1. UNIT 5: FACTOR MARKETS
Why does a coach get paid $6 million?

2. In this section we will examine:
Unit 4.1: Monopoly
Define derived demand
Define & graph Demand for Labor (DL) & Supply for Labor (SL)
Define & graph Marginal Revenue Product (MRP) and Marginal Resource Cost (MRC)
Effects of shifts in the market supply or demand for resources
Define & graph a perfectly competitive labor markets
Review & graph imperfectly competitive labor markets
AP Micro

3. Basic Graphing in Factor Markets
&
MRP = MRC Rule

4. Factor Market Overview
Basic view of the market for resource is a mirrored image of the product market.
SProduct
SLabor
Wage
Price
$10
$10
DLabor DP
QProduct
5000
QResource/Labor
5000
Industry
Industry

5. Vocab: Derived Demand
The demand for a factor of production is a derived demand.
It is derived from the demand for the goods and services the factor of production is used to produce.
In other words, if the demand for a good such as wheat increases, then the productivity increases, which leads to an increase in labor.

6. Vocab: Marginal Revenue Product
Value of Marginal Product (VMP) is the additional revenue that results from the additional product produced when more inputs are added.
The value of marginal product is simply:
Marginal product x the price for those additional units.
Value of
Marginal
Product =
Change in
Marginal Product
Price of those additional units x

7. Vocab: Marginal Revenue Product
Marginal Revenue Product (MRP) is the change in revenue that results from the addition of one extra unit when all other resources are kept equal.
The MRP is often used to calculate the affect of adding employees, as companies want to add employees up to the point at which additional labor won't bring in enough revenue to cover costs.

8. Marginal Revenue Product (MRP)
The additional revenue generated by an additional worker (resource).
Another way to calculate MRP is:
Marginal
Revenue
Product =
Change in
Total Revenue
Inputs
Marginal
Revenue
Product =
Marginal Revenue
Marginal Product x
How much are those unit of labor worth in term of additional revenue?

9. Marginal Revenue Product (MRP)
Assumes $3 per wash.
Marginal
Revenue
Product

10. Factor Market: Vocab Marginal Revenue Product: DL=MRP
Also called the marginal revenue product curve.
The orange line is the firm’s value of the marginal revenue product of labor curve.
Thus the demand for labor is the marginal revenue product curve.
Assumes $3 per wash.
DL=MRP

11. = Vocab: Marginal Resource Cost (MRC) Marginal Resource Cost
The additional cost of an additional resource.
Another way to calculate MRC is:
Marginal
Resource
Cost =
Change in
Total Cost
Inputs
How much extra does each resource cost me?
Materials
Technology
Labor

12. = Vocab: Marginal Resource Cost (MRC) Marginal Cost Labor
Marginal Cost Labor (MCL):
The additional cost of an additional worker.
Another way to calculate MCL is:
Marginal
Cost Labor =
Change in
Total Cost
Labor
How much extra does each laborer cost me?
Labor

13. Basic View of MRP & MRC Firm MRC = SResource $10 MRP = DResource
Cost of Resource
Most beneficial amount of inputs to employ.
$10
MRP = DResource
It is almost a mirrored image of the product market graph.
QResource
5000
Firm

14. Supply and Demand For Surgeons Supply and Demand For Gardeners
Basic View of MRP & MRC
Use supply and demand analysis to explain why surgeons earn an average salary of $137,050 and gardeners earn $13,560.
Supply and Demand For Surgeons
Supply and Demand For Gardeners SL
Wage Rate
Wage Rate SL DL DL
Quantity of Workers
Quantity of Workers

15. MRP = MRC Continue to hire until…
MRP = MRC RULE
How do you know how many resources (workers) to employ?
Continue to hire until…
MRP = MRC
This is similar to the MC = MR rule in the product market

16. How do you know how many resources (workers) to employ?
MRP = MRC RULE
How do you know how many resources (workers) to employ?
This example assumes a perfectly competitive labor market. More on this later
This example assumes a perfectly competitive product market
PIZZA
(only 1 Oven)
Wage = $20
Price = $10
Total Product
(Pizzas)
Marginal Revenue Product
Marginal Resource Cost
Quantity of Workers
Marginal Product - - 1 2 2 7 3 10 4 12 5 13 6 13 7 10

17. How do you know how many resources (workers) to employ?
MRP = MRC RULE
How do you know how many resources (workers) to employ?
PIZZA
(only 1 Oven)
Wage = $20
Price = $10
Total Product
(Pizzas)
Marginal Revenue Product
Marginal Resource Cost
Quantity of Workers
Marginal Product - - 20 1 2 2 20 50 20 2 7 5
The firm should NOT hire more than 4 workers.
(MRP = MRC)
Thus this logic applies to all inputs. 20 3 10 3 30 4 12 2 20 20 10 20 5 13 1 20 6 13 20 7 10 -3
-30

18. As long as MRP > MRC the firm will continue to hire inputs
MRP = MRC RULE
Note: One would not stop hiring here since there is additional marginal revenue per unit of product to achieve.
The firm will stop hiring inputs at the 4th worker since any more workers (given current other fixed inputs) will result in diminished returns on the marginal unit produced.
As long as MRP > MRC the firm will continue to hire inputs
LABOR MARKET
FIRM
Wage SL
Wage
$20
$20
SL=MRC DL
DL=MRP
100 4
Quantity of Labor
Quantity of Labor

19. SHIFTERS OF RESOURCE DEMAND

20. Shifters of Resource Demand
1.) Changes in the Demand for the Product
Price increase of the product increases MRP and demand for the resource.
3.) Changes in Price of Other Resources
Substitute Resources
Ex: What happens to the demand for assembly line workers if price of robots falls?
Complementary Resources
Ex: What happens to the demand for nails if the price of lumber increases significantly?
2.) Changes in Productivity
Technological advances increase Marginal Product and therefore MRP/Demand.

21. PERFECTLY COMPETITIVE LABOR MARKET
We are stuck making the same wage as everyone else in this labor market!

22. Types of Factor Markets Perfectly Competitive Labor Market
Competition
Monopsony
Perfectly Competitive Labor Market
Characteristics:
Many small firms are hiring workers
No one firm is large enough to manipulate the market.
Many workers with identical skills
Wage is constant: firms are wage takers
Firms can hire as many workers as they want at a wage set by the industry

23. Types of Factor Markets Perfectly Competitive Labor Market
Competition
Monopsony
Perfectly Competitive Labor Market
MRC = Wage
same as
MCL = Wage

24. Perfectly Competitive Labor Market
Generally this condition is found in low skilled labor markets. SL
Wage
Wage WE
SL=MRC DL
DL=MRP Q Qe Q QE
Industry
Firm

25. Perfectly Competitive Labor Market
What happens to the wage and quantity in the market and firm if new workers enter the industry? SL
Wage
Wage
SL1 WE
SL=MRC W1
SL1=MRC1 DL
DL=MRP Q Qe Q1 Q QE Q1
Industry
Firm

26. Perfectly Competitive Labor Market
I am stuck making the same wage as everyone else!
Suxs to be a Wage Taker
In perfectly competitive labor markets there is sometimes the pressure to unionize workers in an effort to increase the wage above the market equilibrium wage.
United Auto Workers

27. Practice: What should the firm do – hire more, hire less, or stay put?
1. MRPL = $15; PL = $ MRPL = $10; PL = $10
2. MRPL = $5; PL = $ MRPL = $10; PL = $15
3. MRPL = $25; PL = $ MRPL = $15; PL = $15
4. MRPL = $12; PL = $ MRPL = $50; PL = $40
MORE
STAY PUT
LESS
LESS
MORE
STAY PUT
STAY PUT
MORE

28. IMPERFECT LABOR MARKET
Monopsony

29. Types of Factor Markets Monopsony Labor Market
Perfect
Competition
Monopsony
Monopsony Labor Market
Monopsonist (Greek: mono”single” - opsonia”purchase”)
Characteristics:
Few large firms are hiring workers
One firm is large enough to manipulate the labor market.
Wage is NOT constant: firms are wage makers
If the monopsonist wants to increase the number of workers that it hires, it must increase the wage that it pays to all of its workers, including those whom it currently employs.

30. Imperfect Labor Market
Monopsonist (Greek: mono”single” - opsonia”purchase”)
An employer is said to be a monopsonist if the employer must increase the wage offered to workers in order to attract additional workers.
There are two types of monopsonists:
A non-discriminating monopsonist is an employer who must increase the wage offered to workers in order to attract more workers.
A discriminating monopsonist is one that pays the higher wage only to the extra worker for whom the employer raised the wage. Could be illegal!!

31. Imperfect Labor Market
Monopsonist
Non-discriminating monopsonist: true cost to the firm of adding an extra worker (MRC) will be greater than the wage paid to that worker. [MRC > Wage]
MRC doesn’t
equal wage
MRC = MRP

32. Imperfect Labor Market
Monopsonist
Non-discriminating monopsonist: true cost to the firm of adding an extra worker (MRC) will be greater than the wage paid to that worker. [MRC > Wage]
MRC
MRC

33. “Glass Ceilings”

34. The Labor Market: Minimum Wage Laws & Unions
Unit 5: Resource Market
How can raising minimum wage cause higher unemployment?
AP Micro

35. Perfectly Competitive Labor Market
Generally this condition is found in low skilled labor markets.
If viewed to be too low. The government attempts to adjust the wage. SL
Wage
Wage
Surplus of Labor
$10
Minimum
Wage
Wminimum WE
SL=MRC DL
DL=MRP
QDL
QSL Q QE
Qmin Qe Q
Industry

36. Unionized Labor Market
A labor union restricts the supply of labor and the supply of labor curve shifts leftward to LS1.
The wage rate rises to $15 an hour, but employment decreases to 200 workers.
Jobs are traded off for a higher wage rate.

37. Unionized Labor Market
If union action increases labor productivity, the demand for union labor increases and the demand for labor curve shifts rightward to LD1.
The wage rate rises to $20 an hour and employment increases to 250 workers.

38. LEAST COST RULE
Up to this point we have analyzed the use of only one resource.
What about when a firm wants to combine different resources?
MPx = MPy
Px Py

39. If you only have $35, the best combination is 2 robots and 3 workers
Least Cost Rule
How much additional output does each resource generate per dollar spent?
$10 $5
Robots MP
(Robots)
MP/PR
(PriceR =$10)
Workers
MP (Workers)
MP/PW
(PriceW =$5) 1 30 3 20 4 2 15 10 5
.50
If you only have $35, the best combination is 2 robots and 3 workers

40. If you only have $35, the best combination is 2 robots and 3 workers
Least Cost Rule
MPx = MPy
$10 $5
Px Py
Robots MP
(Robots)
MP/PR
(PriceR =$10)
Workers
MP (Workers)
MP/PW
(PriceW =$5) 1 30 3 20 4 2 15 10 5
.50
If you only have $35, the best combination is 2 robots and 3 workers

41. Profit Maximizing Rule for a Combining Resources
MRPx MRPy 1 = =
MRCx MRCy
This means that the firm is employing resources where MRP = MRC for each resource.

42. 2010 Practice FRQ
3 apples and 2 oranges 42