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Unit 6: The FACTOR MARKET

Unit 6: The FACTOR MARKET. (aka: The Resource Market … or Input Market). Unit 6: The Factor Market. Length: 5-6 Lessons Chapters: 12 & 13 in textbook Good News: Only two Graphs to learn ( PC vs. Monopsony – for factor market )

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Unit 6: The FACTOR MARKET

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  1. Unit 6: The FACTOR MARKET (aka: The Resource Market … or Input Market)

  2. Unit 6: The Factor Market • Length: 5-6 Lessons • Chapters: 12 & 13 in textbook • Good News: • Only two Graphs to learn (PC vs. Monopsony – for factor market) • Many concepts are just the application of things we have already learned. • Basically just Supply and Demand

  3. Product Market Producers Supply Households Demand

  4. Resource Market Producers Demand Households Supply

  5. Resource Markets Perfect Competition Monopsony Perfectly Competitive Labor Market • Characteristics: • 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

  6. Perfectly Competitive Labor Market and Firm SL Wage Wage ? $10 DL Q Q 5000 Firm Industry

  7. DERIVED 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

  8. How do you know how many resources (workers) to employ? Continue to hire until… MRP = MFC Remember the Paper Chain Activity

  9. Change in Total Cost Marginal Factor Cost = Change in Inputs Marginal Factor Cost (MFC) The additional cost of an additional worker (or resource). In a perfectly competitive labor market 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:

  10. Change in Total Revenue Marginal Revenue Product = Change in Inputs Marginal Revenue Product (MRP) 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……. $100 Another way to calculate MRP is:

  11. Perfectly Competitive Labor Market and Firm SL Wage Wage ? WE DL Q Q QE Industry Firm

  12. Side-by-side graph showing Market and Firm SL Wage Wage SL=MFC WE DL=MRP DL Q Qe Q QE Industry Firm

  13. Industry Graph 18

  14. DEMAND RE-DEFINED • What is Demand for Labor? • Demand = quantities of workers that businesses are willing and able to hire at each wage. • What is the Law of Demand for Labor? • There is an INVERSE relationship between wage and quantity of labor demanded. • What is Supply for Labor? • Supply = quantities of individuals that are willing and able to sell their labor at each wage. • What is the Law of Supply for Labor? • There is a DIRECT (or positive) relationship between wage and quantity of labor supplied. • Workers face trade-off between work and leisure 19

  15. Where do you get the Market Demand? Market McDonalds Burger King Other Firms P P P P $8 $8 $8 $8 D D D D Q Q Q Q 3 2 25 30

  16. 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. • As wage falls, Qd increases. • As wage increases, Qd falls. Wage DL Quantity of Workers 21

  17. 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. Labor Supply Wage • As wage increases, Qs increases. • As wage decreases, Qs decreases. Quantity of Workers 22

  18. Market Equilibrium Wage (the price of labor) is set by the market. EX: Supply and Demand for Carpenters Labor Supply = MFC Wage $30hr Labor Demand = MRP Quantity of Workers 23

  19. Individual Firms Wage SL= MFC DL= MRP Qe Q 24

  20. 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. • What is the MFC for each worker? • What is the first worker’s MRP? • What is the second worker’s MRP? • How many workers will you hire? • How much are you willing to pay the first worker? • How much will you actually pay the first worker? • What must happen to the wage in the market for you to hire the second worker? 25

  21. 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

  22. Use the following data: Price = $10 Wage = $20 Total Product (Output) Workers 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 *Hint* How much is each worker worth? 27

  23. Use the following data: Price = $10 Wage = $20 Total Product (Output) Units of Labor 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 • What is happening to Total Product? • Why does this occur? • Where are the three stages? 28

  24. Use the following data: Price = $10 Wage = $20 Total Product (Output) Marginal Product (MP) Units of Labor - 7 10 7 3 2 1 -3 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 This shows the PRODUCTIVITY of each worker. Why does productivity decrease? 29

  25. Use the following data: Price = $10 Wage = $20 Total Product (Output) Marginal Product (MP) Units of Labor Product Price - 7 10 7 3 2 1 -3 0 10 10 10 10 10 10 10 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 Price constant because we are in a perfectly competitive market. 30

  26. Use the following data: Price = $10 Wage = $20 Total Product (Output) Marginal Revenue Product Marginal Product (MP) Units of Labor Product Price - 7 10 7 3 2 1 -3 0 10 10 10 10 10 10 10 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 0 70 100 70 30 20 10 -30 This shows how much each worker is worth 31

  27. Use the following data: Price = $10 Wage = $20 Total Product (Output) Marginal Revenue Product Marginal Factor Cost Marginal Product (MP) Units of Labor Product Price - 7 10 7 3 2 1 -3 0 10 10 10 10 10 10 10 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 0 70 100 70 30 20 10 -30 0 20 20 20 20 20 20 20 How many workers should you hire? 32

  28. Factor Markets (Part 2)Drawing the Factor Demand Curve 33

  29. P.Q. • Give an example of Derived Demand. • Define MRP. • Explain the difference between MRP and MR. • Why does the MRP fall as more workers are hired? • Identify the two ways to calculate MRP. • Define MFC. • Explain the difference between MFC and MC. • How does a firm decide how many workers to hire?

  30. Does having an education guarantee you a higher income?

  31. 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

  32. Real Life Application • Top 5 Fastest Growing Jobs (2000-2010) • Computer Software Engineers, Applications • Computer Support Specialists • Computer Software Engineers, Systems • Computer Systems Administrators • Data Communications Analyst • Top 5 Fastest Declining Jobs • Railroad Switch Operators • Shoe Machine Operators • Telephone Operators • Radio Mechanics • Loan Interviewers • WHY? “You’ve got to learn technology!”

  33. 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”)

  34. Average Wage (1964-2006)

  35. Wage Trends Other US labor market trends: • Workers with higher skills are paid more than unskilled workers. This gap is increasing. • College graduates earn more than high school graduates and the gap has been increasing. • Women, on average, are paid lower than men, although the gap has become more narrow over the years.

  36. Drawing the Demand Curve for Resources 43

  37. Yesterday's Activity Price = $10 Wage = $20 Total Product (Output) Marginal Product (MP) Units of Labor Product Price MRP - 7 10 7 3 2 1 -3 0 10 10 10 10 10 10 10 0 70 100 70 30 20 10 -30 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 Shows how many workers a firm is willing and able to hire at different wages.

  38. Use the following data: Price = $10 Wage = $20 Total Product (Output) Marginal Product (MP) Units of Labor Product Price MRP - 7 10 7 3 2 1 -3 0 10 10 10 10 10 10 10 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 0 70 100 70 30 20 10 -30 Demand for this resource Plotting the D=MRP curve

  39. Demand=MRP Why is it downward sloping? Because of the law of diminishing marginal returns Wage Rate $100 80 60 40 20 Each additional resource is less productive and therefore is worth less than the previous one D = MRP Q 1 2 3 4 5 6 7 8 Quantity of Workers

  40. Demand=MRP Wage Rate This model applies to land, labor, and capital Notice the inverse relationship between wage and quantity of resources demand $100 80 60 40 20 D = MRP Q 1 2 3 4 5 6 7 8 Quantity of Workers

  41. What happens if demand for the product increases? Wage Rate $100 80 60 40 20 MRP increases causing demand to shift right D1 = MRP1 D = MRP Q 1 2 3 4 5 6 7 8 Quantity of Workers 48

  42. 3 Shifters of Factor Demand • 1.) 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?

  43. Drawing the Demand Curve for Resources 50

  44. Use the following data: Price = $10 Wage = $20 Total Product (Output) Additional Revenue per worker Additional Cost per worker Marginal Product (MP) Units of Labor Product Price - 7 10 7 3 2 1 -3 0 10 10 10 10 10 10 10 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 0 70 100 70 30 20 10 -30 0 20 20 20 20 20 20 20 • How would this change if the demand for the good increased significantly? • Price of the good would increase. • Value of each worker would increase. 51

  45. Use the following data: Price = $100 Wage = $20 Total Product (Output) Additional Revenue per worker Marginal Product (MP) Units of Labor Product Price - 7 10 7 3 2 1 -3 0 100 100 100 100 100 100 100 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 52

  46. Use the following data: Price = $100 Wage = $20 Total Product (Output) Additional Revenue per worker Marginal Product (MP) Units of Labor Product Price - 7 10 7 3 2 1 -3 0 100 100 100 100 100 100 100 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 0 700 1000 700 300 200 100 -300 Each worker is worth more!! THIS IS DERIVED DEMAND. 53

  47. Use the following data: Price = $10 Wage = $20 Total Product (Output) Additional Revenue per worker Additional Cost per worker Marginal Product (MP) Units of Labor Product Price - 7 10 7 3 2 1 -3 0 10 10 10 10 10 10 10 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 0 70 100 70 30 20 10 -30 0 20 20 20 20 20 20 20 • How would this change if the productivity of each worker increased? • Marginal Product would increase. • Value of each worker would increase. 54

  48. Use the following data: Price = $10 Wage = $20 Total Product (Output) Additional Revenue per worker Marginal Product (MP) Units of Labor Product Price - 70 100 70 30 20 10 -30 0 10 10 10 10 10 10 10 0 1 2 3 4 5 6 7 0 70 170 240 270 290 300 270 0 700 1000 700 300 200 100 -300 Each worker is worth more! More demand for the resource. 55

  49. 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, 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.

  50. 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, 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 decrease decrease increase increase

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