1. + Resource/Factor Market Students will demonstrate understanding of concepts by: 1. Completing the Unit 2 Quiz 2. Analyzing a data set to determine the quantity of workers a firm should hire in a perfectly competitive labor market Homework: 1.Notes Modules 69-71— Expect Reading Quiz 2. Complete the sample problems in the “Perfectly Competitive Factor Market” Reading

2. + The Factor Market What we have been examining up until this point is the product market: where firms sell products to individuals What we will now focus on is the factor market: where firms purchase individuals factors of production Perfectly Competitive Factor Markets: Individuals are wage-takers! Cost of one worker (to the firm that employs) is their wage In PC, wages are all the same! Benefits of one worker is the value ($) they create for the firm

3. + Marginal Analysis of Factor Market Marginal Product of Labor (MPL): additional output produced by hiring additional worker Marginal Revenue Product (MRP): additional revenue a firm receives when hiring an additional an additional unit of the factor (labor). MPL × P (of product sold) = MRP Marginal Resource Cost (MRC): additional cost of hiring one more unit of the factor (labor). In a perfectly competitive factor market this is the market wage rate

4. + Crunch the Numbers… Wage: $200 Price: $20 Q Labor (# of workers) Q Output (# units produced) MPL (Marginal Product Labor) MRP (Marginal Revenue Product) MRC (Marginal Resource Cost) 00--- 119 $380$200 23617$340$200 35115$300$200 46413$260$200 57511$220$200 6849$180$200 7917$140$200 8965$100$200 Market Wage Rate Revenue created from additional worker Additional output produced from additional worker Total Product Curve!

5. + Perfectly Competitive Factor Market Illustrated Labor MarketFirm SLSL DLDL Wage QLQL WEWE QEQE S = MRC D = MRP WEWE QHQH 1. Use side-by-side graphs of the factor market and firm hiring workers. Wage QLQL

6. + Perfectly Competitive Factor Market Illustrated Labor MarketFirm SLSL DLDL Wage QLQL WEWE QEQE S = MRC D = MRP WEWE QHQH 2. In labor market: Supply is made up of individuals willing to work (Direct Relationship). Demand in made up of firms wanting to hire (Inverse Rel.).

7. + Perfectly Competitive Factor Market Illustrated Labor MarketFirm SLSL DLDL Wage QLQL WEWE QEQE S = MRC D = MRP WEWE QHQH 3. Price-taking individuals in PC labor market will take the wage established in the labor market…see W E below.

8. + Perfectly Competitive Factor Market Illustrated Labor MarketFirm SLSL DLDL Wage QLQL WEWE QEQE S = MRC D = MRP WEWE QHQH 4. Firm: S=MRC is derived from wage because the cost to employ 1 additional worker is the same as market wage rate (constant value) Wage QLQL

9. + Perfectly Competitive Factor Market Illustrated Labor Market SLSL DLDL Wage QLQL WEWE QEQE WEWE Firm S = MRC D = MRP QHQH 5. Firm: D=MRP is downward sloping from the law of diminishing marginal returns…additional unit of labor generates less output than previous unit

10. + Perfectly Competitive Factor Market Illustrated Labor MarketFirm SLSL DLDL Wage QLQL WEWE QEQE S = MRC D = MRP WEWE QHQH 6. Q H is determined by the MRP = MRC Rule MPR = MRC

11. + Perfectly Competitive Factor Market Illustrated Labor MarketFirm SLSL DLDL Wage QLQL WEWE QEQE S = MRC D = MRP $50 4 6. Q H is determined by the MRP = MRC Rule MRP = MRC $100 $80 $60 Wage QLQL 1 $25 52 3

12. + Product Market vs. Resource Market (Perfectly Competitive) Resource Market: Inputs S = MRC D = MRP QHQH Wage QLQL Product Market: Outputs P Q D=MR MC Q Output Profit Max. Quantity MR=MC Marginal revenue is the additional revenue from selling one additional unit of output Marginal cost is the additional cost of producing additional unit of output

13. + Product Market vs. Resource Market (Perfectly Competitive) Resource Market: Inputs S = MRC D = MRP QHQH Wage QLQL Product Market: Outputs P Q D=MR MC Q Output Profit Max. Quantity MR=MC Hire Rule: MRC =MRP Marginal resource cost is the additional cost of hiring one additional worker Marginal revenue product is the additional revenue received by each additional worker