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Unit 5 Resource Market (aka: The Factor/Input/Labor Market) 2

Goods & services Purchased Individual Goods & services sold Spending Revenue (Not Profit) Producers Supply Households Demand Producers Demand Households Supply Businesses The Circular Flow Model Resources Cost $ Resources Income

1.Number of firms:  Many small firms are hiring workers  No firm is large enough to manipulate the market. 2.Wage maker? Wage taker?  Workers are wage takers  Firms can hire as many workers as they want at a wage set by the industry 3.Wages rate:  Wage is constant 4.Workers’ skills:  Many workers with identical skills 4 Perfect Competition Monopsony Resource Markets

Resource 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 teachers? Etc. Example 2: An increase in the demand for cars increases the demand for… Derived Demand : The DEMAND for resources (workers) is determined (derived) by the products they help to produce. 5

Industry Demand for Labor  What is Demand for Labor (D L )? Demand is the different quantities of workers that businesses are willing and able to hire at different wages.  Market Demand for Labor is the sum of every firm’s MRP.  What is the Law of Demand for Labor? There is an INVERSE relationship between wage and quantity of labor demanded. 6 Quantity of Workers Wage  As wage, Qd. Demand for Labor (D L ) (Q L )  FIRMS demand labor.

 What is Supply for Labor (S L )? 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. 7 Industry Supply for Labor Quantity of Workers Wage Supply for Labor (S L ) (Q L )  INDIVIDUALS supply labor.  As wage, Qs.

The additional cost of an additional resource (worker). MRC is the WAGE. 8 Marginal Resource Cost = Δ Total Cost Δ Inputs  Another way to calculate MRC is:

The additional revenue generated by an additional worker (resource). 9 Marginal Revenue Product = Δ Total Revenue Δ Inputs  Another way to calculate MRC is: marginal product price of the product. MRP = X

Continue to hire until… MRP = MRC How do you know how many resources (workers) to employ? 10 (≥)(≥)

2 Wage $9 QLQL DLDL WageQ L Dem $121 $102 $93 $65 $47 WageQ L Dem $120 $101 $92 $63 $45 WageQ L Dem $129 $1017 $925 $642 $468 WageQ L Dem $1210 $1020 $930 $650 $480 Where to get the Market Demand ? Industry Market 3 Wage $9 QLQL DLDL 25 Wage $9 QLQL DLDL 30 Wage $9 QLQL DLDL

SLSL DLDL Wage QLQL 2800 $12 QLQL Firm 28 D L =MRP S L =MRC ? Perfectly Competitive Labor Market and Firm Industry

13 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 lawns per day.  If you hire 2 workers, they can mow 5 lawns per day together. 1.What is the MRC for each worker? 2.What is the first worker’s MRP? 3.What is the second worker’s MRP? 4.How many workers will you hire? 5.How much are you willing to pay the first worker? 6.How much will you actually pay the first worker? 7.What must happen to the wage in the market for you to hire the second worker?

You’re the Boss You 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? 14

Units of Labor Total Product (Output) Wage = $20 / Price = $10 15 *Hint* How much is each worker worth?

Units of Labor Total Product (Output) Wage = $20 / Price = $ What is happening to Total Product? 2.Why does this occur? 3.Where are the three stages?

Units of Labor Total Product (Output) Wage = $20 / Price = $10 Marginal Product (MP) Product Price Price constant because we are in a perfectly competitive market. How many workers should you hire?

Units of Labor Total Product (Output) Wage = $20 / Price = $10 Marginal Product (MP) Product Price How many workers should you hire? 18 Marginal Revenue Product (MRP) This shows how much each worker is worth

Units of Labor Total Product (Output) Wage = $20 / Price = $10 Marginal Product (MP) Product Price Marginal Resource Cost (MRC) Marginal Revenue Product (MRP) How many workers should you hire?

Push-Up Machine 20

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) 21 The Push-Up Machine

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

Supply 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. The Push-Up Machine