1. Micro Unit IV Chapters 25, 26, and 27

3. 1. The economic concepts are similar to those for product markets. 2. The demand for a factor of production is derived from the demand for the good or service produced from this resource. 3. A firm tries to hire additional units of a resource up to the point where the resource’s marginal revenue product (MRP) is equal to its marginal resource cost (MRC). 4. In hiring labor, a perfectly competitive firm will do best if it hires up to the point where MRP = the wage rate.Wages are the marginal resource cost of labor.

4. 5. If you want a high wage: A. Make something people will pay a lot for. B. Work for a highly productive firm. C. Be in relatively short supply. D. Invest in your human capital. 6. Real wages depend on productivity. 7. Productivity depends on real or physical capital, human capital, labor quality and technology.

5. Labor markets, like other markets in the economy, are governed by the forces of supply and demand. Demand depends on Productivity of the resource in helping to create a good or service The market value or price of the good or service it helps produce

6. Copyright©2003 Southwestern/Thomson Learning Quantity of Apples 0 Price of Apples Demand Supply Demand Supply Quantity of Apple Pickers 0 Wage of Apple Pickers (a) The Market for Apples(b) The Market for Apple Pickers P QL W

7. Most labor services, rather than being final goods ready to be enjoyed by consumers, are inputs into the production of other goods.

8. The production function illustrates the relationship between the quantity of inputs used and the quantity of output of a good.

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10. Copyright©2003 Southwestern/Thomson Learning Production function Quantity of Apple Pickers 0 Quantity of Apples 300 280 240 180 100 12345

11. The marginal product of labor is the increase in the amount of output from an additional unit of labor. MP =  Q/  L MP = (Q 2 – Q 1 )/(L 2 – L 1 )

12. Diminishing Marginal Product of Labor As the number of workers increases, the marginal product of labor declines. As more and more workers are hired, each additional worker contributes less to production than the prior one. The production function becomes flatter as the number of workers rises. This property is called diminishing marginal product.

13. Diminishing marginal product refers to the property whereby the marginal product of an input declines as the quantity of the input increases.

14. Copyright©2003 Southwestern/Thomson Learning Production function Quantity of Apple Pickers 0 Quantity of Apples 300 280 240 180 100 12345

15. The value of the marginal product of labor (Marginal Resource Cost) is the marginal product of the input multiplied by the market price of the output in a perfectly competitive product market. MRP = MP  P In an imperfectly competitive product market, it is the change in TR divided by change in resource quantity. MRP = (Change in TR) / (Change in Resource Quantity)

16. The value of the marginal product (also known as marginal revenue product) is measured in dollars. It is the marginal benefit of hiring on more worker. It diminishes as the number of workers rises because the market price of the good is constant.

17. The marginal-revenue-product curve is the labor demand curve for a competitive, profit-maximizing firm.

18. Marginal Resource Cost (MRC) or Marginal Factor Cost (MFC) is the extra cost for one additional unit of resource (labor, capital, etc) MRC = (change in total resource cost) ____________________________________________ (change in resource quantity)

19. The profit maximizing rule of life MC=MB To maximize profit, the competitive, profit- maximizing firm hires workers up to the point where the marginal revenue product (MB) of labor equals the marginal resource cost (MC) MRP = MRC

20. When MRP=MRC, the firm produces an output where MC=MR

21. Copyright©2003 Southwestern/Thomson Learning 0 Quantity of Apple Pickers 0 MRP (demand curve for labor) Market Wage (MRC) Profit-maximizing quantity

22. Combining Capital and Labor Profit Max MRP L /P L = MRP C /P C = 1 Least Cost MP L /P L = MP C /P C

23. Output Price Technological Change Productivity of the resource Supply of Other factors

24. STOP HERE!

25. The labor supply curve reflects how workers’ decisions about the labor-leisure tradeoff respond to changes in opportunity cost. An upward-sloping labor supply curve means that an increase in the wages induces workers to increase the quantity of labor they supply.

26. Copyright©2003 Southwestern/Thomson Learning Wage (MRC) 0 Quantity of Labor Supply

27. Changes in Tastes Changes in Alternative Opportunities Immigration

28. The wage adjusts to balance the supply and demand for labor. The wage equals the value of the marginal product of labor.

29. Copyright©2003 Southwestern/Thomson Learning Wage (price of labor) 0 Quantity of Labor Supply Demand Equilibrium wage,W Equilibrium employment,L

30. Labor supply and labor demand determine the equilibrium wage. Shifts in the supply or demand curve for labor cause the equilibrium wage to change.

31. Copyright©2003 Southwestern/Thomson Learning Wage (price of labor) 0 Quantity of Labor Supply,S Demand 2.... reduces the wage... 3.... and raises employment. 1. An increase in labor supply... S W L W L

32. An increase in the supply of labor : Results in a surplus of labor. Puts downward pressure on wages. Makes it profitable for firms to hire more workers. Results in diminishing marginal product. Lowers the value of the marginal product. Gives a new equilibrium.

33. Copyright©2003 Southwestern/Thomson Learning Wage (price of labor) 0 Quantity of Labor Supply Demand,D 2.... increases the wage... 3.... and increases employment. D W L W L 1. An increase in labor demand...

34. An increase in the demand for labor : Makes it profitable for firms to hire more workers. Puts upward pressure on wages. Raises the value of the marginal product. Gives a new equilibrium.

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36. Capital refers to the equipment and structures used to produce goods and services. The economy’s capital represents the accumulation of goods produced in the past that are being used in the present to produce new goods and services.

37. Prices of Land and Capital The purchase price is what a person pays to own a factor of production indefinitely. The rental price is what a person pays to use a factor of production for a limited period of time.

38. The rental price of land and the rental price of capital are determined by supply and demand. The firm increases the quantity hired until the value of the factor’s marginal product equals the factor’s price.

39. Copyright©2003 Southwestern/Thomson Learning Quantity of Land 0 Rental Price of Land Demand Supply Demand Supply Quantity of Capital 0 Rental Price of Capital Q P (a) The Market for Land(b) The Market for Capital P Q

40. Each factor’s rental price must equal the value of its marginal product. They each earn the value of their marginal contribution to the production process.

41. Factors of production are used together. The marginal product of any one factor depends on the quantities of all factors that are available.

42. A change in the supply of one factor alters the earnings of all the factors.

43. A change in earnings of any factor can be found by analyzing the impact of the event on the value of the marginal product of that factor.

44. The Effects of Resource Market Structure on Wages and Employment

45. Unit 4 : Microeconomics National Council on Economic Education

46. Why is the market labor demand curve downward sloping? Why is the market labor supply curve upward sloping? Why is the labor supply to a firm horizontal? The firm can hire all the labor it wants at the market wage; it does not have to raise the wage to attract more labor.

47. A monopsony is the sole buyer of labor and must offer a higher wage to attract more workers. The basic hiring rule applies to any firm, regardless of whether it buys labor in a perfectly competitive or a monopsonistic labor market: Hire where MRP = MRC. Since the firm pays the market wage to all workers in a perfectly competitive labor market, that firm can also use the hiring rule of MRP = wage. A monopsony must stick with the MRP = MRC rule because the wage is less than the MRC for a monopsonist. The firm’s marginal resource cost from adding another unit of labor is greater than the wage paid to that labor unit.

48. Unit 4 : Microeconomics National Council on Economic Education The firm determines its profit-maximizing quantity of labor where MRP = MRC. Its optimal wage comes from the labor supply curve at that quantity of labor.