Unit 5: The Resource Market Copyright ACDC Leadership 2015 1

How many workers should you hire? Use the following data: Price = $10 Wage = $15 Total Product (Output) Marginal Product (MP) Marginal Revenue Product Marginal Resource Cost 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 15 How many workers should you hire? Copyright ACDC Leadership 2015 2 2

Side-by-side Graphs Use side-by-side graphs to draw a perfectly competitive labor market and firm hiring workers Copyright ACDC Leadership 2015

Wage is set by the market Demand/MRP falls SL Wage Wage SL=MRC WE DL=MRP DL Q Qe Q QE Industry Firm 4 Copyright ACDC Leadership 2015

What happens to the wage and quantity in the market and firm if new workers enter the industry? SL Wage Wage SL=MRC WE DL=MRP DL Q Qe Q QE Industry Firm 5 Copyright ACDC Leadership 2015

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 DL=MRP DL Q Qe Q1 Q QE Q1 Industry Firm 6 Copyright ACDC Leadership 2015

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? 7 Copyright ACDC Leadership 2015

Least Cost Rule $10 $5 MP MP (Workers) How much additional output does each resource generate per dollar spent? $10 $5 # of Units MP (Robots) MP/PR (PriceR =$10) MP (Workers) MP/PW (PriceW =$5) 1st 30 3 20 4 2nd 2 15 3rd 10 1 4th 5 .50 If you only have $35, what combination of robots and workers will maximize output? 8 Copyright ACDC Leadership 2015

If you only have $35, the best combination is 2 robots and 3 workers Least Cost Rule MPx = MPy $10 $5 Px Py Resource x Resource y # Times Going MP (Robots) MP/PR (PriceR =$10) MP (Workers) MP/PW (PriceW =$5) 1st 30 3 20 4 2nd 2 15 3rd 10 1 4th 5 .50 If you only have $35, the best combination is 2 robots and 3 workers 9 Copyright ACDC Leadership 2015

Profit Maximizing Rule for Combining Resources 1 MRPx = MRPy = MRCx MRCy This means that the firm is hiring where MRP = MRC for each resource x and y 10 Copyright ACDC Leadership 2015

Practice: What should the firm do – hire more, hire less, or stay put? 1. MRPL = $15; PL = $6; MRPC = $10; PC = $10 2. MRPL = $5; PL = $10; MRPC = $10; PC = $15 3. MRPL = $25; PL = $20; MRPC = $15; PC = $15 4. MRPL = $12; PL = $12; MRPC = $50; PC = $40 5. MRPL = $20; PL = $15; MRPC = $100; PC =$40 MORE STAY PUT LESS LESS MORE STAY PUT STAY PUT MORE MORE MORE 11 Copyright ACDC Leadership 2015

2010 Practice FRQ 3 apples and 2 oranges Copyright ACDC Leadership 2015

Shifter Review 3 Resource Demand Shifters (Based on MRP) Demand (price) of the product Productivity of the resource Price of related resources 3 Resource Supply Shifters Number of qualified workers Education, training, & abilities required Government regulation/licensing Ex: What if waiters had to obtain a license to serve food? 3. Personal values and traditions regarding leisure time and societal roles. Ex: Why did the US Labor supply increase during WWII? Copyright ACDC Leadership 2015

Monopsony Copyright ACDC Leadership 2015

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: Midwest small town with a large Car Plant NCAA Copyright ACDC Leadership 2015 15

Marginal Resource Cost 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 $4.00   4.50 1 5.00 2 5.50 3 6.00 4 7.00 5 8.00 6 9.00 7 10.00 8 Copyright ACDC Leadership 2015

Marginal Resource Cost Assume that this firm CAN’T wage discriminate and must pay each worker the same wage. MRC doesn’t equal wage Acme Coal Mining Co. Wage rate (per hour) Number of Workers Marginal Resource Cost $4.00  - 4.50 1  $4.50 5.00 2  5.50 5.50 3  6.50 6.00 4  7.50 7.00 5 11 8.00 6  13 9.00 7  15 10.00 8  17 Copyright ACDC Leadership 2015

If the firm can’t wage discriminate, where is MRC? Monopsony If the firm can’t wage discriminate, where is MRC? MRC Wage SL WE DL=MRP QE

Identify the wage and quantity of labor that would be hired by this monopsony MRC $15 Supply of Labor $12 $10 Wage=$9 Quantity= Q2 $9 MRP Q1 Q2 Q3 Quantity Copyright ACDC Leadership 2015

Monopoly vs. Monopsony Wage MRC SL WE DL=MRP QL Price MC PE D MR Q QE Copyright ACDC Leadership 2015 QE

Goal is to increasing wages and benefits Labor Unions Goal is to increasing wages and benefits Copyright ACDC Leadership 2015

How do Unions Increase Wages? Convince Consumers to buy only Union Products Ex: Advertising the quality of union/domestic products Lobbying government officials to increase demand Ex: Teacher’s Union petitions governor to increase spending. Increase the price of substitute resources Ex: Unions support increases in minimum wage so employers are less likely to seek non-union workers Copyright ACDC Leadership 2015