Microeconomics Unit 5

The Resource Market

Topic 1: Intro to the Resource Market

Product Market

Resource Market

PRODUCT market

Looks at total production

Households DEMAND products Firms SUPPLY products

Resource Market

Looks at things that go INTO makingproducts (land, labor, capital,entrepreneurship)

Households SUPPLY resources Firms DEMAND resources

• Derived Demand: The demand for the resources that go into making a product.

• An increase in the demand for a product will increase the demand for the resources (land, labor, capital) used to produce it

Resource market based on: Derived Demand

Derived demand for cars???

Topic 2: Market Demand for Labor •FIRMS demand labor.

DL

Quantity of Workers

Wage • As wage falls, Qd increases.

• As wage increases, Qd falls.

7

Shifts in the Market Demand for Labor

• Increase = demand shifts to right• Decrease = demand shifts to the left

D

D1

Reasons why demand for Labor will shift:

1. Change in price of product P increases = increase in the demand for resource used to produce product; price decreases = decrease for the demand for the resource used to produce product 2. Change in productivity (increase in productivity

makes workers more valuable = increase in demand)

3. Change in price of other resources 4. Change in the demand for the product

Practice: Will the demand for ROOFERS shift??? If so, what direction???

• 1. There is an increase in the price of houses • 2. There is a decrease in the wages of roofers• 3. There is a decrease in the demand for

houses• 4. There is an increase in the productivity of

roofers

Quantity of Workers

Wage

• As wage increases, Qs increases.• As wage decreases, Qs decreases.

Labor Supply

11

Topic 3: Market supply of Labor

Households supply labor.

Shifts in Market Supply of Labor

• Increase = supply of labor shifts to the right • Decrease = supply of labor shifts to the left

s1 S

Reasons why the supply of labor will shift

1. Change in Number of workers

2. Change in Government regulation/licensing

3. Change in worker attitudesLeisure time vs. work

Practice: Will the supply of teachers shift??? If so, which direction???

1. The government passes a law requiring all teachers to obtain a PH.D

2. More teachers reach retirement age and retire

3. There is a decrease in the wages paid to teachers

Topic 4: The labor marketSL

DL

Wage

QQ of workers

Change in wages; just a movement ALONG the curves!!!! NOT a shift!

America’s Highest Paying Jobs 2011

• With data recently released by the Bureau of Labor Statistics , BLS, CNBC.com took a look at the most highly-compensated occupations in the country, based upon BLS job definitions.

• 1. Doctors/surgeons

• 2. CEO• • 3. Dentists

• 4. Lawyers

• 5. Petroleum engineer

• 6. Architectural engineer

• 7. Computer and information systems manager • 8. Marketing manager

• 9. Financial manager• • 10. Pilot

Lowest paying jobs: *BLS

Fast food cooks

Food preparation and serving

Dishwashers

Shampooers.

Cafeteria/coffee shop counter attendant

Bartender's helper

Restaurant hostess

Amusement/recreation attendant

Cashiers

Ushers

What are the best and worst jobs???

• Criteria based on: Physical Demands, Work Environment, Income, Outlook (Job Growth), and Stress.

Top 10 best and worst jobs 2011

Best Jobs • Software engineer.• Mathematician.• Actuary.• Statistician.• Computer systems

analyst.• Meteorologist.• Biologist.• Audiologist.• Dental hygienist

Worst Jobs • Roustabout.• Ironworker.• Lumberjack.• Roofer.• Taxi driver.• Emergency medical

technician.• Welder.• Meter reader.• Construction worker

Most Dangerous Jobs

1. Bomb Squad Technician 2. Armed Forces 3. Miner 4. Police Officer 5. Alaskan Crab Fishing 6. Firefighter

* career builder survey

Top 10 scary, creepy and just plain disturbing jobs www.careercast.com

• 1. Field epidemiologist

• 2. Embalmer

• 3 pest control specialist • 4. Slaughterer

• 5. Arachnologist

6. Road kill remover specialist

7. Crime scene cleaner

8. Reptologist

9. Septic tank services

10. Forensic entomologist

• Occupations that you think are highly respected:

• Why are some jobs more highly respected than others?

Most admired jobs * Forbes

• 1. Firefighter • 2. Doctor • 3. Nurse • 4. Scientist • 5. Teacher • 6. Military officer • 7. Police officer • 8. Clergymen • 9. Farmer • 10. Engineer

Backward bending supply of labor curve

Reason for backward bending S of labor

• The Substitution effect states that a higher wage makes work more attractive than leisure. Therefore, supply increases.

• The income effect states that a higher wage means workers can achieve a target income by working less hours. Therefore, because it is easier to get enough money they work less.

• When your wage is low, the substitution effect dominates. As wages increase, the income effect starts to dominate.

S

Wage

Q Labor

D

Topic 5: Minimum Wage

$15

$8

$6

The government wants to “help” workers because the equilibrium wage is too low

275 6 7 8 9 10 11 12

S

Wage

Q Labor

D

Fast Food Cooks

Government sets up a “WAGE FLOOR.”

Where?

28

$15

$8

$6

5 6 7 8 9 10 11 12

S

Wage

Q Labor

D

Minimum Wage

Above Equilibrium!

29

$15

$8

$6

5 6 7 8 9 10 11 12

S

Wage

Q Labor

D

What’s the result?Q demanded falls.Q supplied increases.

30

$15

$8

$6

5 6 7 8 9 10 11 12

Surplus of workers(Unemployment)

Minimum Wage

Topic 6: Labor Decisions of the Individual Firm

• The firm’s demand for labor = MARGINAL REVENUE PRODUCT (MRP)

D=MRP

Marginal Revenue Product (MRP)

• Additional revenue of using one more

resource • The value of the resource to the firm; shows

how much each resource is “worth”

MRP = marginal product X price of item

Complete the table below (price of product is $2.00)

# of workers Total product Marginal product Marginal revenue product

1 10

2 22

3 35

4 40

Complete the table below (price of product is $2.00)

# of workers Total product Marginal product Marginal revenue product

1 10 10 $20

2 22 12 $24

3 35 13 $26

4 40 5 $10

Stages of return???

• The firm’s supply of labor = MARGINAL FACTOR COST (MFC)

Marginal FACTOR Cost (MFC)

Additional cost of using one more resource

Complete the table assuming wage is $8.00

# of workers Total cost Marginal FACTOR cost

0

1

2

3

4

Complete the table assuming the wage is $8.00

# of workers Total cost Marginal FACTOR cost

0 0 0

1 $8 $8

2 $16 $8

3 $24 $8

4 $32 $8

“How much are you worth? “

• 20/20 video

In the resource market: firmscompare the MFC to MRP todetermine resource usage

Maximizing Profit in the labor market

• MRP>MFC Hire • MRP<MFC Don’t HIRE • MRP=MFC Hire and stop

Profit maximizingMRP = MFC

What should the firm do??? Hire more, less or stay put???

1. MRP= $12; MFC=$6 2. MRP=$10; MFC = $103. MRP = $5; MFC = $10 4. MRP = $45; MFC = $155. MRP = $20; MFC = $40

Complete the following chart. Assume the wage is $20 and the price of the product is $10

# of workers Total product

Marginal product

Marginal revenue product

Total cost Marginal FACTOR cost

0 0

1 7

2 17

3 24

4 27

5 29

6 30

7 27

Complete the following chart. Assume the wage is $20 and the price of the product is $10

# of workers Total product

Marginal product

Marginal revenue product

Total cost Marginal FACTOR cost

0 0 0 - - -

1 7 7 $70 $20 $20

2 17 10 $100 40 20

3 24 7 $70 60 20

4 27 3 $30 80 20

5 29 2 $20 100 20

6 30 1 $10 120 20

7 27 -3 $-30 140 20

Which worker produced increasing, decreasing and negative returns?

# of workers Total products

Marginal product

Marginal revenue product

Total cost Marginal FACTOR cost

0 0 0 - - -

1 7 7 $70 $20 $20

2 17 10 $100 40 20

3 24 7 $70 60 20

4 27 3 $30 80 20

5 29 2 $20 100 20

6 30 1 $10 120 20

7 27 -3 $-30 140 20

How many workers should this firm hire??? WHYWhat is the profit at this number???

# of workers Total product

Marginal product

Marginal revenue product

Total cost Marginal FACTOR cost

0 0 0 - - -

1 7 7 $70 $20 $20

2 17 10 $100 40 20

3 24 7 $70 60 20

4 27 3 $30 80 20

5 29 2 $20 100 20

6 30 1 $10 120 20

7 27 -3 $-30 140 20

Topic 7: Economic models of the labor market

Perfect competition Monopsony

Regardless of type of firm, all Firms will hire where MRP=MRC

Topic 8: Perfectly competitive labor market

1. many small firms competing to hire a specific type of labor

2. many workers with identical skills 3. wage is set by the market 4. workers are wage takers

- firms can hire as many workers as they want at a wage set by the industry

5. MFC=W=S

SL

DL

Wage

Q

Wage

Q

Industry FirmQ

W

Q

DL=MRP

MFC=W=S

Use side-by-side graph showing labor market and perfectly competitive firm

There is a decrease in the supply of workers. Show how this impacts the below

graphs

What happens to wages??? Will the firm hire more or less workers???

Q1

MFC=W=S1

MFC=W=S

SL

DL

Wage

Q

Wage

Q

Industry FirmQE

WE

Qe

DL=MRP

MFC=W=S

What happens to the wage and quantity in the market and firm if new workers enter the industry?

SL1

W1

Q1

MFC=W=S

Q1

Topic 9: Monopsony Labor market

1. only one employer in the market 2. firm is a wage maker 3. MFC does NOT equal wage/Supply Why???must pay higher wages to attract more

workers

Monopsony

• Must pay higher wage to attract more workers

# of workers Wage Total cost Marginal FACTOR cost

1 $5

2 $6

3 $7

4 $8

5 $9

6 $10

Monopsony

• Must pay higher wage to attract more workers

# of workers Wage Total cost Marginal FACTOR cost

1 $5 $5 $5

2 $6 $12 $7

3 $7 $21 $9

4 $8 $32 $11

5 $9 $45 $13

6 $10 $60 $15

MRC increases as firm hires more workers

W=SL

Wage

QE

WE

DL=MRP

MFC

Monopsony Hires fewer workers and pays lower wage than perfectly competitive market

Q determined by MRP=MFC; wage determined by Supply

Topic 10:Combining Resources (land, labor and capital)

If using multiple resources, a firm should hire the resource that brings them the most value; “bang for the buck”

To find “bang for buck” find the MP/W

• 1. The cost to hire a worker is $10 at an MP of 20. What is the worker’s MP/wage?

• 2. The cost to rent a machine is $100 at an MP of 300. What is the machine’s MP/wage?

LEAST COST RULE in labor market (if using multiple resources)

MP (L) = MP (c ) W(L) W ( c)

If the two resources are equal in their value, firm should stay put. If not equal, firm should hire more of the valuable resource and less of the least valuable resource

Practice

• The price to hire one more baker is $20 at an MP of 40. The price to hire one more waitress is $10 at an MP of 30. If this is a profit maximizing firm, what should the firm do???

Practice

What should the firm do??? 1. MP/W labor is 20, MP/W of machine is 30? 2. MP/W of labor is 10, MP/W of machine is 10? 3. MP/W of labor is 5, MP/W of machine is 2? 4. MP/W of labor is 10, MP/W of machine is 13? 5. MP/W of labor is 3, MP/W of machine is 3?

Budget constraint and combination of resources

# MP(Robots)

MP/w MP (Workers)

MP/w

1 30 20

2 20 15

3 10 10

4 5 5

$10 $5

If you only have $35, what is the best combination or resources?

# MP(Robots)

MP/w MP (Workers)

MP/w

1 30 3 20 4

2 20 2 15 3

3 10 1 10 2

4 5 .50 5 1

$10 $5

If you only have $35, the best combination is 2 robots and 3 workers

MP/P (robots) = MP/P(worker)

# MP(Robots)

MP/w MP (Workers)

MP/w

1 30 3 20 4

2 20 2 15 3

3 10 1 10 2

4 5 .50 5 1

$10 $5

Topic 11: Labor Markets and Globalization

Why is Globalization Happening? • 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.

Against outsourcing

For outsourcing

Advantages and Disadvantages 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