1. Unit 6: The FACTOR MARKET
(aka: The Resource Market or Input Market)

2. Unit 5: The Factor Market
Length: 5-6 Lessons
Chapters: 12 & 13 in packet
Good News:
Only one Graph to learn (PC vs. Monopsony)
Application of things we have already learned.
Basically just Supply and Demand

3. Product Market
Producers Supply
Households Demand

4. Resource Market
Producers Demand
Households Supply

5. Perfectly Competitive Labor Market
Resource Markets
Perfect
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
Workers are wage takers
Firms can hire as many workers as they want at a wage set by the industry 5

6. Perfectly Competitive Labor Market and FirmSL
Wage
Wage ?
$10 DL Q Q
5000
Firm
Industry

7. Derived Demand- 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? Etc.
Example 2: An increase in the demand for cars increases the demand for…
Derived Demand-
The demand for resources is determined (derived) by the products they help produce. 7

8. MRP = MFC Continue to hire until…
How do you know how many resources (workers) to employ?
Continue to hire until…
MRP = MFC

9. Push-Up Machine

10. 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 generative $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 4ft x 7ft box).
Let’s start hiring workers (Each worker must make sound effects)

11. Marginal Factor Cost (MFC)
The additional cost of an additional worker (resource).
In perfectly competitive labor markets the MFC equals the WAGE set by the market and is constant.
Ex: The MFC of an unskilled worker is $8.75.
Another way to calculate MFC is:
Marginal
Factor
Cost =
Change in
Total Cost
Inputs

12. Marginal Revenue Product (MRP)
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

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

14. The Push-Up Machine 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?

15. 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.

16. Perfectly Competitive Labor Market and FirmSL
Wage
Wage ? WE DL Q Q QE
Industry
Firm

17. Side-by-side graph showing Market and FirmSL
Wage
Wage
SL=MFC WE
DL=MRP DL Q Qe Q QE
Industry
Firm

18. Industry Graph 18

19. Workers have trade-off between work and leisure
DEMAND RE-DEFINED
What is Demand for Labor?
Demand = quantities of workers that businesses are willing and able to hire at each wage.
What is the Law of Demand for Labor?
There is an INVERSE relationship between wage and quantity of labor demanded.
What is Supply for Labor?
Supply = quantities of individuals that are willing and able to sell their labor at each wage.
What is the Law of Supply for Labor?
There is a DIRECT (or positive) relationship between wage and quantity of labor supplied.
Workers have trade-off between work and leisure 19

20. Where do you get the Market Demand?
McDonalds
Burger King
Other Firms
Wage
QLDem
$12 1
$10 2 $8 3 $6 5 $4 7
Wage
QLDem
$12
$10 1 $8 2 $6 3 $4 5
Wage
QLDem
$12 9
$10 17 $8 25 $6 42 $4 68
Wage
QLDem
$12 10
$10 20 $8 30 $6 50 $4 80 P P P P $8 $8 $8 $8 D D D D Q Q Q Q 3 2 25 30

21. Who demands labor? FIRMS demand labor.
Demand for labor shows the quantities of workers that firms will hire at different wage rates.
Market Demand for Labor is the sum of each firm’s MRP.
As wage falls, Qd increases.
As wage increases, Qd falls.
Wage DL
Quantity of Workers 21

22. Who supplies labor? Individuals supply labor.
Supply of labor is the number of workers that are willing to work at different wage rates.
Higher wages give workers incentive to leave other industries or give up leisure activities.
Labor Supply
Wage
As wage increases, Qs increases.
As wage decreases, Qs decreases.
Quantity of Workers 22

23. Market Equilibrium Wage (the price of labor) is set by the market.
EX: Supply and Demand for Carpenters
Labor Supply = MFC
Wage
$30hr
Labor Demand =
MRP
Quantity of Workers 23

24. Individual Firms
Wage
SL= MFC
DL= MRP Qe Q 24

25. 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 one worker, he can mow 4 lawns per day.
If you hire two workers, they can mow 5 lawns per day together.
What is the MFC for each worker?
What is the first worker’s MRP?
What is the second worker’s MRP?
How many workers will you hire?
How much are you willing to pay the first worker?
How much will you actually pay the first worker?
What must happen to the wage in the market for you to hire the second worker?
$100
$200
$50 1
$200 (Up to the amount he generates)
$100 (The wage set by the market)
Decrease to $50 or below 25

26. 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 FACTOR market so the wage is constant at $20.
Also assume the wage is the ONLY cost.
Given the table (next slide) To maximize profit how many workers should you hire? 26

27. Use the following data: How much is each worker worth?
Price = $10
Wage = $20
Total
Product
(Output)
Workers 1 2 3 4 5 6 7 7 17 24 27 29 30
*Hint*
How much is each worker worth? 27

28. Use the following data:
Price = $10
Wage = $20
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? 28

29. Use the following data:
Price = $10
Wage = $20
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? 29

30. Use the following data:
Price = $10
Wage = $20
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. 30

31. Use the following data:
Price = $10
Wage = $20
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 31

32. How many workers should you hire?
Use the following data:
Price = $10
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Marginal Revenue Product
Marginal Factor
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 20
How many workers should you hire? 32

33. Factor Markets (Part 2) Drawing the Factor Demand Curve33

34. P.Q. Give an example of Derived Demand. Define MRP.
Explain the difference between MRP and MR.
Why does the MRP fall as more workers are hired?
Identify the two ways to calculate MRP.
Define MFC.
Explain the difference between MFC and MC.
How does a firm decide how many workers to hire?
Demand for Factor is DERIVED from demand for product
Marginal Revenue Product (extra revenue from hiring last worker)
MR is extra revenue from last product
Diminishing Marginal Returns
MR * MP (if P.C.), or change in TR / change in QL
Marginal Factor Cost (extra cost from hiring last worker)
MC is extra cost from last product
MFC=MRP

35. Does having an education mean that you will automatically have a higher income?

36. Why do people with only high school degrees make less money on average?
Employers assume they have low productivity and will generate less additional revenue. 36

37. “You’ve got to learn technology!”
Real Life Application
Top 5 Fastest Growing Jobs ( )
Computer Software Engineers, Applications
Computer Support Specialists
Computer Software Engineers, Systems
Computer Systems Administrators
Data Communications Analyst
Top 5 Fastest Declining Jobs
Railroad Switch Operators
Shoe Machine Operators
Telephone Operators
Radio Mechanics
Loan Interviewers
WHY?
“You’ve got to learn technology!”

38. Real Life Application

39. Adjusting for Inflation
Wage – The price of labor defined as currency per unit of labor worked.
NOMINAL Wage – The price of labor not adjusted for inflation.
REAL wage – The price of labor adjusted for inflation; Economists use the CPI to adjust numbers from prices/wages from different times into a consistent unit of measure (ie. “2010 dollars”)

40. Average Wage ( )

41. Wage Trends Other US labor market trends:
Workers with higher skills are paid more than unskilled workers. This gap is increasing.
College graduates earn more than high school graduates and the gap has been increasing.
Women, on average, are paid lower than men, although the gap has become more narrow over the years.

42. The MRP of a resource equals the Demand.

43. Drawing the Demand Curve for Resources43

44. Yesterday's Activity 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 10
Price = $10
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Units of
Labor
Product
Price
MRP 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
Shows how many workers a firm is willing and able to hire at different wages.

45. Plotting the D=MRP curve
Use the following data:
Price = $10
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Units of
Labor
Product
Price
MRP 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
Demand for this resource
Plotting the D=MRP curve

46. Demand=MRP Why is it downward sloping?
Because of the law of diminishing marginal returns
Wage Rate
$100 80 60 40 20
Each additional resource is less productive and therefore is worth less than the previous one
D = MRP Q
Quantity of Workers

47. This model applies to land, labor, and capital
Demand=MRP
Wage Rate
This model applies to land, labor, and capital
Notice the inverse relationship between wage and quantity of resources demand
$100 80 60 40 20
D = MRP Q
Quantity of Workers

48. What happens if demand for the product increases?
Wage Rate
$100 80 60 40 20
MRP increases causing demand to shift right
D1 = MRP1
D = MRP Q
Quantity of Workers 48

49. 3 Shifters of Factor Demand
1.) Derived Demand:
Changes in the Demand for the Product
Price increase of the product increases MRP and demand for the resource.
2.) Changes in Productivity
Technological Advances increase Marginal Product and therefore MRP… Demand.
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 nails if the price of lumber increases significantly?

50. Drawing the Demand Curve for Resources50

51. Use the following data:
Price = $10
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Additional
Revenue
per worker
Additional
Cost
per worker
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 20
How would this change if the demand for the good increased significantly?
Price of the good would increase.
Value of each worker would increase. 51

52. Use the following data:
Price = $100
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Additional
Revenue
per worker
Units of
Labor
Product
Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3
100 52

53. Use the following data: Each worker is worth more!!
Price = $100
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Additional
Revenue
per worker
Units of
Labor
Product
Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3
100
700
1000
300
200
100
-300
Each worker is worth more!!
THIS IS
DERIVED DEMAND. 53

54. How would this change if the productivity of each worker increased?
Use the following data:
Price = $10
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Additional
Revenue
per worker
Additional
Cost
per worker
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 20
How would this change if the productivity of each worker increased?
Marginal Product would increase.
Value of each worker would increase. 54

55. Use the following data:
Price = $10
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Additional
Revenue
per worker
Units of
Labor
Product
Price 1 2 3 4 5 6 7 70
170
240
270
290
300 - 70
100 30 20 10
-30 10
700
1000
300
200
100
-300
Each worker is worth more!
More demand for the resource. 55

56. 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, a(n) __________ 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 demand for skilled labor, leads to an ___________ in demand for education/training.

57. 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, a(n) __________ 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 demand for skilled labor, leads to an ___________ in demand for education/training.
increase
increase
decrease
decrease
increase
increase

58. Resource Supply Shifters
Supply Shifters for Labor
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 regarding leisure time and societal roles.
Ex: Why did the US Labor supply increase during WWII?
Why do some occupations get paid more than others?

59. Supply and Demand For Surgeons Supply and Demand For Gardeners
With your partner...
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

60. What are other reasons for differences in wage?
Labor Market Imperfections-
Insufficient/misleading job information-
This prevents workers from seeking better employment.
Geographical Immobility-
Many people are reluctant or too poor to move so they accept a lower wage
Unions-
Collective bargaining and threats to strike often lead to higher than equilibrium wages
Wage Discrimination-
Some people get paid differently for doing the same job based on race or gender (Very illegal!).

61. “Glass Ceilings” – Interpret

62. Factor Markets (Part 3) The Perfectly Competitive Labor Market62

63. Review Who demands in the Factor Market?
Who supplies in the Factor Market?
Define Derived Demand
The demand for resources is determined (derived) by the products they help produce.
4. Identify the Shifters of Factor Demand
Derived Demand
Productivity of the Resources
Price of related resources

64. Use side-by-side graphs to draw a perfectly competitive labor market and firm hiring workers

65. Wage is set by the market demand (DL)
The firm’s MRP falls SL
Wage
Wage
SL= MFC
WM1
DL= MRP DL Q
QF1 Q
QM1
Industry
Firm

66. What happens to the wage and quantity in the market and firm if new workers enter the industry?SL
Wage
Wage
SL= MFC
WM1
DL= MRP DL Q
QF1 Q
QM1
Industry
Firm

67. What happens to the wage and quantity in the market and firm if new workers enter the industry?
SL1
Wage
Wage
SL2
SL1=MFC1
WM1
WM2
SL2=MFC2
DL=MRP DL Q
QF1
QF2 Q
QM1
QM2
Industry
Firm

68. Do you support this new law?
Minimum Wage
Assume the government was interested in increasing the federal minimum wage to $15 an hour
Do you support this new law?
Why or why not

69. Fast Food Cooks Wage S $15 $8 $6 D 5 6 7 8 9 10 11 12 Q Labor
The government wants to “help” workers because the equilibrium wage is too low D
Q Labor

70. Government sets up a “WAGE FLOOR.”
Fast Food Cooks
Wage S
$15 $8 $6
Government sets up a “WAGE FLOOR.”
Where? D
Q Labor

71. Minimum Wage Above Equilibrium! Wage S $15 $8 $6 D 5 6 7 8 9 10 11 12
Q Labor

72. Minimum Wage What’s the result? Q demanded falls.
Surplus of workers
(Unemployment) S
$15 $8 $6
What’s the result?
Q demanded falls.
Q supplied increases. D
Q Labor

73. Is increasing minimum wage good or bad?
GOOD IDEA-
We don’t want poor people living in the street, so we should make sure they have enough to live on.
BAD IDEA-
Increasing minimum wage too much leads to more unemployment and higher prices.

74. Minimum Wage Worksheet

75. 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?

76. Least Cost Rule $10 $5 MP MP (Workers)
How much additional output does each resource generate per dollar spent?
$10 $5
# 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, what combination of robots and workers will maximize output?

77. 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

78. Profit Maximizing Rule for a Combing Resources1
MRPx = MRPy =
MFCx MFCy
This means that the firm is hiring where MRP = MFC for each resource x and y

79. Practice: What should the firm do – hire more, hire less, or stay put?
1. MRPL = $15; MFCL = $6; MRPC = $10; PC = $10
MORE
STAY PUT
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
LESS
LESS
MORE
STAY PUT
STAY PUT
MORE
MORE
MORE

80. 2010 Practice FRQ
(in problem set)
3 apples and 2 oranges 80

82. Factor Markets (Part 4) The IMPERFECTLY Competitive Labor Market AKA: monopsony82

83. Use the concept of derived demand to explain this cartoon
What about SUPPLY?

84. 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 rolls.
Ex: Why did the US Labor supply increase during WWII?

85. Imperfect Competition: Monopsony
Resource Markets
Perfect
Competition
Monopsony
Imperfect Competition: Monopsony
Characteristics:
One firms hiring workers
The firm is large enough to manipulate the market
Workers are relatively immobile
To hire add
Firm is wage maker
To hire additional workers the firm must increase
Examples:
Central American Sweat Shops
Midwest small town with a large Car Plant
NCAA 85

86. Assume that this firm CAN’T wage discriminate (same idea as price discrimination) and must pay each worker the same wage.
Acme Coal Mining Co.
Wage rate (per hour)
Number of
Workers
Marginal Factor 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

87. Marginal Resource Cost
Assume that this firm CAN’T wage discriminate and must pay each worker the same wage.
MFC does NOT
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

88. If the firm can’t wage discriminate, where is MFC?
Monopsony
If the firm can’t wage discriminate, where is MFC?
MFC
Wage SL WE
DL= MRP QE

89. Goal is to increasing wages and benefits
Labor Unions
Goal is to increasing wages and benefits

90. 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

91. Labor Markets

92. Labor Markets and Globalization

93. Check your Tags

94. Why is Globalization Happening? What types of jobs are outsourced?
Globalization is the result of firms seeking lowest costs. Firms are seeking greater profits.
Parts are made in China because labor in significantly cheaper.
What is Outsourcing?
Outsourcing is when firms send jobs overseas.
What types of jobs are outsourced?
For many years it was only unskilled jobs, but now other skilled jobs are sent overseas.

96. Advantages and Disadvantages
Increases U.S. unemployment
Less US tax revenue generated from workers and corporations means less public benefits
Foreign workers don’t receive same protections as US workers
Advantages
Lowers prices for nearly all goods and services
Decreases world unemployment
Improves quality of life and decreases poverty in less developed countries

97. Video 1: Outsourcing Child Care Video 2: Stossle Outsourcing