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

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

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

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

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

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

Push-Up Machine

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)

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

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?

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.

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

Industry Graph Industry SL Wage WE DL Q QE 14

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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