Post on 19-Dec-2015
• Dominican Republic GDP- $5,800
• Costa Rican- GDP Per Capita- $12,600
• United State- GDP Per Capita -$53,000
• Average Hourly Salary Construction-Dominican Republic- $3.00
• Average Hourly Salary Tour Guide Costa Rica- $8.00
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Factor Market
• 1)What factors influence how much an individual earns? What determines a wage??– Or, why do some jobs earn more than others?
• 2) Do employees have the power to set wages?– When? For what industries?
• 3)Do employers have the power to set wages?– When? For what industries?
• 4) What are some examples of fair wage disparity? What are some examples of unfair wage disparity?
2
The Factor Market
3
Factors of Production
• A Factor of Production can continuously earn income while producing more goods
• 2 Types of Factors
• 1) Physical Capital- Buildings, Machines
• 2) Human Capital- People, Education, Training- Human Capital will be the focus of this chapter!
4
Factors of Production
• What is the difference between chocolate chips and a baker in the production of cookies?
5
The Factor Market• The Factor Market has two
major differences from the product market .
• 1) The Factor Market is where a majority of people earn their income (trillions of dollars in the US)
• 2) Demand in the Factor Market is derived
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FACTOR DEMAND (LABOR DEMAND)
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Factor Demand
Example 1: If there was a significant increase in the demand
for pizza, how would this change the demand for its factors of production?
Example 2: An increase in the demand for health care
increases the demand for what factors?
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Factor Demand
Derived Demand- The demand for factors (resources) is determined (derived) by the products they help produce.
9
DEMAND OF LABORWhat is Demand for Labor?
Demand is the different quantities of workers that businesses are willing and able to hire at different wages.
What is the Law of Demand for Labor? There is an INVERSE relationship between wage and
quantity of labor demanded.
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Who demands labor?•FIRMS demand labor.•Demand for labor shows the quantities of workers that firms will hire at different wage rates.
•Firms will only pay employees a wage equal to or less than that employees productivity.
DL
Quantity of Workers
Wage •As wage falls, Qd increases.•As wage increases, Qd falls.
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Marginal Product
• Let’s review… what is marginal product
• Marginal product is how much additional product an additional worker provides
• Or Change in Product/Change in Inputs
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How much value does my Marginal Product have?
• Hard with students
• Easier with more tangible items
• Let’s think cookies • If a bakery hires me and I make 10 additional cookies that sell for
2 dollars each. – My marginal product’s value is $20 or my product makes $20 of marginal
revenue. The bakery would pay me up to $20 • If Mr. Brooks is hired and makes 5 cookies that sell for 2 dollars
each. – His marginal product’s value is $10 or his product makes $10 of marginal
revenue. The bakery would pay Mr. Silver up to $10.
•
•The additional revenue generated by an additional worker (resource).
•Marginal Revenue Product =Marginal Product x Price of Product
•Employers will never pay an employee more than his or her MRP
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Marginal Revenue Product( AKA Value of the Marginal Product of Labor
If the Marginal Product of the 3rd worker is 5 and the price of the good is constant at $20 the MRP is…….
Another way to calculate MRP is:
MarginalRevenueProduct
=Change in
Total Revenue
Change inInputs
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Marginal Revenue Product( AKA Value of the Marginal Product of Labor
Cupcake Wars
• Each team has 10 seconds to write the word “cupcake” as many times as possible. Each time cupcake is written the firm earns $10 .
• How much will I pay my employees?
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Calculate MPL and MRP
Cupcake Wars
Quantity Labor
Total Product Marginal Product of
Labor
MRP @ $10 Price
GRAPHING TIME
• Graph your Marginal Revenue Product.
• X axis- Quantity of Labor
• Y axis- Wage Rate
• If I paid employees $20 per round how many employees would I hire?
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Why does the MRP eventually fall?• Diminishing Marginal Returns.• Fixed resources means each worker will
eventually add less than the previous workers.
Cup Cake Wars
The MRP determines the demand for labor • The firm is willing and able to pay each worker
up to the amount they generate.• Each worker is worth the amount of money
they generate for the firm.• MRP= Demand for Labor
Cup Cake Wars
The MRP of a resource equals the Demand.
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With your partner...Use supply and demand analysis to explain why surgeons
earn an average salary of $137,050 and cashiers earn $11,000. How could wages change for either
profession?
With your partner...Use supply and demand analysis to explain why surgeons
earn an average salary of $137,050 and cashiers earn $15,000. How could wages change for either
profession?
Quantity of Workers
Wag
e Rate
SL
DL
Supply and Demand For Surgeons Supply and Demand For Fast Food Cashiers
Quantity of Workers
Wag
e Rate
SL
DL
Industry in EquilibriumWage (the price of labor) is set by the market.
EX: Supply and Demand for Fast Food Workers
Quantity of Workers
Wage Labor Supply
Labor Demand =MRP
$8.75hr
THE
WAGE RATE
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Perfectly Competitive Labor Market and Firm
DL
?Wage
Q
Wage
QQE
WE
Industry Firm
SL
SL
DL
Wage
Q
Wage
Q
Industry FirmQE
WE
Qe
DL=MRP
SL=MFC
Side-by-side graph showing Market and Firm
• The additional cost of an additional resource (worker).
• In perfectly competitive labor markets the MRC equals the wage set by the market and is constant. Ex: The MFC of a minimum wage worker is $8.75.
Another way to calculate MFC is:
MarginalFactor
Cost=
Change inTotal Cost
Change inInputs
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Marginal Factor Cost (MFC)- The Wage Rate
Continue to hire until…
MRP = MFC (Wage Rate)
Consider that this also occurs when MR=MC
-
How do you know how many resources (workers) to employ?
35
Perfectly Competitive Labor MarketCharacteristics: •Many small firms are hiring workers
•No one firm is large enough to manipulate the market.
•Many workers with identical skills•Wage is constant•Workers are wage takers
•Firms can hire as many workers as they want at a wage set by the industry
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PerfectCompetition Monopsony
Factor Markets
Drawing the Demand Curve for
Factors
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Wage Rate
Q
$100
80
60
40
20
D=MRP
Quantity of Workers
Demand=MRP
1 2 3 4 5 6 7 8
Why is it downward sloping? Because of the law of diminishing marginal
returns
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Each additional factor is less productive and
therefore is worth less than the previous one
Wage Rate
Q
$100
80
60
40
20
D=MRP
Quantity of Workers
What happens if demand for the product increases?
1 2 3 4 5 6 7 8
MRP increases causing demand to shift right
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D1=MRP1
Question?
• What could be factors that shift the MRP (Factor Demand)?
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3 Shifters of Factor Demand1.) Changes in the Demand for the Product (Change in
Price) • Price increase of the product increases MRP and
demand for the factor. (and vice versa) 2.) Changes in Productivity
• Technological Advances increase Marginal Product and therefore MRP/Demand.
3.) Changes in Price of Other Factors • 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 for nails if the price of
lumber increases significantly?
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Units ofLabor
TotalProduct(Output)
Use the following data:
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Wage = $20Price = $10
MarginalProduct
(MP)
-
7
10
7
3
2
1
-3
ProductPrice
0
10
10
10
10
10
10
10
MarginalRevenueProduct
0
70
100
70
30
20
10
-30
AdditionalCost
per worker
0
20
20
20
20
20
20
20
How would this change if the demand for the good
increased significantly?1.Price of the good would
increase.2.Value of each worker would
increase.
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Units ofLabor
TotalProduct(Output)
Use the following data:
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Wage = $20Price = $100
MarginalProduct
(MP)
-
7
10
7
3
2
1
-3
ProductPrice
0
100
100
100
100
100
100
100
MarginalRevenueProduct
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Units ofLabor
TotalProduct(Output)
Use the following data:
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
Wage = $20Price = $100
MarginalProduct
(MP)
-
7
10
7
3
2
1
-3
ProductPrice
0
100
100
100
100
100
100
100
MarginalRevenueProduct
0
700
1000
700
300
200
100
-300
Each worker is
worth more!!
THIS ISDERIVED DEMAND.
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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 homes (compared to big
homes) 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 skilled labor.
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3 Shifters of Resource Demand
Identify the Resource and Shifter (ceteris paribus):• 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
decreasedecrease
increase
increase
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3 Shifters of Resource Demand
Factor Supply (Labor Supply)
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SUPPLY OF LABORWhat is Supply for Labor?
Supply is the different quantities of individuals that are willing and able to sell their labor at different wages.
What is the Law of Supply for Labor?There is (Usually) DIRECT (or positive) relationship
between wage and quantity of labor supplied.
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Labor Supply •Supply of labor is the number of workers that are willing to work at different wage rates.
•Higher wages can give workers incentives to leave other industries or give up leisure activities (Activities done outside of work)
Quantity of Workers
Wage
•As wage increases, Qs increases.•As wage decreases, Qs decreases.
Labor Supply
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Questions
• What could be shifters of factor supply (workers) (MRC)?
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Factor Supply ShiftersSupply Shifters for Labor1. Number of qualified workers
• Education, training, & abilities required• Immigration
2. Government regulation/licensingEx: What if waiters had to obtain a license to serve food?Immigration policies
3. Personal values regarding leisure time and societal roles.Ex: Why did the US Labor supply increase during WWII?
Why do some occupations get paid more than others?
SL
DL
Wage
Q
Wage
Q
Industry FirmQE
WE
Qe
DL=MRP
SL=MRC
Side-by-side graph showing Market and Firm
Monopsony
• One buyer of labor
• When does this occur?
• Their supply curve is the industry supply curve.
• One firm is now a wage setter (factor cost setter) instead of wage taker (factor cost taker)
66
Examples of Monopsony
• Mining Companies in mining towns
• The US Military • Walmart in small
towns?
67
68
$
L1 2 3 4
8765
S
In this example the one individual will work when the wage is 5, and so on.
Wage Quantity
4 0
5 1
6 2
7 3
8 4
69
$
E1 2 3 4
8765
S
Marginal Factor Cost is now different than labor supply , it’s higher!
Meaning the employer can gain additional workers at additional cost.
The employer can choose the wage rate!
MRC
Wage Quantity Total Resource Cost
Marginal Resource Cost
4 0 0 N/A
5 1 5 5
6 2 12 7
7 3 21 9
8 4 32 11
Where would a monopsony produce
• Quantity-MRP=MRC• But what wage would people
be willing to accept at that quantity
• The monopsonist will move down to the supply curve- hiring fewer people at a lower wage – creating deadweight.
70
Monopsony- Inefficient Labor Market
• Deadweight created• Fewer jobs at lower
wages
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?
If you only have $35, what combination of robots and workers will maximize output?
Least Cost Rule
# Times Going
MP(Robots)
MP/PR
(PriceR =$10)
MP (Workers)
MP/PW
(PriceW =$5)
1st 30 3 20 4
2nd 20 2 15 3
3rd 10 1 10 2
4th 5 .50 5 1
$10 $5How much additional output does each
resource generate per dollar spent?
If you only have $35, the best combination is 2 robots and 3 workers
Least Cost Rule
# Times Going
MP(Robots)
MP/PR
(PriceR =$10)
MP (Workers)
MP/PW
(PriceW =$5)
1st 30 3 20 4
2nd 20 2 15 3
3rd 10 1 10 2
4th 5 .50 5 1
$10MPk = MPL
Pk PL$5
Resource k Resource L
Profit Maximizing Rule for a Combing Resources
MRPk = MRPL =MRCk MRCL
1This means that the firm is hiring where MRP = MRC for each resource k and L
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
LESS
STAY PUT
MORE
MORE MORE
MORE
STAY PUT
STAY PUT
LESS
2010 Practice FRQ
77
Work and Wages
79
What are some 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 (Market Power)•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 (Very illegal!).
Other reasons for wage disparity
• Compensating differentials
• Differences in talent
• Differences in the quality of human capital
• Idea of “efficiency wage”
• Marginal productivity theory of income distribution
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82
Wage Disparities in Practice
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Earnings Differentials by Education, Gender, and Ethnicity, 2002
“Glass Ceilings”
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.
86
Does having an education mean that you will automatically have a higher income?
87
Real Life Application Top 5 Fastest Growing Jobs (2000-2010)
1. Computer Software Engineers, Applications2. Computer Support Specialists3. Computer Software Engineers, Systems4. Computer Systems Administrators5. Data Communications Analyst
Top 5 Fastest Declining Jobs1. Railroad Switch Operators2. Shoe Machine Operators3. Telephone Operators4. Radio Mechanics5. Loan Interviewers
WHY?
“You’ve got to learn computers!”
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Real Life Application
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