsony
Imperfect Competition: Monopsony
Characteristics:
• One firm hiring workers
• The firm is large enough to manipulate the market
• Workers are relatively immobile
• Firm is wage maker
• To hire additional workers the firm must increase
the wage
Examples:
Central American Sweat Shops
Midwest small town with a large Car Plant
NCAA
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51
ASSUME THAT THIS FIRM CAN’T WAGE
DISCRIMINATE AND MUST PAY EACH
WORKER THE SAME WAGE.
Acme Coal Mining Co.
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ACDC Leadership 2015
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.
Notice
Anything
Different?
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ACDC Leadership 2015
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
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
5.50
6.00
7.00
8.00
9.00
10.00
3
4
5
6
7
8
6.50
7.50
11
13
15
17
$4.00
0
MRC
doesn’t
4.50
1
$4.50
equal 2wage 5.50
5.00
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ACDC Leadership 2015
Monopsony
If the firm can’t wage discriminate, where is MRC?
MRC
Wage
SL
WE
DL=MRP
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ACDC Leadership 2015
QE
Identify the wage and quantity of labor that
would be hired by this monopsony
Wage
MRC
$15
Supply
of Labor
$12
$10
$9
Wage=$9
Quantity= Q2
MRP
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Q1
Q2 Q3 Quantity
56
MRC
Wage
SL
Monopsony
(resource
WE
market)
----vs.----
Monopoly
(product
market)
Price
QE
DL=MRP
QL
MC
PE
D
MR
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ACDC Leadership 2015
QE
Q
Labor Unions
Three goals:
Better Pay/Benefits
Better Working Conditions
Job Security
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ACDC Leadership 2015
LABOR UNIONS
Are labor
unions good or
bad for the
economy?
DEMAND ENHANCEMENT MODEL
• Union model
• Increase product demand
• lobbying
• Alter price of other inputs
Wage Rate (Dollars)
• Complements – minimum wage
• Substitutes – tariffs and quotas
S
Increase
In Demand
Wu
Wc
D2
D1
Qc
Qu
Quantity of Labor
13-60
CRAFT UNION MODEL
• Effectively reduce supply of labor
• Restrict immigration
• Reduce child labor
• Compulsory retirement
• Shorter workweek
• Exclusive unionism
• Plumbers, carpenters
• Occupational licensing
• Teachers!
13-61
CRAFT UNION MODEL
Wage Rate (Dollars)
S2
S1
Decrease
In Supply
Wu
Wc
D
Qu
Qc
Quantity of Labor
13-62
INDUSTRIAL UNION MODEL
• Inclusive unionism
• Auto and steel workers - get paid or
strike?
Wage Rate (Dollars)
S
Wu
a
b
e
Wc
D
Qu
Qc
Qe
Quantity of Labor
13-63
UNION MODELS
• Are unions successful?
• Wages 15% higher on average
• Consequences?
• Higher unemployment
• Less efficient workforce?
• Restricted ability to demand
higher wages and still keep
members employed
13-64
BILATERAL MONOPOLY
• Monopsony and inclusive
unionism
• Single buyer and seller
• Not uncommon
13-65
BILATERAL MONOPOLY
• Firm pushes for WM, Union
pushes for WU
Indeterminate
• Result?
S
Wage Rate (Dollars)
MRC
Wu
a
Wc
Wm
D=MRP
Qu=Qm
Qc
Quantity of Labor
13-66