Unemployment

1. Unemployment Those 16 years and older who are willing and able to work and who are actively looking for work but have not found a job. • What are the costs of unemployment? • Lost output. Psychological impact. • Discouraged Workers • Individuals who have stopped looking for a job because they are convinced they will not find a suitable one. Not considered unemployed. • Types of Unemployment • Frictional, Structural, Cyclical, Seasonal

2. Significance of Resource Pricing • Money-income determination • Household income • Resource allocation • Shift of resources • Cost minimization • Profit = Revenue minus Costs • Ethical questions and policy issues • Equality, taxes, regulation

3. Derived Demand Strength of demand depends on: • The productivity of the resource in helping to create a good. • The market value or price of the good it helps produce.

4. Marginal Product • The marginal product of any input into production is the increase in the quantity of output obtained from an additional unit of that input.

5. Marginal Product • The marginal product of any input into production is the increase in the quantity of output obtained from an additional unit of that input.

6. Diminishing Marginal Product • Diminishing marginal product is the property whereby the marginal product of an input declines as the quantity of the input increases. • Example: As more and more workers are hired at a firm, each additional worker contributes less and less to production because the firm has a limited amount of equipment.

7. The Production Function and The Marginal Product of Labor • The production function illustrates the relationship between the quantity of inputs used and the quantity of output of a good.

8. The Production Function and The Marginal Product of Labor • The marginal product of labor is the increase in the amount of output from an additional unit of labor. MPL = D Q/D L MPL = (Q2 – Q1)/(L2 – L1)

9. Quantity of Apples Quantity of Apple Pickers The Production Function and The Marginal Product of Labor Production 300 function 280 240 180 100 1 2 3 4 5 0

10. Diminishing Marginal Product of Labor • As the number of workers increases, the marginal product of labor declines. • As more and more workers are hired, each additional worker contributes less to production than the prior one. • The production function becomes flatter as the number of workers rises.

11. Quantity of Apples Production 300 function 280 240 180 100 1 2 3 4 5 0 Quantity of Apple Pickers Diminishing Marginal Product of Labor

12. Factors of Production • Factors of production are the inputs used to produce goods and services.

13. The Market for the Factors of Production • What are the major factors of production? • What determines how much is paid for each factor of production? • What determines how much of each factor of production will be purchased?

14. A Firm’s Demand For Labor • Labor is the most important factor of production. • Labor markets, like other markets in the economy, are governed by the forces of supply and demand.

15. Price of Wage of Apples Apple Pickers Supply Supply P W Demand Demand 0 Q Quantity of 0 L Quantity of Apples Apple Pickers A Firm’s Demand For Labor The Market for Apples The Market for Apple Pickers

16. Determinants of Resource Demand • Changes in the Price of other resources • Changes in Productivity • technological improvements • Changes in Product Demand • resource demand is derived from product demand.

17. A Firm’s Demand For Labor • Most labor services, rather than being final goods ready to be enjoyed by consumers, are inputs into the production of other goods.

18. The CompetitiveProfit-Maximizing Firm • Two basic assumptions about the firm are: ä It is competitive in both the product market and the input market. ä Its goal is to maximize profits.

19. The Competitive Profit-Maximizing Firm • The firm must consider how the size of its workforce affects the amount of output that is produced.

20. Rule for Employing Resources • MRP = MRC rule • It will be profitable for a firm to hire additional units of a resource up to the point at which that resource’s MRP = MRC. • MRP is also equal to the resource demand curve.

21. How many workers to hire? • To maximize profits, the firm considers how much profit each worker would bring in. ä Called the value of the marginal product.

22. Value of the Marginal Product • The value of the marginal product is measured in dollars. • It diminishes as the number of workers rises because the market price of the good is constant.

23. Value of the Marginal Product Quantity of Apple Pickers Value of the Marginal Product Value of marginal product (demand curve for labor) 0 0

24. Labor-Market Equilibrium • Labor supply and labor demand determine the equilibrium wage. • Shifts in the supply or demand curve for labor cause the equilibrium wage to change.

25. Labor-Market Equilibrium • Profit maximization by competitive firms demanding labor ensures that the equilibrium wage always equals the value of the marginal product of labor. • The wage adjusts to balance the supply and demand for labor.

26. Wage Supply (price of labor) Equilibrium wage, W Demand 0 Equilibrium employment, L Quantity of Labor Labor-Market Equilibrium

27. Shifts in the Supply and Demand of Labor • Shift in Supply of Labor ä May be caused by a change in the number of workers. • Shift in Demand for Labor ä May be caused by a change in the demand for the final product produced by labor, labor productivity, and prices of other resources.

28. Shift in Labor Supply • An increase in the supply of labor : ä Results in a surplus of labor. ä Puts downward pressure on wages. ä Makes it profitable for firms to hire more workers. ä Results in diminishing marginal product. ä Lowers the value of the marginal product. ä Gives a new equilibrium.

29. Wage (price of labor) Quantity of Labor Shift in Labor Supply 0

30. Wage (price of labor) Quantity of Labor Shift in Labor Supply Supply, S1 Demand 0

31. Wage (price of labor) Quantity of Labor Shift in Labor Supply Supply, S1 W1 Demand 0 L1

32. Wage (price of labor) Quantity of Labor Shift in Labor Supply Supply, S1 S2 W1 Demand 0 L1

33. Wage 1. An increase in (price of labor supply... labor) Quantity of Labor Shift in Labor Supply Supply, S1 S2 W1 Demand 0 L1

34. Wage 1. An increase in (price of labor supply... labor) Quantity of Labor Shift in Labor Supply Supply, S1 S2 W1 W2 Demand 0 L1 L2

35. Wage 1. An increase in (price of labor supply... labor) 2. ...reduces the wage... Quantity of Labor Shift in Labor Supply Supply, S1 S2 W1 W2 Demand 0 L1 L2

36. Wage 1. An increase in (price of labor supply... labor) 2. ...reduces the wage... Quantity of Labor Shift in Labor Supply Supply, S1 S2 W1 W2 Demand 3. ...and raises employment. 0 L1 L2

37. Shift in Labor Demand • An increase in the demand for labor : ä Makes it profitable for firms to hire more workers. ä Puts upward pressure on wages. ä Raises the value of the marginal product. ä Gives a new equilibrium.

38. Wage (price of labor) Quantity of Labor Shift in Labor Demand 0

39. Wage (price of labor) Quantity of Labor Shift in Labor Demand Supply Demand, D1 0

40. Wage (price of labor) Quantity of Labor Shift in Labor Demand Supply W1 Demand, D1 0 L1

41. Wage (price of labor) Quantity of Labor Shift in Labor Demand Supply W1 D2 Demand, D1 0 L1

42. Wage (price of labor) 1. An increase in labor demand... Quantity of Labor Shift in Labor Demand Supply W1 D2 Demand, D1 0 L1

43. Wage (price of labor) 1. An increase in labor demand... Quantity of Labor Shift in Labor Demand Supply W2 W1 D2 Demand, D1 0 L1 L2

44. Wage (price of labor) 1. An increase in labor demand... 2. ...increases the wage... Quantity of Labor Shift in Labor Demand Supply W2 W1 D2 Demand, D1 0 L1 L2

45. Wage (price of labor) 1. An increase in labor demand... 2. ...increases the wage... Quantity of Labor Shift in Labor Demand Supply W2 W1 D2 Demand, D1 0 L1 L2 3. ...and increases employment.

46. Combination of Several Resources • The Profit-Max Rule • MRP = MRC • The Least-Cost Rule • MPL/PL = MPc/Pc • McConnell pgs. 322-324

47. Marginal Product Of Capital (MPC) Marginal Product Of Labor (MPL) = Price of Capital (PC) Price of Labor (PL) The Least Cost Rule Minimize cost of producing a given output Last dollar spent on each resource yields the same marginal product

48. Elasticity of Resource Demand • Ease of Substitutes • Receptionists vs Physicians • Elasticity of Product Demand • Percent of Total Cost

49. Case Study: Productivity and Wages • What causes productivity and wages to vary so much over time and across countries? äPhysical Capital: When workers work with a larger quantity of equipment and structures, they produce more. äHuman Capital: When workers are more educated, they produce more.

50. Case Study: Productivity and Wages • What causes productivity and wages to vary so much over time and across countries? äTechnological Knowledge: When workers have access to more sophisticated technologies, they produce more.