Transcript Chapter 27, 28, & 29

Tests ???? 2006
 Test on Units 4 & 5 – After the AP Test, Monday
May 15. Your last textbook test!
 10 point Bonus Homework for unit 4 due Friday
May 5. All Homework for unit 4 after the AP
Test, Monday May 15.
 A week break of Wal-Mart and Daddy Day Care.
 Final two weeks the state of our current U.S. and
global economy and Freakonomics.
 Your Choice last essay to be scored as a test on
one of the last topics.
The Demand for
Resources
CHAPTER TWENTY-SEVEN
Product Market
Burgers
P
Factor Markets
CELL
S
D2
D
P
S
S
Q Land P
P
D
D2
D
S
Q Entrepreneurship
P
Q
D
Markets Move in Unison!
D2
S
D2
D2
Q Labor
D
Q Capital
Determinants of Resource
Demand or Factor Demand(CELL)
Changes in Product Demand
Changes in Productivity
1 - Quantities of Other Resources
2 - Technological Progress
3 - Quality of the Resource
Prices of Other Resources
Supply & Demand
Product and Factor Markets
S
S
P
P
D
Quantity
Product Market
D
Quantity
Factor Market
CELL
What if Product Demand Falls
Product and Factor Markets
S
S
P
P
D
Quantity
Product Market
D
Quantity
Factor Market
CELL
What if Product Demand Falls
Product and Factor Markets
S
S
P
P
D
Quantity
Product Market
D
Quantity
Factor Market
CELL
What if Demand Falls
Product and Factor Markets
S
S
P
P
D
Quantity
Product Market
D
Quantity
Factor Market
CELL
Supply & Demand
Product and Factor Markets
S
S
P
P
D
Quantity
Product Market
D
Quantity
Factor Market
CELL
What if Factor Demand Increased?
Product and Factor Markets S
S
P
P
D
Quantity
Product Market
D
Quantity
Factor Market
CELL
What if Factor Demand Increased?
Product and Factor Markets S
S
P
P
D
Quantity
Product Market
D
Quantity
Factor Market
CELL
Failure to Know Difference Between
Product and Factor Markets Major Miss for the AP Exam
S
S
P
P
D
Quantity
Product Market
D
Quantity
Factor Market
CELL
Marginal Productivity
Theory of Resource Demand
Resource Demand as a Derived Demand
Marginal Product (MPP=^TP/^Q)
Marginal Revenue Product (MRP)
Productivity (MRP=MPP*Po)
Product Price (MRP=^TR/^Q)
Marginal Resource Cost (MRC) – in a purely
competitive resource market MRC=Price
Rule for Employing a Single Resource:
MRP = MRC
Optimum Combination of Resources
Rules for multiple inputs!
Least-Cost Combo Rule
MPP of Labor
MRC of Labor
MPP of Capital
MRC of Capital
Profit-Maximizing Combination
MRPL
MRPC
MRCL
MRCC
1
For nonmath people: if MRP = MRC then MRP/MRC = 1
Ha Ha Ha – Factor Markets are Fun!
1
The
Product Market
S
Individual Firms
Households
Signals
D
Individual Firm
Product Market
Household
s = MC
S
P*
d = MR
q*
P*
Q*
P*
s
D
d
q*
The Product Market signals both Households and Individual Firm
the price of products. The signals indicate P* to both.
Based on its cost of producing one more firms determine how much.
Based on their demand consumer determine how many.
Workers
Factor Market
Labor
Individual Firms
s = MSC
S
P*
d = MSB
P*
MRC
P*
MRP
D
q*
Q*
q*
The Factor Market signals both Workers and Individual Firms
the price of labor & the wage of labor. The signals indicate P* to both.
Based on its revenue/worker(mrp) vs. its costs(mrc) firms determine how
many workers to hire (mrp=mrc). Based on their Marginal Benefit vs.
Marginal Cost workers determine whether or not they will work for this
wage (msc=msb).
Supply & Demand:
Labor in a Competitive Firm and Market
Wage Rate (dollars)
S
D
Target
Workers
Wc
S = MRC
Wc
($6.85)
D = MRP
(S mrp’s)
d = mrp
(1000)
Quantity of Labor
Quantity of Labor
Individual Firm
Market
Supply & Demand:
Labor in a Competitive Firm and Market
Wage Rate (dollars)
S
($6) W
c
D
Marginal Resource
Cost (MRC) will be
constant and equal to
S = MRC
resourceWprice
c
(the wage rate)
D = MRP
(S mrp’s)
d = mrp
(1000)
Quantity of Labor
Quantity of Labor
Individual Firm
Market
Labor Market Theory
The Real World Will Get You!
• Human Capital
– Education = Income
• Sorting Mechanism
– Hoops
• Radical View
– Rich Dad Poor Dad
• Dual Labor Market
– Good Job v Bad Job Market
3,500,000
• Fast food workers lead
the nation in minimum
wage jobs
• McDonalds Corp #1 at
hiring minimum wage
workers in the world
• How many minimum
wage workers does
McDonalds own?
CAUSES OF INCOME INEQUALITY-Unit V
1 - Ability Differences
2 - Education and Training:
Human Capital & Sorting Mechanism Theories
3 - Discrimination
4 - Tastes and Risks
5 - Unequal Distribution of Wealth
Radical Theory
6 - Market Power
7 - Luck, Connections, and Misfortune
Good Job, Bad Job Market
EQUALITY-EFFICIENCY TRADEOFF
Wage Rate (dollars)
Monopsonistic Labor Market
MRP
DD
MRC
S=MRC
The MRC of a
Monopsonist is
Pulled Above the
Supply
Wc
Wm
MRP
DD
Qm Qc
Quantity of Labor
Monopsonistic Labor Market
Wage Rate (dollars)
MRC
Price paid for
resources less
than in a
Competitive
Market
MRP
S
MRP = MRC
Profit Max
S(MRC)=DD(MRP)
Wc
Wm
MRP
Qm
Qc
Quantity of Labor
Qm units of
labor hired
less than in a
Competitive Market
Monopsonist & Minimum wage…
MRC
Wage Rate (dollars)
S
Wc
Wg
Wm
D
Qm Q
g
Qc
Quantity of Labor
Goodwill, Buy American
Demand-Enhancement Model
Wage Rate (dollars)
S
Wu
...by increasing
product demand
...by increasing
productivity
...by increasing
the price of
substitutes
Wc
D2
D1
Qc
Qu
Quantity of Labor
Occupational Licensing
Exclusive or Craft Union Model S
Wage Rate (dollars)
2
S1
Wu
...restrictive
membership
policies
...occupational
licensing
Doctors, Lawyers
Teachers….
Wc
D
Qu
Qc
Quantity of Labor
Close Shop Model
...by organizing
virtually all
S workers and
thereby control
of the supply
curve for labor
Wage Rate (dollars)
Inclusive Unionism
Wu
Wc
D
Qu
Qc
Quantity of Labor
ECONOMIC RENT
Note: Fixed Total Supply
means...
Perfectly Inelastic Supply
therefore...
Demand Determines Price!
Determination of Land Rent
Changes in the demand for land...
Land Rent (dollars)
Inelastic Supply...
0
Copyright McGraw-Hill, Inc.,
Q
Acres of Land
Determination of Land Rent
Changes in the demand for land...
Land Rent (dollars)
S
0
S
Acres of Land
Inelastic Supply...
combines with
demand...
Q
Determination of Land Rent
Changes in the demand for land...
Land Rent (dollars)
S
R1
Inelastic Supply...
combines with
demand... to
determine RENT
D1
0
S
Acres of Land
Q
Determination of Land Rent
Changes in the demand for land...
Land Rent (dollars)
S
If demand decreases...
R1
D1
0
S
Acres of Land
Q
Determination of Land Rent
Changes in the demand for land...
Land Rent (dollars)
S
If demand decreases...
Rent decreases.
R1
R2
D1
D2
0
S
Acres of Land
Q
Determination of Land Rent
Changes in the demand for land...
Land Rent (dollars)
S
R1
If demand decreases...
Rent decreases.
...and decreases
R2
D1
R3
0
D2
D3
S
Acres of Land
Q
Determination of Land Rent
Changes in the demand for land...
Land Rent (dollars)
S
R1
If demand decreases...
Rent decreases.
...and decreases
...and decreases
R2
D1
R3
0
D2
D3
S
D4
Acres of Land
Q
Economic Rent & Stardom?
Changes in the demand for a fixed resource...
Brett Favre’s Salary
S
$100,000,000
Pure
Economic
Rent
$99,800,000!
D
Would play for $200,000
for love of the game!
$200,000
0
Perfectly
Inelastic Supply...
combines with
demand... to
determine Salary!
1
Q
All Pro Quarter Backs with
100+ Games Started without a miss
Factor Market Theory
• Land earns Rent, or Economic Rent
• Labor earns Wages or Salary
• Capital earns Interest
• Entrepreneurship earns Economic Profit
Interest Rate and the
Role of the Interest Rate:
Interest & Total Output: RGDP
 Interest & Capital Investment
 Interest & R&D Investment
 Nominal Interest Rates vs.
Real Interest Rates
Loanable Funds Theory of Interest
Nominal i = Real i + Rate of Inflation
Interest Rate i, (percent)
MS
8%
4% Inflation
+4% Real Interest Rate
8% Nominal Interest Rate
MD
M1
Quantity of Loanable Funds
Rate of interest, i (percent)
The Money Market
MS
10
7.5
i
5
2.5
MD
0
0
50
100
150
200
250 300
Amount of money demanded
(billions of dollars)
Rate of interest, i (percent)
The Money Market
Sm1
Sm
10
Any Micro
7.5
Or any Macro AP
ie
Question
concerning
5
Interest Rate uses this
2.5
Dm
Graph!!!!
0
0
50
100
150
200
250 300
Amount of money demanded
(billions of dollars)
Rate of interest, i (percent)
The Money Market
MS – Fed controls MS
OMO, RRR, DR, FFR
10
7.5
i
5
MD – Fiscal
Policy: G,T,
Surplus, Deficit
2.5
0
0
50
100
150
200
250 300
Amount of money demanded
(billions of dollars)
Transmission Graphs
Real rate of interest, i
Monetary Policy and Equilibrium GDP
Sm1
8
R 10
i
R 8
6
6
10
Dm
0
Quantity of money demanded and supplied
MEI
Investment
Demand
0
Amount of planned
investment, I
Price level
AS
MEI – Marginal Efficiency of Investment
As interest falls more Investment becomes
Possible and Profitable!
P1
AD1
Real domestic output, GDP
Real rate of interest, i
Monetary Policy and Equilibrium GDP
Sm1
8
R 10
i
R 8
6
6
10
Dm
0
Quantity of money demanded and supplied
MEI
Investment
Demand
0
Amount of planned investment, I
Price level
AS
P1
AD1
Real domestic output, GDP
If the money supply
increases to
stimulate the
economy....
Real rate of interest, i
Monetary Policy and Equilibrium GDP
Sm1 Sm2
8
R 10
i
R 8
6
6
10
Dm
0
Quantity of money demanded and supplied
Price level
AS
P2
P1
AD1
AD2
Real domestic output, GDP
MEI
Investment
Demand
0
Amount of planned investment, I
Real rate of interest, i
Monetary Policy and Equilibrium GDP
Sm1 Sm2
8
R 10
i
R 8
6
6
10
Dm
0
Quantity of money demanded and supplied
MEI
Investment
Demand
0
Amount of planned investment, I
Price level
AS
P2
P1
If the money
supply increases
again....
AD1
AD2
Real domestic output, GDP
Real rate of interest, i
Monetary Policy and Equilibrium GDP
Sm1 Sm2 Sm3
8
R 10
i
R 8
6
6
10
Dm
0
MEI
Investment
Demand
0
Quantity of money demanded and supplied
Amount of planned investment, I
Price level
AS
P3
P2
P1
AD1
AD2
Real domestic output, GDP
AD3
Long Run Effects:
1. Increased planned investment
will lead to increased AS
2. Canceling effect: AD up, MD up,
i up, and I down, = AD down
3. i down = international $ down,
PL up = X down
Real rate of interest, i
Fiscal Policy and Equilibrium GDP
Sm1
Price level
10
AD1
AD2
Real domestic output, GDP
R 10
i
8
R
6
0
PI2
MEI
PI1
Amount of planned investment, I
8
6
0
Dm2
Dm1
Quantity of money demanded and supplied
Long Run Effects:
1. Decreased planned investment
will lead to decreased AS
2. Canceling effect: I down, AD down,
MD down, and i down, = AD up
3. i up = international $ up, PL down = X up
SCARCE RESOURCES
PROPERTY RESOURCES
LAND
CAPITAL
HUMAN RESOURCES
LABOR
What’s missing????
SCARCE RESOURCES
PROPERTY RESOURCES
LAND
CAPITAL
HUMAN RESOURCES
LABOR
ENTREPRENEURIAL ABILITY
ENTREPRENEURIAL ABILITY
TAKES THE INITIATIVE
ENTREPRENEURIAL ABILITY
TAKES THE INITIATIVE
MAKES POLICY DECISIONS
ENTREPRENEURIAL ABILITY
TAKES THE INITIATIVE
MAKES POLICY DECISIONS
SOURCE OF INNOVATION
ENTREPRENEURIAL ABILITY
TAKES THE INITIATIVE
MAKES POLICY DECISIONS
SOURCE OF INNOVATION
THE RISK BEARER
RESOURCE PAYMENTS
PROPERTY RESOURCES
LAND
CAPITAL
RENT
INTEREST
HUMAN RESOURCES
LABOR
ENTREPRENEUR
WAGES
PROFIT &
LOSS