1. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 1 Chapter 12 Economic resources and the labour market

2. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 2 Learning objectives 1.Discuss the significance of resource pricing. 2.Introduce marginal productivity theory as a way of explaining the amounts of resources that firms use. 3.Examine the way the employment of resources may vary when there are many buyers of the resource and different forms of competition in the product market. 4.Explain the demand for a resource, what determines changes to resource demand and what factors determine the elasticity of resource demand.

3. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 3 Learning objectives (cont.) 5.See how wage rates are determined in particular labour markets. 6.Examine wage-price (incomes) policies as a means of dealing with stagflation. 7.Survey the development of Australia’s unique industrial relations system. 8.Discuss changes in Australia’s industrial relations system in the 1990s and beyond.

4. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 4 Significance and complexity of resource pricing Resources are a major determinant of money incomes. Resource pricing allocates resources among various industries and firms. Cost minimisation—a firm must produce the profit-maximising output with the most efficient (least costly) combination of resources. There are many ethical and public policy issues in the resource market.

5. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 5 Complexities of resource pricing Resource demand-and-supply determines pricing and employment. However, exact nature depends on: –type of resource –type of market –policies and practices of government –complications added by firms and unions.

6. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 6 Marginal productivity theory The least cost rule: the cost of any output is minimised when the marginal product per dollar’s worth of each resource used is the same. The cost minimising position occurs when: MP of materials Price of materials MP of labour Price of labour =

7. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 7 Marginal productivity theory (cont.) Optimal employment of resources: MRP = MRC –To maximise profits, a firm should hire additional units of any given resource as long as each successive unit adds more to the firm’s total revenue than it does to its total costs. Marginal revenue product (MRP) –The increase in total revenue resulting from the use of one additional unit of input.

8. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 8 Marginal productivity theory (cont.) Marginal resource cost (MRC) –The increase in total resource cost resulting from the use of one additional unit of input. MRP = MRC rule –Explains the way demand for economic resource is formulated. –Does not explain the exact derivation of demand curve.

9. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 9 Demand for a resource Depends on two types of markets Product market in which the firm sells and produces goods Resource market –Many buyers? –Few buyers?

10. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 10 Marginal definitions Marginal product (MP) –Additional output resulting from the use of one additional unit of a resource, ceteris paribus. Marginal revenue product (MRP) –The increase in total revenue resulting from the use of one additional unit of input. MRP = MP × P when product market is competitive

11. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 11 Resource demand under perfect competition Assume perfect competition in resource market. Derived demand for resource –Productivity of resource in producing the good –Market value of the good MRP schedule constitutes the firm’s demand for labour.

12. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 12 MRP as a demand schedule

13. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 13 Demand for resource: perfect competition MRP curve DRDR DRDR 1 2 3 4 5 6 7 8 9 10 0 Resource price (wage rate) Quantity of resource demanded 3 6 9 12 15 Q

14. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 14 Resource demand under imperfect competition Perfect competition in the resource market Product demand curve is down-sloping. –Firm must accept lower price in order to increase sales. Comparison with perfect competition: –MRP = MP × MR –MRP curve is less elastic than perfect competition. –Imperfectly competitive firms are less responsive to wage cuts in terms of workers employed.

15. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 15 Demand for resource: imperfect competition

16. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 16 Market demand for a resource Derived by horizontally summing the individual demand or MRP curves for all firms hiring that resource on assumption that product price is constant Constant product price unlikely as industry output expands

17. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 17 Changes in resource demand Changes in product price Changes in productivity –Quantities of other inputs used –Technological progress –Labour quality Prices of other resources Substitute resources –Substitution effect –Output effect Complementary resources

18. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 18 Elasticity of resource demand Resource price elasticity of demand determined by: –rate of MP decline –ease of resource substitutability –price elasticity of product demand  greater price elasticity of product demand, greater elasticity of resource demand –resource cost–total cost ratio:  The larger the contribution of a resource’s price to total costs, the greater the resource elasticity.

19. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 19 Wages in particular labour markets Wages are the price paid per unit of time for the services of labour. –Nominal wages—money received per time unit of labour service –Real wages—amount of goods and services that can be purchased with a money wage during some period

20. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 20 Purely competitive labour market Many firms competing for labour Many qualified workers with identical skills acting as independent suppliers of labour Firms (demanders) and workers (suppliers) are price takers (‘wage takers’) as none can totally control wage rate

21. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 21 Competitive market for labour Wc=$6 Q D S D QcQc Wage rate ($) Quantity of labour S ∑dd

22. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 22 Single competitive firm MRC Q d d QcQc Wage rate ($) Quantity of labour Wc=$6 MRP curve

23. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 23 Market policies Two kinds of market policies Employment and training policy, which is: –intended to reduce or eliminate imbalances and bottlenecks in the labour market. Pro-competition policy which: –attempts to reduce the market power of unions and large corporations.

24. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 24 Wage-price (incomes) policies Income policies are designed to constrain both nominal incomes and prices paid in order to influence real income. Two types of incomes policies –Wage price guideposts (voluntary) –Wage price controls (mandatory)

25. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 25 History of wage fixation in Australia Cost-of-living adjustments –Capacity to pay Indexation and the economy –Indexation –Indexation revived: the Accord. The two-tier system Increase in industrial disputes –The Industrial Relations Commission –Arbitration process

26. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 26 Industrial disputes: 1957–2009

27. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 27 The 1990s and beyond The enterprise bargaining principle Accord Mark VII Industrial Relations Amendment Act 1992 Industrial Relations Reform Act 1993 National wages and the Accord Mark VIII Enterprise Flexibility Agreements Test Case 1995 The Workplace Relations Amendment (Work Choices) Bill 2005

28. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 28 Workplace Relations Act 1996 Wage fixation shifted towards decentralisation Greater emphasis on enterprise bargaining culminated in reforms known as ‘Work Choices’ (2005). –‘Allowable’ award matters –Minimum employment standards –Maximum ordinary hours –Exemption from unfair dismissal laws for firms with less than 100 employees

29. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 29 Fair Work Act (2009) Restored ‘fairness’ lost by introduction of ‘Work Choices’ –New unfair dismissal laws –New regulatory body: Fair Work Australia and Fair Work Ombudsman –New bargaining framework –Union right of entry to all workplaces –New rules requiring transfer of existing employment agreements January 2010 additional provisions introduced: modern award inclusions and 10 National Employment Standards

30. Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada Slides prepared by George Bredon 12- 30 Next chapter The international monetary system