Unit 6: The FACTOR MARKET
description
Transcript of Unit 6: The FACTOR MARKET
![Page 1: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/1.jpg)
Unit 6: The FACTOR MARKET
(aka: The Resource Market or Input Market)
1
![Page 2: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/2.jpg)
Unit 5: The Factor MarketLength: 5-6 LessonsChapters: 12 & 13 in packet Good News:
•Only one Graph to learn (PC vs. Monopsony)•Application of things we have already learned.•Basically just Supply and Demand
2
![Page 3: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/3.jpg)
Producers SupplyHouseholds Demand
Product Market
3
![Page 4: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/4.jpg)
Producers Demand Households Supply
Resource Market
4
![Page 5: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/5.jpg)
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
5
PerfectCompetition Monopsony
Resource Markets
![Page 6: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/6.jpg)
Perfectly Competitive Labor Market and Firm
SL
DL
?Wage
Q
Wage
Q5000
$10
Industry Firm
![Page 7: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/7.jpg)
Resource Demand
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 cars increases the demand for…
Derived Demand- The demand for resources is determined (derived) by the products they help produce.
7
![Page 8: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/8.jpg)
Continue to hire until…
MRP = MFC
How do you know how many resources (workers) to employ?
8
![Page 9: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/9.jpg)
The additional cost of an additional worker (resource). In perfectly competitive labor markets the MFC equals the WAGE set by the market and is constant.Ex: The MFC of an unskilled worker is $8.75.Another way to calculate MFC is:
MarginalFactorCost
=Change inTotal Cost
Change inInputs
11
Marginal Factor Cost (MFC)
![Page 10: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/10.jpg)
The additional revenue generated by an additional worker (resource). In perfectly competitive product markets the MRP equals the marginal product of the resource times the price of the product.Ex: If the Marginal Product of the 3rd worker is 5 and the price of the good is constant at $20 the MRP is…….
$100Another way to calculate MRP is:
MarginalRevenueProduct
=Change in
Total Revenue
Change inInputs
12
Marginal Revenue Product (MRP)
![Page 11: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/11.jpg)
Perfectly Competitive Labor Market and Firm
DL
?Wage
Q
Wage
QQE
WE
Industry Firm
SL
![Page 12: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/12.jpg)
SL
DL
Wage
Q
Wage
Q
Industry FirmQE
WE
Qe
DL=MRP
SL=MFC
Side-by-side graph showing Market and Firm
![Page 13: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/13.jpg)
Industry Graph
18
![Page 14: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/14.jpg)
DEMAND RE-DEFINED
19
![Page 15: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/15.jpg)
Where do you get the Market Demand?
Q
McDonalds Wage QLDem
$12 1
$10 2
$8 3
$6 5
$4 7
Burger King Other FirmsWage QLDem
$12 0
$10 1
$8 2
$6 3
$4 5
Wage QLDem
$12 9
$10 17
$8 25
$6 42
$4 68
Wage QLDem
$12 10
$10 20
$8 30
$6 50
$4 80
3
P
Q2
P
Q25
P
Q30
P
$8 $8 $8 $8
D DDD
![Page 16: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/16.jpg)
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.
DL
Quantity of Workers
Wage •As wage falls, Qd increases.•As wage increases, Qd falls.
21
![Page 17: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/17.jpg)
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 incentive to leave other industries or give up leisure activities.
Quantity of Workers
Wage
•As wage increases, Qs increases.•As wage decreases, Qs decreases.
Labor Supply
22
![Page 18: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/18.jpg)
Market EquilibriumWage (the price of labor) is set by the market.
EX: Supply and Demand for Carpenters
Quantity of Workers
Wage Labor Supply = MFC
Labor Demand =MRP
$30hr
23
![Page 19: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/19.jpg)
Individual Firms
24
Wage
QQe
DL= MRP
SL= MFC
![Page 20: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/20.jpg)
25
Example:• You hire workers to mow lawns. The wage for each
worker is set at $100 a day.• Each lawn mowed earns your firm $50. • If you hire one worker, he can mow 4 lawns per day.• If you hire two workers, they can mow 5 lawns per
day together.1. What is the MFC for each worker?2. What is the first worker’s MRP? 3. What is the second worker’s MRP? 4. How many workers will you hire?5. How much are you willing to pay the first worker?6. How much will you actually pay the first worker? 7. What must happen to the wage in the market for you
to hire the second worker?
![Page 21: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/21.jpg)
You’re the Boss• You own a business.• Assume the you are selling the goods in a
perfectly competitive PRODUCT market so the price is constant at $10.
• Assume that you are hiring workers in a perfectly competitive FACTOR market so the wage is constant at $20.
• Also assume the wage is the ONLY cost.
Given the table (next slide) To maximize profit how many workers should you
hire? 26
![Page 22: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/22.jpg)
WorkersTotal
Product(Output)
Use the following data:
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
*Hint* How much is each
worker worth?
Wage = $20Price = $10
27
![Page 23: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/23.jpg)
Units ofLabor
TotalProduct(Output)
Use the following data:
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
1. What is happening to Total Product?
2. Why does this occur?
3. Where are the three stages?
Wage = $20Price = $10
28
![Page 24: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/24.jpg)
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
This shows the PRODUCTIVITY of
each worker.
Why does productivity decrease?
29
![Page 25: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/25.jpg)
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
Price constant because we are
in a perfectly competitive
market.
30
![Page 26: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/26.jpg)
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
Marginal Revenue Product
0
70
100
70
30
20
10
-30
This shows
how much each
worker is worth
31
![Page 27: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/27.jpg)
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
0
70
100
70
30
20
10
-30
Marginal FactorCost
0
20
20
20
20
20
20
20
How many workers should you hire?32
Marginal Revenue Product
![Page 28: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/28.jpg)
Factor Markets (Part 2)
Drawing the Factor Demand Curve
33
![Page 29: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/29.jpg)
P.Q.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 MFC.7. Explain the difference between MFC and
MC.8. How does a firm decide how many
workers to hire?34
![Page 30: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/30.jpg)
35
![Page 31: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/31.jpg)
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.
36
![Page 32: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/32.jpg)
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 technology!”
37
![Page 33: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/33.jpg)
Adjusting for Inflation
• Wage – The price of labor defined as currency per unit of labor worked.
– NOMINAL Wage – The price of labor not adjusted for inflation.
– REAL wage – The price of labor adjusted for inflation; Economists use the CPI to adjust numbers from prices/wages from different times into a consistent unit of measure (ie. “2010 dollars”)
![Page 34: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/34.jpg)
Average Wage (1964-2006)
![Page 35: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/35.jpg)
Wage Trends
Other US labor market trends:
1) Workers with higher skills are paid more than unskilled workers. This gap is increasing.
2) College graduates earn more than high school graduates and the gap has been increasing.
3) Women, on average, are paid lower than men, although the gap has become more narrow over the years.
![Page 36: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/36.jpg)
Drawing the Demand Curve for
Resources
43
![Page 37: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/37.jpg)
Units ofLabor
TotalProduct(Output)
Yesterday's Activity
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
MRP
0
70
100
70
30
20
10
-30
Shows how many
workers a firm is
willing and able to hire at different
wages.
44
![Page 38: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/38.jpg)
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
MRP
0
70
100
70
30
20
10
-30
Demand for this
resource
Plotting the D=MRP curve45
![Page 39: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/39.jpg)
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
46
Each additional resource is less productive and therefore is worth less than the previous one
![Page 40: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/40.jpg)
Wage Rate
Q
$100
80
60
40
20
D = MRP
Quantity of Workers
Demand=MRP
1 2 3 4 5 6 7 8
47
This model applies to land, labor, and capital
Notice the inverse relationship between wage and quantity of resources demand
![Page 41: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/41.jpg)
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
48
D1 = MRP1
![Page 42: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/42.jpg)
3 Shifters of Factor Demand1.) Derived Demand: 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 Other 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? 49
![Page 43: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/43.jpg)
Drawing the Demand Curve for
Resources
50
![Page 44: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/44.jpg)
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
AdditionalRevenue
per worker
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.
51
![Page 45: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/45.jpg)
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
AdditionalRevenue
per worker
52
![Page 46: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/46.jpg)
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
AdditionalRevenue
per worker
0
700
1000
700
300
200
100
-300
Each worker is
worth more!!
THIS ISDERIVED DEMAND.
53
![Page 47: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/47.jpg)
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
AdditionalRevenue
per worker
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 productivity of each worker
increased?1.Marginal Product would increase.2.Value of each worker would
increase.
54
![Page 48: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/48.jpg)
Units ofLabor
TotalProduct(Output)
Use the following data:
0
1
2
3
4
5
6
7
0
70
170
240
270
290
300
270
Wage = $20Price = $10
MarginalProduct
(MP)
-
70
100
70
30
20
10
-30
ProductPrice
0
10
10
10
10
10
10
10
AdditionalRevenue
per worker
0
700
1000
700
300
200
100
-300
Each worker is
worth more!
More demand for the
resource.
55
![Page 49: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/49.jpg)
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, a(n) __________ 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 demand for skilled labor, leads
to an ___________ in demand for education/training.
56
3 Shifters of Resource Demand
![Page 50: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/50.jpg)
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, a(n) __________ 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 demand for skilled labor, leads
to an ___________ in demand for education/training.
increase
increase
decreasedecrease
increase
increase
57
3 Shifters of Resource Demand
![Page 51: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/51.jpg)
Resource Supply ShiftersSupply Shifters for Labor1. Number of qualified workers
• Education, training, & abilities required2. Government regulation/licensing
Ex: What if waiters had to obtain a license to serve food?
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?
![Page 52: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/52.jpg)
With your partner...Use supply and demand analysis to explain why surgeons earn an average salary of $137,050 and
gardeners earn $13,560.
Quantity of Workers
Wag
e Rate
SL
DL
Supply and Demand For Surgeons Supply and Demand For Gardeners
Quantity of Workers
Wag
e Rate
SL
DL
![Page 53: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/53.jpg)
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 (Very illegal!).
![Page 54: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/54.jpg)
Factor Markets (Part 3)
The Perfectly Competitive
Labor Market
62
![Page 55: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/55.jpg)
Review1. Who demands in the Factor Market?2. Who supplies in the Factor Market?3. Define Derived Demand
The demand for resources is determined (derived) by the products they help produce.
4. Identify the Shifters of Factor Demand1. Derived Demand2. Productivity of the Resources3. Price of related resources
![Page 56: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/56.jpg)
Use side-by-side graphs to draw a perfectly competitive labor market
and firm hiring workers
64
![Page 57: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/57.jpg)
SL
DL
Wage
Q
Wage
Q
Industry FirmQM1
WM1
QF1
DL= MRP
SL= MFC
Wage is set by the market demand (DL)The firm’s MRP falls
![Page 58: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/58.jpg)
SL
DL
Wage
Q
Wage
Q
Industry FirmQM1
WM1
QF1
DL= MRP
SL= MFC
What happens to the wage and quantity in the market and firm if new workers enter the
industry?
![Page 59: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/59.jpg)
SL1
DL
Wage
Q
Wage
Q
Industry FirmQM1
WM1
QF1
DL=MRP
SL1=MFC1
What happens to the wage and quantity in the market and firm if new workers enter the
industry?
SL2
WM2
QM2
SL2=MFC2
QF2
![Page 60: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/60.jpg)
Minimum WageAssume the government was interested in increasing the federal minimum wage to
$15 an hourDo you support this new law?
Why or why not
68
![Page 61: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/61.jpg)
S
Wage
Q Labor
D
Fast Food Cooks
$15
$8
$6
The government wants to “help” workers because the equilibrium wage is too low
695 6 7 8 9 10 11 12
![Page 62: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/62.jpg)
S
Wage
Q Labor
D
Fast Food Cooks
Government sets up a “WAGE FLOOR.”
Where?
70
$15
$8
$6
5 6 7 8 9 10 11 12
![Page 63: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/63.jpg)
S
Wage
Q Labor
D
Minimum Wage
Above Equilibrium!
71
$15
$8
$6
5 6 7 8 9 10 11 12
![Page 64: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/64.jpg)
S
Wage
Q Labor
D
What’s the result?Q demanded falls.Q supplied increases.
72
$15
$8
$6
5 6 7 8 9 10 11 12
Surplus of workers(Unemployment)
Minimum Wage
![Page 65: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/65.jpg)
Is increasing minimum wage good or bad?
GOOD IDEA-We don’t want poor people living in the street, so we should make sure they have enough to live on.
BAD IDEA-Increasing minimum wage too much leads to more unemployment and higher prices.
73
![Page 66: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/66.jpg)
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?
![Page 67: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/67.jpg)
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?
![Page 68: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/68.jpg)
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
$10MPx = MPy
Px Py $5Resource x Resource y
![Page 69: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/69.jpg)
Practice: What should the firm do – hire more, hire less, or stay put?
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
1. MRPL = $15; MFCL = $6; MRPC = $10; PC = $10
![Page 70: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/70.jpg)
2010 Practice FRQ(in problem set)
80
![Page 71: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/71.jpg)
![Page 72: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/72.jpg)
Factor Markets (Part 4)
The IMPERFECTLY
CompetitiveLabor Market
AKA: monopsony82
![Page 73: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/73.jpg)
Use the concept of derived demand to explain this cartoon
What about SUPPLY?83
![Page 74: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/74.jpg)
Shifter Review3 Resource Demand Shifters (Based on MRP)
1. Demand (price) of the product2. Productivity of the resource3. Price of related resources
3 Resource Supply Shifters1. Number of qualified workers
• Education, training, & abilities required2. Government regulation/licensingEx: 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?
84
![Page 75: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/75.jpg)
Imperfect Competition: MonopsonyCharacteristics: • One firms hiring workers
• The firm is large enough to manipulate the market• Workers are relatively immobile• To hire add• Firm is wage maker
• To hire additional workers the firm must increaseExamples:
Central American Sweat ShopsMidwest small town with a large Car PlantNCAA
85
PerfectCompetition Monopsony
Resource Markets
![Page 76: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/76.jpg)
Assume that this firm CAN’T wage discriminate (same idea as price discrimination) and must pay
each worker the same wage.
Acme Coal Mining Co.Wage rate (per hour)
Number ofWorkers
Marginal Factor Cost
$4.00 0
4.50 1
5.00 2
5.50 3
6.00 4
7.00 5
8.00 6
9.00 7
10.00 8
![Page 77: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/77.jpg)
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 ofWorkers
Marginal Resource Cost
$4.00 0 -
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
MFC does NOTequal wage
![Page 78: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/78.jpg)
SL
Wage
QE
WE
DL= MRP
MFC
Monopsony If the firm can’t wage discriminate, where is MFC?
![Page 79: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/79.jpg)
Labor UnionsGoal is to increasing wages and
benefits
![Page 80: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/80.jpg)
How do Unions Increase Wages? 1. Convince Consumers to buy only Union
ProductsEx: Advertising the quality of union/domestic
products2. Lobbying government officials to increase
demandEx: Teacher’s Union petitions governor to
increase spending.3. Increase the price of substitute resources
Ex: Unions support increases in minimum wage so employers are less likely to seek non-union workers
![Page 81: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/81.jpg)
Labor Markets and Globalization
![Page 82: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/82.jpg)
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.
What types of jobs are outsourced?• For many years it was only unskilled jobs, but
now other skilled jobs are sent overseas.
![Page 83: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/83.jpg)
![Page 84: Unit 6: The FACTOR MARKET](https://reader036.fdocuments.us/reader036/viewer/2022062423/56814b36550346895db83f4d/html5/thumbnails/84.jpg)
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