1. Unit 5: The Resource Market
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2. 3 Shifters of Resource Demand
Identify the Resource and Shifter (ceteris paribus):
Increase in demand for microprocessors leads to a(n) ________ in the demand for processor assemblers.
Increase in the price for plastic piping causes the demand for copper piping to _________.
Increase in demand for small homes (compared to big homes) leads to a(n) _________ the demand for lumber.
For shipping companies, __________ in price of trains leads to decrease in demand for trucks.
Decrease in price of sugar leads to a(n) __________ in the demand for aluminum for soda producers.
Substantial increase in education and training leads to an ___________ in demand for skilled labor.
increase
increase
decrease
decrease
increase
increase
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3. Perfectly Competitive Labor Market and FirmSL
Wage
Wage ?
$10 DL Q Q
5000
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4. = Marginal Resource Cost (MRC)
Sometimes called Marginal Factor Cost (MFC)
Remember factor inputs are resources
The additional cost of an additional resource (worker).
In perfectly competitive labor markets the MRC equals the wage set by the market and is constant.
Ex: The MRC of an unskilled worker is $8.75.
Another way to calculate MRC is:
Marginal
Resource
Cost =
Change in
Total Cost
Inputs
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5. Marginal Revenue Product
The additional revenue generated by an additional worker (resource).
In perfectly competitive product markets the MRP equals the marginal product of the resource times the price of the product.
Ex: If the Marginal Product of the 3rd worker is 5 and the price of the good is constant at $20 the MRP is…….
$100
Another way to calculate MRP is:
Marginal
Revenue
Product =
Change in
Total Revenue
Inputs
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6. 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 generates $1 worth of energy.
Supply and demand in the labor market has resulted in a equilibrium wage of $10 (MRC = $10).
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 5ft x 7ft box).

7. The Push-Up Machine Calculate MP and MRP Quantity Labor Total Product
Marginal Product
$1 Price
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8. 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.
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9. MRP = MRC Continue to hire until…
How do you know how many resources (workers) to employ?
Continue to hire until…
MRP = MRC
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10. Perfectly Competitive Labor Market and FirmSL
Wage
Wage ? WE DL Q Q QE
Industry
Firm
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11. Side-by-side graph showing Market and FirmSL
Wage
Wage
SL=MRC WE
DL=MRP DL Q Qe Q QE
Industry
Firm

12. Perfect Competition Product Market vs. Resource Market
Price
S=MC
Product Market
Firm Producing Oranges
D=MR Q
Wage Qe
Resource Market
Firm Hiring Orange Pickers
SL=MRC
DL=MRP Q Qe
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13. 2008 AP Exam
57. C

14. 2012 AP Exam
56. B

15. Individual Firms Wage SL=MRC DL=MRP Qe Q 15 Copyright
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16. 2008 AP Audit Exam
41. A
42. C

17. The MRP of a resource equals the Demand.
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18. To maximize profit 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 $15.
Also assume the wage is the ONLY cost.
To maximize profit how many workers should you hire?
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19. Use the following data: How much is each worker worth?
Price = $10
Wage = $15
Total
Product
(Output)
Workers 1 2 3 4 5 6 7 7 17 24 27 29 30
*Hint*
How much is each worker worth?
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20. Use the following data:
Price = $10
Wage = $15
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?
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21. Use the following data:
Price = $10
Wage = $15
Total
Product
(Output)
Marginal
Product
(MP)
Units of
Labor 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3
This shows the PRODUCTIVITY of each worker.
Why does productivity decrease?
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22. Use the following data:
Price = $10
Wage = $15
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.
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23. Use the following data:
Price = $10
Wage = $15
Total
Product
(Output)
Marginal
Product
(MP)
Marginal Revenue Product
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
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24. How many workers should you hire?
Use the following data:
Price = $10
Wage = $15
Total
Product
(Output)
Marginal
Product
(MP)
Marginal Revenue Product
Marginal Resource Cost
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 15
How many workers should you hire?
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25. Side-by-side Graphs
Use side-by-side graphs to draw a perfectly competitive labor market and firm hiring workers
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26. Wage is set by the market
Demand/MRP falls SL
Wage
Wage
SL=MRC WE
DL=MRP DL Q Qe Q QE
Industry
Firm
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27. 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
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28. 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
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29. 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?
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30. Least Cost Rule $10 $5 MP MP (Workers)
How much additional output does each resource generate per dollar spent?
$10 $5
# of Units 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?
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31. If you only have $35, the best combination is 2 robots and 3 workers
Least Cost Rule
MPx = MPy
$10 $5
Px Py
Resource x
Resource y
# 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
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32. Profit Maximizing Rule for Combining Resources1
MRPx = MRPy =
MRCx MRCy
This means that the firm is hiring where MRP = MRC for each resource x and y
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33. 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
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34. 2010 Practice FRQ 3 apples and 2 oranges Copyright
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35. Copyright
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36. 2008 Practice Form B FRQ 3 apples and 2 oranges Copyright
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37. 2008 Practice Form B FRQ 3 apples and 2 oranges Copyright
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