Presentation on theme: "UNIT 5: FACTOR MARKETS Why does a coach get paid $6 million?"— Presentation transcript:
1 UNIT 5: FACTOR MARKETSWhy does a coach get paid $6 million?
2 In this section we will examine: Unit 4.1: MonopolyDefine derived demandDefine & graph Demand for Labor (DL) & Supply for Labor (SL)Define & graph Marginal Revenue Product (MRP) and Marginal Resource Cost (MRC)Effects of shifts in the market supply or demand for resourcesDefine & graph a perfectly competitive labor marketsReview & graph imperfectly competitive labor marketsAP Micro
3 Basic Graphing in Factor Markets &MRP = MRC Rule
4 Factor Market Overview Basic view of the market for resource is a mirrored image of the product market.SProductSLaborWagePrice$10$10DLaborDPQProduct5000QResource/Labor5000IndustryIndustry
5 Vocab: Derived DemandThe demand for a factor of production is a derived demand.It is derived from the demand for the goods and services the factor of production is used to produce.In other words, if the demand for a good such as wheat increases, then the productivity increases, which leads to an increase in labor.
6 Vocab: Marginal Revenue Product Value of Marginal Product (VMP) is the additional revenue that results from the additional product produced when more inputs are added.The value of marginal product is simply:Marginal product x the price for those additional units.Value ofMarginalProduct=Change inMarginal ProductPrice of those additional unitsx
7 Vocab: Marginal Revenue Product Marginal Revenue Product (MRP) is the change in revenue that results from the addition of one extra unit when all other resources are kept equal.The MRP is often used to calculate the affect of adding employees, as companies want to add employees up to the point at which additional labor won't bring in enough revenue to cover costs.
8 Marginal Revenue Product (MRP) The additional revenue generated by an additional worker (resource).Another way to calculate MRP is:MarginalRevenueProduct=Change inTotal RevenueInputsMarginalRevenueProduct=Marginal RevenueMarginal ProductxHow much are those unit of labor worth in term of additional revenue?
9 Marginal Revenue Product (MRP) Assumes $3 per wash.MarginalRevenueProduct
10 Factor Market: Vocab Marginal Revenue Product: DL=MRP Also called the marginal revenue product curve.The orange line is the firm’s value of the marginal revenue product of labor curve.Thus the demand for labor is the marginal revenue product curve.Assumes $3 per wash.DL=MRP
11 = Vocab: Marginal Resource Cost (MRC) Marginal Resource Cost The additional cost of an additional resource.Another way to calculate MRC is:MarginalResourceCost=Change inTotal CostInputsHow much extra does each resource cost me?MaterialsTechnologyLabor
12 = Vocab: Marginal Resource Cost (MRC) Marginal Cost Labor Marginal Cost Labor (MCL):The additional cost of an additional worker.Another way to calculate MCL is:MarginalCost Labor=Change inTotal CostLaborHow much extra does each laborer cost me?Labor
13 Basic View of MRP & MRC Firm MRC = SResource $10 MRP = DResource Cost of ResourceMost beneficial amount of inputs to employ.$10MRP = DResourceIt is almost a mirrored image of the product market graph.QResource5000Firm
14 Supply and Demand For Surgeons Supply and Demand For Gardeners Basic View of MRP & MRCUse supply and demand analysis to explain why surgeons earn an average salary of $137,050 and gardeners earn $13,560.Supply and Demand For SurgeonsSupply and Demand For GardenersSLWage RateWage RateSLDLDLQuantity of WorkersQuantity of Workers
15 MRP = MRC Continue to hire until… MRP = MRC RULEHow do you know how many resources (workers) to employ?Continue to hire until…MRP = MRCThis is similar to the MC = MR rule in the product market
16 How do you know how many resources (workers) to employ? MRP = MRC RULEHow do you know how many resources (workers) to employ?This example assumes a perfectly competitive labor market. More on this laterThis example assumes a perfectly competitive product marketPIZZA(only 1 Oven)Wage = $20Price = $10Total Product(Pizzas)Marginal Revenue ProductMarginal Resource CostQuantity of WorkersMarginal Product--1227310412513613710
17 How do you know how many resources (workers) to employ? MRP = MRC RULEHow do you know how many resources (workers) to employ?PIZZA(only 1 Oven)Wage = $20Price = $10Total Product(Pizzas)Marginal Revenue ProductMarginal Resource CostQuantity of WorkersMarginal Product--20122205020275The firm should NOT hire more than 4 workers.(MRP = MRC)Thus this logic applies to all inputs.2031033041222020102051312061320710-3-30
18 As long as MRP > MRC the firm will continue to hire inputs MRP = MRC RULENote: One would not stop hiring here since there is additional marginal revenue per unit of product to achieve.The firm will stop hiring inputs at the 4th worker since any more workers (given current other fixed inputs) will result in diminished returns on the marginal unit produced.As long as MRP > MRC the firm will continue to hire inputsLABOR MARKETFIRMWageSLWage$20$20SL=MRCDLDL=MRP1004Quantity of LaborQuantity of Labor
20 Shifters of Resource Demand 1.) Changes in the Demand for the ProductPrice increase of the product increases MRP and demand for the resource.3.) Changes in Price of Other ResourcesSubstitute ResourcesEx: What happens to the demand for assembly line workers if price of robots falls?Complementary ResourcesEx: What happens to the demand for nails if the price of lumber increases significantly?2.) Changes in ProductivityTechnological advances increase Marginal Product and therefore MRP/Demand.
21 PERFECTLY COMPETITIVE LABOR MARKET We are stuck making the same wage as everyone else in this labor market!
22 Types of Factor Markets Perfectly Competitive Labor Market CompetitionMonopsonyPerfectly Competitive Labor MarketCharacteristics:Many small firms are hiring workersNo one firm is large enough to manipulate the market.Many workers with identical skillsWage is constant: firms are wage takersFirms can hire as many workers as they want at a wage set by the industry
24 Perfectly Competitive Labor Market Generally this condition is found in low skilled labor markets.SLWageWageWESL=MRCDLDL=MRPQQeQQEIndustryFirm
25 Perfectly Competitive Labor Market What happens to the wage and quantity in the market and firm if new workers enter the industry?SLWageWageSL1WESL=MRCW1SL1=MRC1DLDL=MRPQQeQ1QQEQ1IndustryFirm
26 Perfectly Competitive Labor Market I am stuck making the same wage as everyone else!Suxs to be a Wage TakerIn perfectly competitive labor markets there is sometimes the pressure to unionize workers in an effort to increase the wage above the market equilibrium wage.United Auto Workers
27 Practice: What should the firm do – hire more, hire less, or stay put? 1. MRPL = $15; PL = $ MRPL = $10; PL = $102. MRPL = $5; PL = $ MRPL = $10; PL = $153. MRPL = $25; PL = $ MRPL = $15; PL = $154. MRPL = $12; PL = $ MRPL = $50; PL = $40MORESTAY PUTLESSLESSMORESTAY PUTSTAY PUTMORE
29 Types of Factor Markets Monopsony Labor Market PerfectCompetitionMonopsonyMonopsony Labor MarketMonopsonist (Greek: mono”single” - opsonia”purchase”)Characteristics:Few large firms are hiring workersOne firm is large enough to manipulate the labor market.Wage is NOT constant: firms are wage makersIf the monopsonist wants to increase the number of workers that it hires, it must increase the wage that it pays to all of its workers, including those whom it currently employs.
30 Imperfect Labor Market Monopsonist (Greek: mono”single” - opsonia”purchase”)An employer is said to be a monopsonist if the employer must increase the wage offered to workers in order to attract additional workers.There are two types of monopsonists:A non-discriminating monopsonist is an employer who must increase the wage offered to workers in order to attract more workers.A discriminating monopsonist is one that pays the higher wage only to the extra worker for whom the employer raised the wage. Could be illegal!!
31 Imperfect Labor Market MonopsonistNon-discriminating monopsonist: true cost to the firm of adding an extra worker (MRC) will be greater than the wage paid to that worker. [MRC > Wage]MRC doesn’tequal wageMRC = MRP
32 Imperfect Labor Market MonopsonistNon-discriminating monopsonist: true cost to the firm of adding an extra worker (MRC) will be greater than the wage paid to that worker. [MRC > Wage]MRCMRC
34 The Labor Market: Minimum Wage Laws & Unions Unit 5: Resource MarketHow can raising minimum wage cause higher unemployment?AP Micro
35 Perfectly Competitive Labor Market Generally this condition is found in low skilled labor markets.If viewed to be too low. The government attempts to adjust the wage.SLWageWageSurplus of Labor$10MinimumWageWminimumWESL=MRCDLDL=MRPQDLQSLQQEQminQeQIndustry
36 Unionized Labor Market A labor union restricts the supply of labor and the supply of labor curve shifts leftward to LS1.The wage rate rises to $15 an hour, but employment decreases to 200 workers.Jobs are traded off for a higher wage rate.
37 Unionized Labor Market If union action increases labor productivity, the demand for union labor increases and the demand for labor curve shifts rightward to LD1.The wage rate rises to $20 an hour and employment increases to 250 workers.
38 LEAST COST RULEUp to this point we have analyzed the use of only one resource.What about when a firm wants to combine different resources?MPx = MPyPx Py
39 If you only have $35, the best combination is 2 robots and 3 workers Least Cost RuleHow much additional output does each resource generate per dollar spent?$10$5RobotsMP(Robots)MP/PR(PriceR =$10)WorkersMP (Workers)MP/PW(PriceW =$5)1303204215105.50If you only have $35, the best combination is 2 robots and 3 workers
40 If you only have $35, the best combination is 2 robots and 3 workers Least Cost RuleMPx = MPy$10$5Px PyRobotsMP(Robots)MP/PR(PriceR =$10)WorkersMP (Workers)MP/PW(PriceW =$5)1303204215105.50If you only have $35, the best combination is 2 robots and 3 workers
41 Profit Maximizing Rule for a Combining Resources MRPx MRPy1==MRCx MRCyThis means that the firm is employing resources where MRP = MRC for each resource.