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Competitive Labor Markets

Competitive Labor Markets. An Introduction to the Derived Demand for Resources and the Supply of Labor in Perfectly Competitive Markets. Guiding Questions for Factor Markets and Resource Pricing. How do factor markets fit into the circular flow model? What determines resource pricing?

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Competitive Labor Markets

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  1. Competitive Labor Markets An Introduction to the Derived Demand for Resources and the Supply of Labor in Perfectly Competitive Markets

  2. Guiding Questions for Factor Markets and Resource Pricing • How do factor markets fit into the circular flow model? • What determines resource pricing? • How does a competitive labor market function?

  3. Resource Pricing • Household income is mainly the result of selling resources to firms • Resource prices are costs to firms • Resource prices allocate resources to industries and firms • Government often intervenes in resource markets • Resource demand is derived: • Depends on how productive the resource is and the value of the product it is used to produce.

  4. Resources at the Margins • Marginal Product: the added output produced when one additional unit of a resource is employed • Marginal Revenue Product: the change in a firm’s total revenue when it employs one additional unit of a resource (MRP is the demand curve for a product) • Marginal Resource Cost: the change in a firm’s total cost of employing a resource when one additional unit of the resource is used

  5. Practicing MP and MRP • What is the marginal product (MP) of each added worker? • What is the marginal revenue product (MRP) of each added worker? • Shortcut: MP x P

  6. Determinants of Resource Demand • Changes in product demand • Changes in productivity • Quantity of other (complimentary) resources • Technological advance (e.g. mechanization) • Quality of a variable resource (e.g. education) • Changes in the Prices of Other Resources • Substitution effect (mechanization resulting from decreased costs of robots or capital machines) • Output effect (increased output resulting from declining resource prices leads to greater output, increasing demand for resources) • Net effect (sum of output and substitution effects)

  7. The MRP = MRC Rule • Just like when firms determine output, when determining input the rule is that marginal costs should equal the marginal revenue…in this case it is the extra costs of more of the resource and the additional revenue gained by the increase in production from the added employment of the resource

  8. Optimal Employment of Resources • Least Cost • When the last dollar spent on each resource yields the same marginal cost • (MP1/P1)=(MP2/P2) • Profit Maximizing • When each resource is employed to the point at which its MRP equals its resource price • (MRP1/P1)=(MRP2/P2)=1 • Profit maximization must be at the least cost point, but least cost is not always profit maximizing (e.g. a firm could minimize costs, without maximizing output)

  9. An Example of Optimal Employment • Mr. Healea is considering opening up a factory to produce Whatsits, but he is not sure how much labor and capital machinery to purchase for his factory. Mr. Healea can sell the Whatsits for $10. Using the least cost rule, and given the information below, what should Mr. Healea do? What if Mr. Healea uses the profit-maximizing rule? Capital (Price = $20) Labor (Price = $10)

  10. Classroom Experiment 6.A • For each scenario, determine your reservation wage • Raise your hand the first time the offered daily wage meets or exceeds your reservation wage (this will be done three times, once for each scenario) • Record and graph the class results • Answer the reflection questions

  11. Labor Supply in Competitive Labor Markets • Critical Attributes of Purely Competitive Labor Markets: • Firms compete for workers • Many workers with identical skill sets • Firms are wage takers • In pure competition workers individually compete for jobs and there is no union • It is assumed that workers may easily move between alternate jobs and employers • For individual firms the supply of labor is a horizontal line (it is also the MRC) • For the industry, labor supply slopes upward

  12. Graphing a PerfectlyCompetitive Labor Market

  13. Practicing Competitive Labor Markets • Whiteboard review: draw a basic graph of a competitive labor market. • What if price of the resource changed? • What if a recession decreases the demand for the resource? • What if a technology is developed that makes workers more productive? • What if a technology is developed that replaces the need for workers? • Workbook Unit 4 Lesson 3 Activity 48 (p. 239) • Homework: Chapter 26 SQ3R

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