2. (aka: The Factor Market or Input Market)
Unit 5 Resource Market
(aka: The Factor Market or Input Market)

3. The Circular Flow Model
Resource Market
Producers Demand
Households Supply
Income
Cost $
Resources
Resources
The Circular Flow Model
4 factors of production:
Land
Labor
Capital
Entrepreneur
Businesses supply in product market & demand in resource market.
Individuals demand in the product market & supply in the resource market.
Businesses
Goods & services sold
Goods & services Purchased
Individual
Product Market
Spending
Revenue
(Not Profit)
Producers Supply
Households Demand

4. Perfectly Competitive Labor Market
Resource Markets
Perfectly Competitive Labor Market
Perfect
Competition
Monopsony
Characteristics:
Many small firms are hiring workers
No 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 4

5. Resource Demand Derived 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 Demand:
The demand for resources is determined (derived) by the products they help to produce. 5

6. Marginal Resource Cost (MRC)
The additional cost of an additional resource (worker).
Another way to calculate MRC is:
Marginal
Resource Cost =
Δ Total Cost
Δ Inputs

7. Marginal Revenue Product (MRP)
The additional revenue generated by an additional worker (resource).
Another way to calculate MRP is:
Marginal Revenue
Product =
Δ Total Revenue
Δ Inputs

8. Push-Up Machine

9. The Push-Up Machine
I am the inventor of a new generator that converts human push ups into safe and clean electrical energy.
Each push up generative $1 worth of energy.
Supply and demand in the labor market has resulted in a equilibrium wage of $10 (MRC)
The supply curve for the firm is perfectly elastic at $10…how much will you work for?
Assuming identical skills, hire the first worker (do push ups in a 4ft x 7ft box).
Let’s start hiring workers (Each worker must make sound effects)

10. The Push-Up Machine Calculate MP and MRP Quantity Labor Total Product
Marginal Product
$1 Price

11. The Push-Up Machine Supply Demand
Supply and demand in the INDUSTRY GRAPH has resulted in a equilibrium wage of $10.
How much MUST each worker work for?
Why not ask for more? Why not less?
Demand
If each push up generates $1 worth of energy what is the MRP for each worker?
How much is each worker worth to the firm?

12. The Push-Up Machine Why does the MRP eventually fall?
Diminishing Marginal Returns.
Fixed resources means each worker will eventually add less than the previous workers.
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.

13. MRP = MRC (≥) Continue to hire until…
How do you know how many resources (workers) to employ?
Continue to hire until…
MRP = MRC
(≥)

14. Industry Graph
Industry SL
Wage WE DL Q QE 14

15. Industry Demand & Supply for 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.
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. 15

16. Where to get the Market Demand ?
Industry Market
Wage
QLDem
$12 1
$10 2 $9 3 $6 5 $4 7
Wage
QLDem
$12
$10 1 $9 2 $6 3 $4 5
Wage
QLDem
$12 9
$10 17 $9 25 $6 42 $4 68
Wage
QLDem
$12 10
$10 20 $9 30 $6 50 $4 80 3
Wage $9 QL DL 2
Wage $9 QL DL 25
Wage $9 QL DL 30
Wage $9 QL DL

17. Who demands labor? FIRMS demand labor.
Market Demand for Labor is the sum of each firm’s MRP.
Wage
As wage falls, Qd increases.
As wage increases, Qd falls.
Labor Demand (DL)
Quantity of Workers 17

18. Who supplies labor? Individuals supply labor.
Higher wages give workers incentives to leave other industries or give up leisure activities.
Wage
Labor Supply (SL)
As wage increases, Qs increases.
As wage decreases, Qs decreases.
Quantity of Workers 18

19. Equilibrium EX: Supply and Demand for Carpenters
Wage (the price of labor) is set by the market.
EX: Supply and Demand for Carpenters SL
Wage
$30/hr
DL=MRP
Quantity of Workers 19

20. Individual Firms Graph
Wage
SL=MRC
DL=MRP Qe Q 20

21. Perfectly Competitive Labor Market and Firm
Industry
Firm
SLabor
Wage
Wage ? WE
DLabor Q Q QE

22. Side-by-side graph showing Resource Market and Firm
Industry
Firm SL
Wage
Wage WR
SL=MRC
DL=MRP DL Q Q QR Qe

23. Each lawn mowed earns your firm $50.
Example:
You hire workers to mow lawns. The wage for each worker is set at $100 a day.
Each lawn mowed earns your firm $50.
If you hire 1 worker, he can mow 4 laws per day.
If you hire 2 workers, they can mow 5 lawns per day together.
What is the MRC for each worker?
What is the first worker’s MRP?
What is the second worker’s MRP?
How many workers will you hire?
How much are you willing to pay the first worker?
How much will you actually pay the first worker?
What must happen to the wage in the market for you to hire the second worker?
$100 (The wage set by the market)
$200
$50 1
100
Wage drop down to $50 23

24. How many workers should you hire?
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 $20.
Also assume the wage is the ONLY cost.
To maximize profit
How many workers should you hire? 24

25. How much is each worker worth?
Wage = $20 / Price = $10
Total
Product
(Output)
Units of
Labor 1 2 3 4 5 6 7 7 17 24 27 29 30
*Hint*
How much is each worker worth? 25

26. What is happening to Total Product?
Wage = $20 / Price = $10
Total
Product
(Output)
Units of
Labor 1 2 3 4 5 6 7 7 17 24 27 29 30
What is happening to Total Product?
Why does this occur?
Where are the three stages? 26

27. Price constant because we are in a perfectly competitive market.
Wage = $20 / Price = $10
Total
Product
(Output)
Marginal
Product
(MP)
Units of
Labor
Product
Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 10
Price constant because we are in a perfectly competitive market.
How many workers should you hire? 27

28. Marginal Revenue Product
Wage = $20 / Price = $10
Marginal Revenue Product
(MRP)
Total
Product
(Output)
Marginal
Product
(MP)
Units of
Labor
Product
Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 10 70
100 30 20 10
-30
This shows how much each worker is worth
How many workers should you hire? 28

29. Marginal Revenue Product Marginal Resource Cost
Wage = $20 / Price = $10
Marginal Revenue Product
(MRP)
Marginal Resource Cost
(MRC)
Total
Product
(Output)
Marginal
Product
(MP)
Units of
Labor
Product
Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 10 70
100 30 20 10
-30 20
How many workers should you hire? 29