5 BIG IDEAS ABOUT FACTOR OR RESOURCE MARKETS: 1) The economic concepts are the same as for product markets.2) The demand for a factor of production is derived from the demand for the good or service produced from that resource.3) A firm tries to hire additional units of a resource up to the point where the resource’s marginal revenue product (MRP) is equal to its marginal resource cost (MRC).
6 4) In hiring labor, a firm will do best if it hires up to the point where MRP = the wage rate. Wages are the marginal resource cost of labor.5) If you want a high wage:a) make something people will pay a lot for.b) work for a highly productive firm.6) Real wages depend on productivity.7) Productivity depends on real capital, human capital, labor quality, and technology.Activity 49
7 Can you give some ideas of what is bought and sold in a factor market Can you give some ideas of what is bought and sold in a factor market? a product market?
8 PERCENTAGE DISTRIBUTION OF NATIONAL INCOME -- 1992 Wages and Salaries %Interest %Corporate Profits %Proprietor’s Income %Rental Income * %*not the same as pure economic rent
9 The relationship between the quantity of inputs (workers) and quantity of output (candy bars) is called the PRODUCTION FUNCTION.
10 MRP = --------------------- MARGINAL REVENUE PRODUCT is the change in total revenue resulting from the use of one additional unit of a resource, orMRP =TRQ of resourceMARGINAL RESOURCE COST is the change in total cost resulting from the use of one additional unit of a resource, orMRC =TC (resource)Q (resource)
11 The profit maximizing rule for employing resources is: MRP = MRC
12 Workers OutputThe marginal product (or marginal physical product (MPP)) of any input into production is the increase in the quantity of output obtained from an additional unit of that input.2 133 184 225 256 277 28
13 Notice that as the number of workers increases, the marginal product declines. This is called DIMINISHING MARGINAL PRODUCT.Workers Output *MPP2 133 184 225 256 277 28]- 7]- 6]- 5]- 4]- 3]- 2]- 1As the number of workers increases, the employees must share equipment and space.*MPP=Marginal Physical Product
14 As the quantity of input increases, the production function gets flatter. This shows the property of DIMINISHING MARGINAL PRODUCT.Workers Output2 133 184 225 256 277 28282624222018161412108642
15 In a perfectly competitive market, the product price is the same In a perfectly competitive market, the product price is the same. What is the total revenue?Workers Output *MPP Price TR$2$2$2$2$2$2$2$214263644505456]- 7]- 6]- 5]- 4]- 3]- 2]- 1
16 What is the MARGINAL REVENUE PRODUCT? Workers Output *MPP Price TR MRP$2$2$2$2$2$2$2$214263644505456]- 14]- 12]- 10]- 8]- 6]- 4]- 2]- 7]- 6]- 5]- 4]- 3]- 2]- 1
17 What is Marginal Physical Product? Why does Marginal Physical Product decline as output increases?What is Marginal Revenue Product?How is Marginal Revenue Product calculated?Why does Marginal Revenue Product decline as output increases?
18 In this perfectly competitive market, how many workers would be employed if wages were: Workers Output *MPP Price TR MRP$13.95$2$2$2$2$2$2$2$214263644505456]- 14]- 12]- 10]- 8]- 6]- 4]- 2]- 7]- 6]- 5]- 4]- 3]- 2]- 11$11.952$ 9.953$ 7.954
19 In an imperfectly competitive market, the product price varies In an imperfectly competitive market, the product price varies. What is the total revenue?Workers Output *MPP Price TR18.2031.2039.6044.0046.2547.2546.20]- 7]- 6]- 5]- 4]- 3]- 2]- 1
20 What is the MARGINAL REVENUE PRODUCT? Workers Output *MPP Price TR MRP18.2031.2039.6044.0046.2547.2546.20]]]]]]]]- 7]- 6]- 5]- 4]- 3]- 2]- 1
21 What is the evidence that this is an imperfectly competitive market? Why does the MRP of the imperfectly competitive firm fall more rapidly than the MRP of perfect competition?What are the implications of this?
22 In this imperfectly competitive market, how many workers would be employed if wages were: $13.95Workers Output *MPP Price TR MRP118.2031.2039.6044.0046.2547.2546.20]]]]]]]]- 7]- 6]- 5]- 4]- 3]- 2]- 1$11.952$ 9.952$ 7.953
23 Given the same costs, what can we conclude about the number of workers hired in perfectly competitive product markets compared to imperfectly competitive product markets?More workers will be hired under perfectly competitive product markets.Activity 50
24 The labor demand curve shifts because: An increase or decrease in the price of output.2) Change in technology.3) A change in the supply of linked factors of production.An increase in the price of widgets, increases the MP of each worker, and increases the demand for labor in widget factories.Improvements in widget technology increases the MP of labor, which increases the demand for labor in widget factories.A fall in the supply of iron to make widgets will decrease the MP of widget workers and decrease the demand for widget workers.
25 The labor supply curve shifts because: A change in attitudes regarding work.2) Change in opportunity3) Immigration policies.Prior to World War II, few women worked outside the home. A changing attitude regarding working has increase the supply of labor for females.Changing opportunities may cause a worker in one field to seek work in a higher paying position elsewhere.An increase in the immigration will increase the supply of labor.
26 The Supply of and Demand for Labor in a Competitive Labor Market. Wage rate ($)PS1S2S = MRCW1w2D=MRPD=mrpL1 L2QQQQ of labor for total labor marketQ of labor for an individual firmWhen the supply of labor increases from S1 to S2, the wage rate falls from W1 to W2 and firms begin to hire more labor increasing quantity from L1 to L2.
27 The Supply of and Demand for Labor in Monopsonistic Labor Market. MRCWage rate ($)SbWcWmMRP = DQmQcQQ of LaborIn a monopsony, the employer’s marginal resource (labor) cost curve (MRC) lies above the labor supply curve S. Equating MRC with MRP at point b, the monopsonist will hire Qm workers (compared with Qc in competition) and pay wage rate Wm (compared with the competitive wage Wc).
29 2) what combination of resources will maximize profit? Firms can vary the amount of resources they use. Considering the combinations of resources to use requires us to look at two questions:1) what combination of resources will minimize costs at a specific level of output?2) what combination of resources will maximize profit?
30 The Least-Cost Rule:A firm is producing a specific output with the least-cost combination of resources when the last dollar spent on each resource yields the same marginal product.
32 The demand for any resource is derived from the demand for the products that the resource can produce.
33 P W S S D D Q Resource Market Product Market and because Q went up, there is a derived demand for resources (labor) in the factor market (causing W and Q to go up).When there is demand for the good or services in the product market (causing P and Q to go up)PWSSP1W1PWDDQQ1QQLQL1Q of LaborResource MarketProduct Market
34 P MFC W S D D Q Q Product Market Resource Market IMPORTANT: do NOT label the supply curve for the labor market as “S”label it MFC (marginal factor cost)PMFCWSP1W1PWDDQQ1QQQ1QProduct MarketResource Market
35 P MFC W S D1 MRP1 D MRP Q Q Product Market Resource Market IMPORTANT: do NOT label the demand curve for the labor market as “D”. . .label it MRP (marginal revenue product)PMFCWSP1W1PWD1MRP1DMRPQQ1QQQ1QProduct MarketResource Market
36 INFRAMARGINAL RENT vs PURE ECONOMIC RENT in the Labor Market
37 RENT: the term rent is a nice way of saying profit There are two types of rent:Inframarginal rentEconomic rent
38 INFRAMARGINAL RENTFirms demand labor from households…..…..households supply labor to the firms.WageSThe number of workers hired is Q…..W……and the wage rate is W.DQQuantity
39 INFRAMARGINAL RENTIf you notice, many workers are willing to work below the equilibrium wage.Even though they are willing to work for less, they are paid the equilibrium wage rate. This means workers are receiving added profit above what they are paid for…WageSWDQuantityQThis added profit is called INFRAMARGINAL RENT.
40 PURE ECONOMIC RENTFirst we label the derived demand and supply curves correctly.In any industry, the firm will hire only so many workers. So at some Q, the supply curve becomes perfectly inelastic.WageMFCWMRPQuantityQ
41 PURE ECONOMIC RENTIn the short run, if derived demand for labor increases without a change in the supply of labor, MRP increases.MFCWageWMRP1MRPQuantityQ
42 PURE ECONOMIC RENTIndividuals who were willing to work for W are now earning W1 and are now earning PURE ECONOMIC RENT.MFCWageW1WMRP1MRPQuantityQ
43 The EndCreated by:Virginia Meachum, Economics Teacher, Coral Springs High SchoolSOURCES:Principles of Economics, by Gregory Mankiw (Thompson, 2006)Steve Reff, Economics Teacher, Tucson, AZ