1. Unit 5 Resource Market 1

2. Review 1.Give an example of Derived Demand. 2.Define MRP. 3.Explain the difference between MRP and MR. 4.Why does the MRP fall as more workers are hired? 5.Identify the two ways to calculate MRP. 6.Define MRC. 7.Explain the difference between MRC and MC. 8.How does a firm decide how many workers to hire? 9.List 10 words ends with “ink” 2

3. MRP (S L ) = MRC (D L ) 3

4. Units of Labor Total Product (Output) 0123456701234567 0 7 17 24 27 29 30 27 Wage = $20 / Price = $10 Marginal Product (MP) - 7 10 7 3 2 1 -3 Product Price 0 10 0 70 100 70 30 20 10 -30 4 Marginal Revenue Product (MRP) Shows how many workers a firm is willing and able to hire at different wages.

5. 0 70 100 70 30 20 10 -30 Units of Labor Total Product (Output) 0123456701234567 0 7 17 24 27 29 30 27 Marginal Product (MP) - 7 10 7 3 2 1 -3 Product Price 0 10 5 Marginal Revenue Product (MRP) Plotting the MRP/Demand curve Demand for this resource Wage = $20 / Price = $10

6. Drawing the Demand Curve for Resources 6

7. Demand = MRP Why is it downward sloping? Because of the law of DIMINISHING MARGINAL RETURNS 7 Each additional resource is less productive and therefore is worth less than the previous one Wage QLQL $100 80 60 40 20 D l =MRP Quantity of Workers 1 2 3 4 5 6 7 8 This model applies to LAND, LABOR, & CAPITAL

8. Video: Did You Know? 8

9. 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. 9

10. Does having an education mean that you will automatically have a higher income? 10

11. Real Life Application Top 5 Fastest Growing Jobs (2000-2010) 1.Computer Software Engineers, Applications 2.Computer Support Specialists 3.Computer Software Engineers, Systems 4.Computer Systems Administrators 5.Data Communications Analyst Top 5 Fastest Declining Jobs 1.Railroad Switch Operators 2.Shoe Machine Operators 3.Telephone Operators 4.Radio Mechanics 5.Loan Interviewers “You’ve got to learn computers!” 11 WHY & NOW WHAT?

12. Real Life Application 12 Ten most profitable majors and the average starting salary (Aug, 2013): 1.Petroleum engineering  $98,000 2.Chemical engineering  $67,500 3.Nuclear engineering  $66,800 4.Electrical engineering  $63,400 5.Computer engineering  $62,700 6.Aerospace engineering  $62,500 7.Mechanical engineering  $60,100 8.Materials science & engineering  $60,100 9.Industrial engineering  $59,900 10.Computer science  $58,400

13. Shifting the Demand Curve for Resources 13

14. Resource Demand Shifters 1. 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 Related 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? 14

15. Units of Labor Total Product (Output) Price = $10 / Wage = $20 0123456701234567 0 7 17 24 27 29 30 27 Marginal Product (MP) - 7 10 7 3 2 1 -3 Product Price 0 10 10 0 70 100 70 30 20 10 -30 Marginal Resource Cost 0 20 15 Marginal Revenue Product How would change if the DEMAND for the good INCREASED significantly?

16. Units of Labor Total Product (Output) Price = $10  $100 / Wage = $20 0123456701234567 0 7 17 24 27 29 30 27 Marginal Product (MP) - 7 10 7 3 2 1 -3 Product Price 0  0 10  100 Marginal Resource Cost 16 Marginal Revenue Product 0 700 1000 700 300 200 100 -300 2. Value of each worker would increase. 1. Price of product would increase.

17. What happens if DEMAND for the PRODUCT INCREASES? MRP increases causing demand to shift right 17 D l ’=MRP’ Wage QLQL $100 80 60 40 20 D l =MRP Quantity of Workers 1 2 3 4 5 6 7 8 In other words, MRP represents the value of each worker.

18. 18 What’d change if the PRODUCTIVITY of each worker INCREASED? Units of Labor Total Product (Output) Price = $10 / Wage = $20 0123456701234567 0 7 17 24 27 29 30 27 Marginal Product (MP) - 7 10 7 3 2 1 -3 Product Price 0 10 10 0 70 100 70 30 20 10 -30 Marginal Resource Cost 0 20 Marginal Revenue Product

19. Total Product (Output) 0123456701234567 0  0 7  70 17  170 24  240 27  270 29  290 30  300 27  270 Price = $10 / Wage = $20 Marginal Product (MP) - 70 100 70 30 20 10 -30 Product Price 0 10 0 700 1000 700 300 200 100 -300 Marginal Revenue Product Each worker is worth more! More demand for resource. 2. Value of each worker would increase. 1. Marginal Product would increase. Units of Labor 19

20. Identify the Resource and Shifter (ceteris paribus): 1.Increase in demand for microprocessors leads to a(n) ________ in the demand for processor assemblers. 2.Increase in the price for plastic piping causes the demand for copper piping to ________. 3.Increase in demand for small houses (comparing to big houses) leads to a(n) ________ the demand for lumber. 4.For shipping companies, __________ in price of trains leads to decrease in demand for trucks. 5.Decrease in price of sugar leads to a(n) _________ in the demand for aluminum for soda producers. 6.Substantial increase in education and training leads to an _________ in demand for teachers and trainers. increase decrease increase 20 Practice 3 Shifters of Resource Demand

21. Shifting the Supply Curve for Resources 21

22. 1. Number of qualified workers Education, training, & abilities required 2. Government regulation/licensing What if waiters had to obtain a license to serve food? 3. Personal values regarding leisure time and societal roles. Why did the US Labor supply increase during WWII? Why do some occupations get paid more than others? Resource Supply Shifters

23. Use supply and demand analysis to explain why surgeons earn an average salary of $137,050 & gardeners earn an average salary of $13,560. Quantity of Workers Wage Rate S L DLDL Supply and Demand For Surgeons Supply and Demand For Gardeners Quantity of Workers Wage Rate S L DLDL

24.  How many workers you should hire? Workers Per Day Paintings Per Day Perfectly Competitive Resource Market Wage = $30/dayPrice = $3/unit 012345678910 03 2032466170808885

25.  How many workers you should hire? Perfectly Competitive Resource Market Wage = $25/dayPrice = $6/unit Workers Per Day Paintings Per Day 02468101214161820 0381421293846546168

26.  How many output you should produce? Paintings Produced 0123456 Total Cost (in Dollars) 202738537295122 Perfectly Competitive Product Market Price = $20/unit

27. 27

28. 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.

29. 1. The Union is successful in requiring that new teachers have to pass a state competency test to be employed. 2. The Labor Union successfully conducts a national advertisement to get people to buy union products. 3. The Union educates workers in new methods of production, which leads to increased productivity. 4. The union promotes national legislation to increase tariffs placed on foreign products. 5. The Labor Unions bargains for and wins an increase in the wage rate above the equilibrium wage rate. 6. The labor union signs an agreement that employers can only hire union members. Wage QLQL SLSL DLDL

30. 1. The Union is successful in requiring that new teachers have to pass a state competency test to be employed. 2. The Labor Union successfully conducts a national advertisement to get people to buy union products. 3. The Union educates workers in new methods of production, which leads to increased productivity. 4. The union promotes national legislation to increase tariffs placed on foreign products. 5. The Labor Unions bargains for and wins an increase in the wage rate above the equilibrium wage rate. 6. The labor union signs an agreement that employers can only hire union members. QLQL Wage SLSL DLDL S L1 D L1 QLQL Wage SLSL DLDL QLQL SLSL DLDL S L1 QLQL Wage SLSL DLDL QLQL SLSL DLDL QLQL SLSL DLDL