1. Unit 5: The Resource Market
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2. 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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3. Side-by-side Graphs
Use side-by-side graphs to draw a perfectly competitive labor market and firm hiring workers
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4. Wage is set by the market
Demand/MRP falls SL
Wage
Wage
SL=MRC WE
DL=MRP DL Q Qe Q QE
Industry
Firm 4
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5. 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 5
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6. 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 6
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7. 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? 7
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8. 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? 8
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9. 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 9
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10. 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 10
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11. 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 11
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12. 2010 Practice FRQ 3 apples and 2 oranges Copyright
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13. Shifter Review 3 Resource Demand Shifters (Based on MRP)
Demand (price) of the product
Productivity of the resource
Price of related resources
3 Resource Supply Shifters
Number of qualified workers
Education, training, & abilities required
Government regulation/licensing
Ex: What if waiters had to obtain a license to serve food?
3. Personal values and traditions regarding leisure time and societal roles.
Ex: Why did the US Labor supply increase during WWII?
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14. Monopsony
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15. Imperfect Competition: Monopsony
Resource Markets
Perfect
Competition
Monopsony
Imperfect Competition: Monopsony
Characteristics:
One firm hiring workers
The firm is large enough to manipulate the market
Workers are relatively immobile
Firm is wage maker
To hire additional workers the firm must increase the wage
Examples:
Midwest small town with a large Car Plant
NCAA
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16. Marginal Resource Cost
Assume that this firm CAN’T wage discriminate and must pay each worker the same wage.
Acme Coal Mining Co.
Wage rate (per hour)
Number of
Workers
Marginal Resource Cost
$4.00
4.50 1
5.00 2
5.50 3
6.00 4
7.00 5
8.00 6
9.00 7
10.00 8
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17. Marginal Resource Cost
Assume that this firm CAN’T wage discriminate and must pay each worker the same wage.
MRC doesn’t
equal wage
Acme Coal Mining Co.
Wage rate (per hour)
Number of
Workers
Marginal Resource Cost
$4.00  -
4.50 1
 $4.50
5.00 2
 5.50
5.50 3
 6.50
6.00 4
 7.50
7.00 5 11
8.00 6
 13
9.00 7
 15
10.00 8
 17
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18. If the firm can’t wage discriminate, where is MRC?
Monopsony
If the firm can’t wage discriminate, where is MRC?
MRC
Wage SL WE
DL=MRP QE

19. Identify the wage and quantity of labor that would be hired by this monopsony
MRC
$15
Supply
of Labor
$12
$10
Wage=$9
Quantity= Q2 $9
MRP Q1 Q2 Q3
Quantity
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20. Monopoly vs. Monopsony Wage MRC SL WE DL=MRP QL Price MC PE D MR Q QE
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21. Goal is to increasing wages and benefits
Labor Unions
Goal is to increasing wages and benefits
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22. How do Unions Increase Wages?
Convince Consumers to buy only Union Products
Ex: Advertising the quality of union/domestic products
Lobbying government officials to increase demand
Ex: Teacher’s Union petitions governor to increase spending.
Increase the price of substitute resources
Ex: Unions support increases in minimum wage so employers are less likely to seek non-union workers
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