1. Unit 3: The Resource Market Wage Determination1

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

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

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

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

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

7. Is raising the minimum wage a good idea or a bad idea? Why or why not

8. State of the Union Speech 2014

9. A different Perspective

10. Fast Food Cooks Wage S $15 $8.25 $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

11. Government sets up a “WAGE FLOOR.”
Fast Food Cooks
Wage S
$15
$8.25 $6
Government sets up a “WAGE FLOOR.”
Where? D
Q Labor

12. Minimum Wage Above Equilibrium! Wage S $15 $8.25 $6 D
Q Labor

13. Minimum Wage What’s the result? Q demanded falls.
Surplus of workers
(Unemployment) S
$15
$8.25 $6
What’s the result?
Q demanded falls.
Q supplied increases. D
Q Labor

14. 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.

15. 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?

16. 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?

17. If you only have $35, the best combination is 2 robots and 3 workers
Least Cost Rule
MPk = MPL
$10 $5
Pk PL
Resource k
Resource L
# 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

18. Profit Maximizing Rule for a Combining Resources1
MRPk = MRPL =
MRCk MRCL
This means that the firm is hiring where MRP = MRC for each resource k and L

19. 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

20. 2010 Practice FRQ
3 apples and 2 oranges 20