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Unit IV: Factor Markets. Factor Markets. When firms need to purchase a factor of production, they buy them from the factor market. Derived Demand. A firm’s demand for a factor of production is derived from its decision to supply a good in another market.

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Factor markets
Factor Markets

  • When firms need to purchase a factor of production, they buy them from the factor market.


Derived demand
Derived Demand

  • A firm’s demand for a factor of production is derived from its decision to supply a good in another market.

  • If Q increases in the product market at every price, demand in the factor market will increase

  • If Q decreases in the product market at every price, demand in the factor market will decrease


Changes in demand in the factor market
Changes in demand in the factor market

  • If people really demand more horses in parades…

  • Then the city will buy more horses in the factor markets




The labor market1
The Labor Market job…

  • Made up of firms and workers

  • Demand

    • Employers willingness to hire a worker at each given wage

  • Supply

    • Workers willingness to work at each given wage


Scenarios
Scenarios job…

  • Market = gym shoes

    • The majority of the public now prefers to wear sandals. What happens to the wage and quantity of sweatshop gym shoe workers?

  • The baby boomers become of working age. What happens to the wage and quantity of the general labor market.

  • Market = basketballs

    • Nike is gaining more and more of the market power. What will happen to the wage and quantity of Spalding workers.


Derived demand activity
Derived Demand Activity job…

  • On a separate sheet of blank paper, please do the following:

    • Write a specific product market and affiliated factor market (Adidas shoes and Rubber)

    • Write a scenario that will affect the product market (Adidas spends 50 million dollars on a new advertisement campaign).

    • MAKE IT UNIQUE BUT NOT CONFUSING!

    • Pass the paper behind you (group at the end…walk to the front)


Partner activity
Partner Activity job…

  • Read your market and the scenario.

  • Determine how this will impact the markets.

  • Then, graph and provide a written description of the market change.

    • What happens to price/wage?

    • What happens to quantity?


Bringing it back
Bringing it Back job…

  • Each group will read their market and scenario they received.

    • Every student must write the market and scenario they hear in their notes

  • Each group will then explain the affect the scenario had on their labor market.

    • Every student must write the effect in their notes.




What is marginal product
What is job…marginal product?

When an additional input is used, how does that impact the total product?


So what is the marginal product of
So what is the job…marginal product of_____________?

Land

Labor

Seeds

Time


The marginal product of labor mpl
The Marginal job…Product of Labor (MPL)

  • Change in the amount of output from an additional unit of labor.


The production function

Production job…

function

The Production Function

Quantity

of Apples

300

280

What is the MPL of the 2nd worker?

240

Answer = 80 Apples

180

100

1

2

3

4

5

Quantity of

0

Apple Pickers


The production function1

Production job…

function

The Production Function

Quantity

of Apples

300

280

Notice that the MPL decreases as the quantity of workers is increased

240

180

100

1

2

3

4

5

Quantity of

0

Apple Pickers


The marginal resource cost mrc
The Marginal Resource Cost (MRC) job…

  • How much an additional input costs


The value of the marginal product
The job…Value of the Marginal Product

  • This is also called marginal revenue product or MRP. (Most people use this term)

  • How much additional revenue is earned when one more input is added.

  • Marginal Product X Price

  • It also eventually diminishes as the number of inputs increase


Market for apples

Total Revenue job…

Market for Apples

Quantity

300

280

What is the MRP of the 3rd worker??

240

Answer = $60

180

100

1

2

3

4

5

Quantity of

0

Apple Pickers


Market for apples1

Total Revnue job…

Market for Apples

Quantity

300

280

Notice, the MRP of labor decreases as more workers are added

240

180

100

1

2

3

4

5

Quantity of

0

Apple Pickers



Profit maximizing firm in labor market
Profit Maximizing Firm in Labor Market job…

  • Hire workers where MRP = MRC

  • Never hire a worker if their MRP is less than their MRC (wage)!

  • The MRP of labor (MRPL) curve is the labor demand curve for a profit-maximizing firm.


Mrp curve

Market job…

wage

Marginal revenue product

(demand curve for labor)

Profit-maximizing quantity

MRP Curve

Wage

Competitive Firm

Quantity of

0

0

Apple Pickers



Economic rent
Economic Rent job…

How much would you have to be paid per hour to work this job?


Economic rent1
Economic Rent job…

  • An excess payment made for a factor of production above the amount expected by its owner.

  • On a graph, the “price” for any physical capital is “rent” or “R”

I would gladly rent out this building for $50,000 a year.

But, a firm is willing to give me $150,000 a year!

The economic rent for this building to the firm is $100,000



Alternative input combinations
Alternative Input Combinations job…

How do firms decide how many different combinations of inputs to use?


If you were the grocery store owner which combination would you choose
If you were the grocery store owner, which combination would you choose?

  • 20 self-checkout stations

  • 4 cashiers

  • 10 self-checkout stations

  • 10 cashiers

Costs to the firm

1 self-checkout station = $2,000

1 cashier = $1,600

Option A

Option B


Cost minimization rule
Cost-Minimization Rule you choose?

  • The firm would add and subtract each input until the marginal product of the first input per dollar spent is the same as the marginal product of the second input per dollar spent

  • Because of diminishing marginal returns:

    • If the number is too high, the firm would increase that input

    • If the number is too low, the firm would decrease that input

MP(input 1) / MRC(input 1) = MP(input 2) / MRC(input 2)



Scenario 1
Scenario 1 you choose?

  • Lets do an example of when the marginal product of labor per dollar is more than the marginal product of capital per dollar

    • Marginal product of labor = 20 units

    • Marginal product of capital = 100 units

    • Wage = $10

    • Rental rate for capital = $100

MP(input 1) / MRC(input 1) = MP(input 2) / MRC(input 2)

MPL / Wage = MPK / Rent


Scenario 11
Scenario 1 you choose?

  • The firm would hire more workers and use less capital

  • This would lower the MP of labor per dollar and increase the MP of capital per dollar

2 units of output per dollar spent on labor > 1 unit of output per dollar spent on capital

MPL / Wage = MPK / Rent


Scenario 2
Scenario 2 you choose?

  • Lets do an example of when the marginal product of labor per dollar is less than the marginal product of capital per dollar

    • Marginal product of labor = 20 units

    • Marginal product of capital = 100 units

    • Wage = $10

    • Rental rate for capital = $25

MPL / Wage = MPK / Rent


Scenario 21
Scenario 2 you choose?

  • This hire would use less workers and rent more capital

    • This would increase the MPL/Wage

    • This would decrease the MPK/Rental rate

2 units of output per dollar spent on labor < 4 unit of output per dollar spent on capital

MPL / Wage = MPK / Rent


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