Unit 5 Resource Market (aka: The Factor Market or Input Market) 1

Use the concept of DERIVED DEMAND to explain this cartoon What about SUPPLY? 2

Shifter Review 3 Resource Demand Shifters (Based on MRP) 1.Demand (price) of the product 2.Productivity of the resource 3.Price of related resources 3 Resource Supply Shifters 1.Number of qualified workers 2.Government regulation/licensing 3.Personal values and traditions regarding leisure time and societal rolls. 3

 Number of firms:  One firm hiring workers The firm is large enough to manipulate the market  Firm is wage taker or wage maker? To hire additional workers the firm must increase wage Examples: Central American Sweat Shops Midwest small town with a large Car Plant NCAA  Workers are relatively immobile 4 Perfect Competition Monopsony

Madrid’s Inc. Wage rate (per hour) Number of Workers Total Resource Cost Marginal Resource Cost $7.000$ $ Assume that this firm CAN NOT wage discriminate and must pay each worker the same wage. MRC Wage

S L =wage Wage QEQE WEWE D L =MRP MRC If the firm can’t wage discriminate, where is MRC? Quantity for Labor

Labor Unions Their goal is to increase wages and benefits

How do Unions Increase Wages? 1.Convince Consumers to buy only Union Products Ex: Advertising the quality of union/domestic products 2.Lobbying government officials to increase demand Ex: Teacher’s Union petitions governor to increase spending. 3.Increase the price of substitute resources Ex: Unions support increases in minimum wage so employers are less likely to seek non-union workers

Labor Markets and Globalization

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Why is Globalization Happening?  Globalization is the result of firms seeking lowest costs.  Firms are seeking greater profits.  Parts are made in China because labor is significantly cheaper. What is Outsourcing?  Outsourcing is when firms send jobs overseas. What types of jobs are outsourced?  For many years it was only unskilled jobs, but now other skilled jobs are sent overseas.

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Advantages and Disadvantages Disadvantages  Increases U.S. unemployment  Less US tax revenue generated from workers and corporations means less public benefits  Foreign workers don ’ t receive same protections as US workers Advantages  Lowers prices for nearly all goods and services  Decreases world unemployment  Improves quality of life and decreases poverty in less developed countries

Outsourcing Video

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2010 AP MicroEcon FRQ Form B #2 The table above gives the short-run marginal revenue product of labor per day for a perfectly competitive firm. The firm is currently selling its product at the market price of $5. a)Calculate the marginal (physical) product of the third worker. b)Define the law of diminishing marginal returns and explain why it occurs. c)Diminishing marginal returns first occur with the hiring of which worker for the firm? d)What is the highest daily wage that the firm is willing to pay to hire the fifth worker? e)What will happen to the demand for labor if the market price of the product increases? Explain. Number of WorkersMarginal Revenue Product Per Day 1$450 2$500 3$450 4$400 5$300 6$100

2010 AP MicroEcon FRQ Form B #2 Number of Workers Marginal Revenue Product Per Day 1$450 2$500 3$450 4$400 5$300 6$100 The table gives the short-run marginal revenue product of labor per day for a perfectly competitive firm. The firm is currently selling its product at the market price of $5. a)Calculate the marginal (physical) product of the third worker. b)Define the law of diminishing marginal returns and explain why it occurs. c)Diminishing marginal returns first occur with the hiring of which worker for the firm? d)What is the highest daily wage that the firm is willing to pay to hire the fifth worker? e)What will happen to the demand for labor if the market price of the product increases? Explain. $450/$5 per unit = 90 units 1.as more and more units of a variable input are added to a fixed input, the output increases at a decreasing rate. 2.the overuse of the fixed input. $300. The hiring of the third worker. The demand for labor will increase because the increase in the product price raises the marginal revenue product of labor.

a)Identify the profit-maximizing quantity of labor for TreeMart. b)Identify the wage rate TreeMart pays to hire the profit-maximizing quantity of labor. c)Identify the quantity of labor hired in each of the following situations. (i) TreeMart operates in a competitive labor market. (ii) The government imposes a minimum wage of $12.5. Explain. Woodland is a small town in which everyone works for TreeMart, the local lumber company. TreeMart is a monopsonist in the labor market and a perfect competitor in the lumber market. In the short run, labor is the only variable input. The labor market for TreeMart is given in the graph Wage($) Quantity of Labor Marginal Revenue Product Supply of Labor Marginal Factor Cost 2011 AP MicroEcon FRQ Form B #3 100 units $ units 150 units MFC curve becomes horizontal at the minimum wage up to a quantity of 150.

2008 AP MicroEcon FRQ Form B #3 3. GW Company produces and sells hats in a perfectly competitive market at a price of $2 per hat. Assume that labor is the only variable input and the wage rate is $15 per unit of labor per day. The table below shows GW’s short-run production function for hats. (a) After which worker do diminishing marginal returns begin? (b) Calculate the marginal physical product of the fifth worker. (c) Calculate the marginal revenue product of the third worker. (d) How many workers will GW hire to maximize profit? (e) If GW Company has fixed costs equal to $20, what will be the company’s short-run economic profits from hiring two workers? (f) If the price of hats increases, what will happen to the number of workers hired in the short run? Explain. Number Of Workers Per Day Output Of Hats Per Day