Unit 3: The Resource Market Wage Determination 1
Review Who demands in the Resource Market? Who supplies in the Resource Market? Define Derived Demand The demand for resources is determined (derived) by the products they help produce. 4. Identify the Shifters of Resource Demand Derived Demand Productivity of the Resources Price of related resources
Use side-by-side graphs to draw a perfectly competitive labor market and firm hiring workers
Wage is set by the market Demand/MRP falls SL Wage Wage SL=MRC WE DL=MRP DL Q Qe Q QE Industry Firm
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
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
Is raising the minimum wage a good idea or a bad idea? Why or why not
State of the Union Speech 2014
A different Perspective
Fast Food Cooks Wage S $15 $8.25 $6 D 5 6 7 8 9 10 11 12 Q Labor The government wants to “help” workers because the equilibrium wage is too low D 5 6 7 8 9 10 11 12 Q Labor
Government sets up a “WAGE FLOOR.” Fast Food Cooks Wage S $15 $8.25 $6 Government sets up a “WAGE FLOOR.” Where? D 5 6 7 8 9 10 11 12 Q Labor
Minimum Wage Above Equilibrium! Wage S $15 $8.25 $6 D 5 6 7 8 9 10 11 12 Q Labor
Minimum Wage What’s the result? Q demanded falls. Surplus of workers (Unemployment) S $15 $8.25 $6 What’s the result? Q demanded falls. Q supplied increases. D 5 6 7 8 9 10 11 12 Q Labor
Is increasing minimum wage good or bad? GOOD IDEA- We don’t want poor people living in the street, so we should make sure they have enough to live on. BAD IDEA- Increasing minimum wage too much leads to more unemployment and higher prices.
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?
Least Cost Rule $10 $5 MP MP (Workers) How much additional output does each resource generate per dollar spent? $10 $5 # 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, what combination of robots and workers will maximize output?
If you only have $35, the best combination is 2 robots and 3 workers Least Cost Rule MPk = MPL $10 $5 Pk PL Resource k Resource L # 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
Profit Maximizing Rule for a Combining Resources 1 MRPk = MRPL = MRCk MRCL This means that the firm is hiring where MRP = MRC for each resource k and L
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
2010 Practice FRQ 3 apples and 2 oranges 20