1. ***Factors = Resources = Inputs***
Unit V: Factor Markets
***Factors = Resources = Inputs***
Length: 2 Weeks
Chapters: 27 and 28
Assignments: Problem Set #5
Final Exam
½ Unit V: Factor Markets
½ Everything Else
Many AP and former exam questions

2. The Demand for Resources27
C H A P T E R
The Demand for Resources

3. Example 1: Example 2: Derived Demand-
DEMAND FOR RESOURCES
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 computers increases the demand for…
Derived Demand-
The demand for resources is determined (derived) by the products they help produce.

4. Simulation! Analyzing Demand
Demand for specific resources depend on two things:
The resource’s productivity
Ex: Highly productive workers and resources are preferred to unproductive resources
The additional revenue resulting from each additional resource
Ex: Each worker is worth the additional revenue they generate.
Simulation!

5. 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 COMPEATIVE PRODUCT MARKET so the price is constant at $10.
Assume that you are hiring workers in a PERFECTLY COMPEATIVE LABOR MARKET so the wage is constant at $20.
Also assume the wage is the ONLY cost.
To maximize profit how many workers should you hire?

6. Use the following data: *Hint* 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?

7. 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?

8. 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?

9. 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

10. Use the following data: Shows how much each worker is worth
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 7 17 24 27 29 30 - 7 10 3 2 1 -3 10 70
100 30 20 10
-30
Shows how much each worker is worth

11. Use the following data:
Price = $10
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Additional
Revenue
per worker
Additional
Cost for each
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 many should we hire?

12. Demand for specific resources depend on two things:
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 70
170
240
270
290 30 27 - 70
100 30 20 1 -3 10
700
1000
300
200 10
-30 20
Demand for specific resources depend on two things:
The resource’s productivity
The additional revenue resulting from each additional resource
Each worker is worth more

13. 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

14. 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

15. 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

16. 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

17. 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

18. MRP and MRC

19. = MARGINAL REVENUE PRODUCT (MRP)
The additional revenue generated by an additional worker.
In perfectly competitive product markets the MRP equals the marginal product of the resource times the price of the product.
Ex: If the MP 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
Resource Quantity

20. = MARGINAL RESOURCE COST (MRC)
The additional cost of an additional worker.
In perfectly competitive labor markets the MRC equals the wage set by the market.
Ex: The MRC of an unskilled worker is $6.75.
Another way to calculate MRC is:
Marginal
Revenue
Product =
Change in
Total Revenue
Resource Quantity

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

22. Identifying the Demand Curve for Resources

23. Shows how much each worker is worth
Yesterday's Activity
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 much each worker is worth

24. As wage falls, quantity demanded rises
Demand and MRP
Conclusions:
According to the chart, if wage rate (MRC) was $100 how many workers will they hire?
What if wage rate is $70? $30 $20? $10?
As wage falls, quantity demanded rises
As wage rises, quantity demanded falls
In the perfectly competitive labor market, the falling portion of MRP is the firm’s resource demand curve.
Each point on the curve indicates the number of workers the firm is willing and able to hire at different wages.

25. Plot the resource demand 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
Resource Demand Schedule
Plot the resource demand curve

26. Demand=MRP
Wage Rate
This shows the quantity of workers that will be hired at different wages
$100 80 60 40 20
D=MRP Q
Quantity of Workers

27. Demand=MRP Why is it downward sloping?
Wage Rate
Why is it downward sloping?
Because of the law of diminishing marginal returns.
$100 80 60 40 20
D=MRP Q
Quantity of Workers

28. Demand=MRP
Wage Rate
Each worker is less productive and therefore is worth less than the previous
$100 80 60 40 20
D=MRP Q
Quantity of Workers

29. Shifters of Demand

30. 3 DETERMINANTS (SHIFTERS) OF RESOURCE DEMAND
1.) Changes in Product Demand
Price increase of the product increases MRP and demand for the resource (and vice versa)
2.) Changes in Productivity
Technological Advances increase Marginal Product and therefore MRP/Demand (and vice versa)
3.) Changes in Price of Other Resources
Substitutes
EX: What happens to the demand for assembly line workers in price of robots falls?
Compliments
Ex: What happens to the demand for software writing programs if the wage paid to software engineers falls?

31. Identify the Resource and Shifter (ceteris peribus)
DETERMINANTS OF RESOURCE DEMAND
Identify the Resource and Shifter (ceteris peribus)
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.

32. Identify the Resource and Shifter (ceteris peribus)
DETERMINANTS OF RESOURCE DEMAND
Identify the Resource and Shifter (ceteris peribus)
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

33. Revisiting Current Trends “You’ve got to learn computers!”
Top 5 Fasting 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
“You’ve got to learn computers!”

34. Drawing the Demand for Resources

35. Plot the demand curve for these workers
Demand and MRP
In the perfectly competitive labor market, the falling portion of MRP is the firm’s resource demand curve.
Each point on the curve indicates the number of workers the firm is willing and able to hire at different wages.
Example: According to the chart, if wage rate (MRC) was $100 how many workers will they hire?
What if wage rate is $90? $70 $60? $40?
Plot the demand curve for these workers

36. Demand=MRP
Wage Rate
This shows the quantity of workers that will be hired at different wages
$100 80 60 40 20
D=MRP Q
Quantity of Workers

37. Demand=MRP
Wage Rate
It is downward sloping because of the law of diminishing marginal returns
$100 80 60 40 20
D=MRP Q
Quantity of Workers

38. Perfectly Competitive Labor Markets28
C H A P T E R
HELP
WANTED
Perfectly Competitive Labor Markets

39. PURELY COMPETITIVE LABOR MARKET
Characteristics:
Many Firms hiring workers
No one firm large enough to manipulate the market.
Identical Skills
Firms are “Wage Takers”
Firms can hire as many workers as it needs at a wage set by the industry

40. How does this compare to supply and demand for products?
Firms Supply and Individuals Demand
Price
Supply =
Marginal Cost
Demand =
Marginal Benefit
Quantity

41. 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
d = MRP
Quantity of Workers

42. As wage increases, Qs increases
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 incentives 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

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

44. Side-by-side graph showing Market and Firm
Draw and label both at wage set at $10 S
Quantity of Labor
Wage Rate (dollars)
S = MRC Wc
$10 Wc
($10)
D = MRP
( mrp’s)
d = mrp
(1000)
(5)
Labor Market
Individual Firm

45. Side-by-side graph showing Market and Firm
Draw and label both at wage set at $10
Marginal Resource
Cost (MRC) will be
constant and equal to
the wage set by
the market S
Quantity of Labor
Wage Rate (dollars)
S = MRC Wc
$10 Wc
($10)
D = MRP
( mrp’s)
d = mrp
(1000)
(5)
Labor Market
Individual Firm

46. Side-by-side graph showing Market and Firm
Draw and label both at wage set at $10
All workers
will supply their labor
at the wage set
by the market ($10). S
Quantity of Labor
Wage Rate (dollars)
S = MRC Wc
$10 Wc
($10)
D = MRP
( mrp’s)
d = mrp
(1000)
(5)
Labor Market
Individual Firm

47. Wage x Number of Workers Total Labor Cost = Wage Rate x # of workers
Where is Labor Costs?
Wage x Number of Workers S
Total Labor Cost = Wage Rate x # of workers
Quantity of Labor
Wage Rate (dollars)
S = MRC Wc
$10
$10
$10
$10
$10
$10 Wc
($10)
Labor
Costs
D = MRP
( mrp’s)
d = mrp
(1000)
(5)
Labor Market
Individual Firm

48. Where is Total Revenue? Sum of each individual worker’s MRP
Total Revenue (Sum of MRP for each worker)
Quantity of Labor
Wage Rate (dollars)
S = MRC Wc
$10
$10
$10
$10
$10
$10 Wc
($10)
Labor
Costs
D = MRP
( mrp’s)
d = mrp
(1000)
(5)
Labor Market
Individual Firm

49. PURELY COMPETITIVE LABOR MARKET EQUILIBRIUMS
Since TR=TC in perfect competition, this area is…
Quantity of Labor
Wage Rate (dollars)
Non-
Labor
Costs
S = MRC Wc
$10
$10
$10
$10
$10
$10 Wc
($10)
Labor
Costs
D = MRP
( mrp’s)
d = mrp
(1000)
(5)
Labor Market
Individual Firm

50. Minimum Wage

51. High supply leads to low wage
Fast Food Cooks
High supply leads to low wage
Wage
$10 8 7 6 $5 4 3 2 S
Not enough to live on, so… D 10
Q Labor

52. Fast Food Cooks $5 Wage $10 8 6 4 2 S7 6 $5 4 3 2 S
Government sets up a “WAGE FLOOR”
Where? D 10
Q Labor

53. Minimum Wage $5 Above Equilibrium Wage $10 8 6 4 2 S $6.75 D 6 7 8 93 2 S
$6.75
Above Equilibrium D 10
Q Labor

54. Surplus (Unemployment)
Minimum Wage
Wage
$10 8 7 6 $5 4 3 2
Surplus (Unemployment) S
$6.75
What’s the result?
Q demanded falls
Q supplied increases D
Q Labor

55. Analyzing Labor

56. Use the concept of derived demand to explain this cartoon

57. Supply and Demand Why do some occupations get paid more than others?
Resource Demand Shifters (Based on MRP)
Demand (price) of the product
Productivity of the resource
Price of related resources
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?

58. 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

59. 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 to poor to move so they accept a lower wage
Unions
Collective bargaining and threats to strike often lead to higher that equilibrium wages
Wage Discrimination-
Some people get paid differently for doing the same job based on race or gender (Very illegal!).

60. PURELY COMPETITIVE LABOR MARKETS IMPERFECTLY COMPETITIVE LABOR MARKETS
VS.
IMPERFECTLY COMPETITIVE LABOR MARKETS

61. Perfectly Competitive Market and Firm
Tell the person next to you what they look like and why S
Quantity of Labor
Wage Rate (dollars)
S = MRC Wc
$10 Wc
($10)
D = MRP
( mrp’s)
d = mrp
(1000)
(5)
Labor Market
Individual Firm

62. Imperfect Competition: Monopsonies

63. MONOPSONY MODEL (A Monopoly for Labor) Characteristics:
Only one firm hiring a type of labor
Instead of a single seller, there is a single buyer
2. The type of labor is relatively immobile
3. Firm is a “Wage Maker”
To hire additional workers this firm MUST increase the wage.
Examples:
Central American Sweat Shops
Midwest small town with a large Car Plant
NCAA

64. 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

65. 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

66. MONOPSONISTIC LABOR MARKET
Wage Rate (dollars)
SL-The number of workers that are willing to work at different wage rates
Quantity of Labor

67. MONOPSONISTIC LABOR MARKET
Wage Rate (dollars)
Since firm is a “wage maker,” the MRC lies above the supply curve.
Quantity of Labor

68. MONOPSONISTIC LABOR MARKET Wage workers are willing to work for
MRC S
MRP = MRC
Wage workers are willing to work for
Wage Rate (dollars) Wm
MRP Qm
Quantity of Labor

69. MONOPSONISTIC LABOR MARKET
MRC S
The competitive
solution would
result in a higher
wage and greater
employment.
Wage Rate (dollars) Wc Wm
MRP Qm Qc
Quantity of Labor

70. MONOPSONISTIC LABOR MARKET
Monopsonists maximize
profits by hiring a smaller
number of workers and
paying a less-than-
competitive wage rate.
MRC S
The competitive
solution would
result in a higher
wage and greater
employment
Wage Rate (dollars) Wc Wm
MRP Qm Qc
Quantity of Labor

71. Labor Unions
Organizations that seek to unify workers and use collective bargaining to negotiate and secure their benefits.

72. Two Types of Unions Craft (Trade) Unions-
Unifies workers in a specific career field.
Limits supply of qualified workers
Examples: Teachers, Lawyer, Carpenters, Doctors, Plumbers, etc.
Industrial Unions-
Unifies workers in specific industries regardless of job.
By getting all workers, the union can more effectively negotiate with management
Examples: Steelworkers, automobile workers, supermarket workers, etc.

73. 5 Goals of Unions All goals revolve around increasing wages
What are the only two ways to increase wages?

74. Increase Demand for Union Labor
Wage Rate (dollars) Wc D1 Qc
Quantity of Labor

75. Increase Demand for Union Labor
Wage Rate (dollars) Wu Wc D2 D1 Qc Qu
Quantity of Labor

76. How do Unions Increase Demand?
Goals
Getting 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

77. Limit Supply of Qualified Workers
Wage Rate (dollars) Wc D Qc
Quantity of Labor

78. Limit Supply of Qualified Workers
Wage Rate (dollars) Wu Wc D Qu Qc
Quantity of Labor

79. How do Unions Decrease Supply?
Goals
4. Lobbying government to increase licensing for specific careers (Often used by craft unions).
Ex: Cosmetologist seek to increase requirements and mandatory training, limiting supply
5. Getting all workers to supply their labor at a higher than equilibrium wage. (Often used by industrial unions) .
Ex: Steelworker threaten to strike unless wage increase by 15%.

80. Organizing virtually all workers and demanding higher wages they control the supply curve for labor
Wage Rate (dollars) Wu Wc D D Qu Qc Qe
Quantity of Labor