Transcript Session 10 Labor - University of Connecticut

Session 10 Resource Markets
Chapter 10 and 11 in the text
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Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
1
End
Lecture Outline Session 10
1.0 Begin
2.0 The Market for Resources
3.0 Adjustment and Surplus
4.0 Shifts in Resource Demand
5.0 Monopsony & Monopoly
6.0 Labor Supply
7.0 End
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
2 End
Example: Bilateral Monopoly in Labor Market

Seattle -- At the heart of the union machinists'
strike against Boeing Co. is a high-stakes
showdown over something the aerospace giant
once touted as a manufacturing innovation: Its
effort to outsource key roles in producing its new
787 Dreamliner jet. Nearly 27,000 machinists
walked off the job at 12:01 a.m. Saturday after
last-ditch talks for a new three-year contract
failed. While wages and health-care costs are big
issues, job security has emerged as perhaps the
most crucial one, with both sides signaling that
the new contract represents a major crossroads.
Begin 2 Market 3 Adjustment
The machinists' strike is a classic
illustration of the bi-lateral
monopoly model.ﾊﾊ
The Boeing labor union represents a
monopoly seller of aircraft worker
services,
in the diagram its wage demand
demand is represented by the
Monopoly Wage of $15.ﾊ
The Boeing management represents a
monopsony buyer of aircraft worker
services,
in the diagram its wage offer is
represented by the Monopsony Wage
of $8.
4 Shifts 5 M & M
6 Labor
3 End
Example
A Hollywood Story Without an Ending
November 12, 2007 7:51 a.m. WSJ
— In Hollywood, the West Coast
capital of conventional wisdom,
several theories about the
Writers Guild strike are widely
held: The longer writers and
their production patrons stay
away from the negotiating table,
the harder it'll be to come back;
no side is likely to emerge
unscathed; As the second week
of the strike begins, layoffs have
already spread across parts of
the TV sector and hostility is
growing,. An example of a bilateral
monopoly
Begin
© 2006 Thomson/South-Western
2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
4 End
Example of Supply Decrease
U.S. Cracks Down on Hiring of Illegal Immigrants By ERIC
LIPTONPublished: April 20, 2006 NY Times
— The apprehension on
Wednesday of more than 1,100
illegal immigrants employed by
a Houston-based pallet supply
company, as well as the arrest of
seven of its managers,
represents the kickoff of a more
aggressive federal immigration
enforcement campaign intended
to hold employers accountable
for breaking the law, Homeland
Security Secretary Michael
Chertoff said today. An example
of a decrease in labor supply
Begin
© 2006 Thomson/South-Western
2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
5 End
2.0 Resource Demand and Supply
2.1 Resource Demand
2.1a Marginal Revenue Product: Competition
2.1b Price Maker: Monopoly
2.2 Resource Supply
Marginal Resource Cost
2.3 Equilibrium Wage and Employment
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
6 End
2.1 Demand Curve: Marginal Revenue Product
 The demand curve for a resource is derived from the marginal product of the input and
the marginal revenue from selling that output . This demand curve is the marginal
revenue product curve for that factor
 Marginal product is the change in total product from employing one more worker
and reflects the law of diminishing returns
 Marginal revenue is the change in total revenue associated with the sale of the
output produced by the factor.
 The slope of the demand curve depends on the structure of the output market. If sold
in a perfectly competitive market the slope is flatter, in a monopoly market, the slope is
steeper.
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
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7 End
2.1a Output sold in Perfectly Competitive
 Here, marginal revenue productMarket
is the marginal product of the resource
multiplied by the product price of $20, the marginal benefit from hiring
one more worker
 Note that because of diminishing returns, the marginal revenue product
falls steadily as the firm employs additional units of the resource.
Workers
per day
(1)
0
1
2
3
4
5
6
7
8
9
10
11
12
Total
Product
(2)
Marginal
Product
(3)
0
10
19
27
34
40
45
49
52
54
55
55
53
10
9
8
7
6
5
4
3
2
1
0
-2
Product
Price
(4)
$20
20
20
20
20
20
20
20
20
20
20
20
20
Begin 2 Market 3 Adjustment
Total
Revenue
(5)
$0
200
380
540
680
800
900
980
1040
1080
1100
1100
1060
Marginal
Revenue
Product
(6)
$200
180
160
140
120
100
80
60
40
20
0
-40
4 Shifts 5 M & M
6 Labor
8 End
2.1b Output sold in Monopoly Market
 If the firm has some market power over the price that it charges, the demand curve
slopes downward and price must be lowered to sell more
 The profit-maximizing firm should be willing and able to pay as much as the
marginal revenue product for an additional unit of the resource
 The marginal revenue product for the price maker declines because of the law of
diminishing returns and because additional output can be sold only if the price is
lower
Workers
per day
(1)
1
2
3
4
5
6
7
8
9
10
11
Total
Product
(2)
10
19
27
34
40
45
49
52
54
55
55
Marginal
Product
Total
Revenue
Price
Revenue
Product
(3)
(4) = (2)  (3)
(5)
$40.00
35.20
31.40
27.80
25.00
22.50
20.50
19.00
18.00
17.50
17.50
Begin 2 Market 3 Adjustment
400.00
668.80
847.80
945.20
1000.00
1012.50
1004.50
988.00
972.00
962.50
962.50
$400.00
268.80
179.00
97.40
54.80
12.50
-8.00
-16.50
-16.00
-9.50
0.00
4 Shifts 5 M & M
6 Labor
9 End
2.2 Supply Curve: Marginal Resource Cost
The additional cost to the firm of employing one
more unit of labor
Since the typical firm hires such a tiny fraction of
the available resources, its employment decision
has no effect on the market price of that resource
Each firm usually faces a given market price for
the resource and decides only on how much to
hire at that price
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
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10 End
2.2a SUPPLY CURVE: Market v Firm
In panel (a) the intersection of market
demand and supply determines the market
wage of $100 per day  becomes the
marginal resource cost of labor to the firm
regardless of how many workers the firm
employees.
In panel (b) the marginal resource cost
curve is shown by the $100 market wage.
The marginal revenue product, or
resource demand curve, is based on the
firm being a price taker. In this case the
firm will hire 6 workers per day.
$200
Resource
demand
Resource
supply
100
0
b) Firm
Dollars per worker per da y
Dollars per worker per day
a) Market demand for factory workers
$200
Marginal revenue product =
resource demand
Marginal resource cost =
resource supply
100
Workers
0
6
per day
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
E
10
6 Labor
Workers
per day
11 End
2.3 Equilibrium Wage and Employment
S
Dollars per hour of labor
Here we illustrate
with “labor” as the
specific resource
The demand curve
slopes downward
and the supply curve
slopes upward
The demand for
and supply of
resources depends on
the willingness and
ability of buyers and
sellers in resource
markets
W
D
0
Begin 2 Market 3 Adjustment
E
4 Shifts 5 M & M
Hours of labor per
period
6 Labor
12 End
3.0 Adjustment and Surplus
3.1 Price Differentials:
A. Temporary/Permanent
3.2 Opportunity Costs
A. Pure Economic Rent
B. Pure Opportunity Costs
Begin 2 Market 3 Adjustment
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3.1 Differences in Resource Prices
 Resource prices sometimes differ temporarily across markets
because adjustment takes time
 The differences can be between industries, or geographic regions
 When resource markets are free to adjust, price differences trigger
the reallocation of resources, which equalizes payments for similar
resources
 Not all resource price differences cause a reallocation of resources
 For example, land may lead to permanent differences in prices
 Certain wage differentials stem from the different costs of acquiring
the education and training required to perform particular tasks
 Other earning differentials reflect differences in the nonmonetary
aspects of similar jobs
Begin 2 Market 3 Adjustment
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3.1a Example: Differences in Demand Market for Carpenters
•Differences in the demand for carpenters in alternative uses
•If carpenters earn $25 an hour to build homes (panel a), $5 more than carpenters making
furniture (panel b), some will move from furniture making to home building: the wage in home
building decreases and the wage in furniture building increases. Eventually, this shift will
continue until the wage is equal at $24 in both markets.
Begin 2 Market 3 Adjustment
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3.2 Opportunity Cost (50%), Economic Rent (50%)
(c) Resource returns are divided between
economic rent and opportunity cost
S
Dollars per unit
If the supply curve slopes
upward, the resource
supplier earns some
economic rent and some
opportunity cost
At a market clearing
wage of $10, the pink
shaded area identifies
the opportunity cost
and
the blue shaded area
the economic rent
Both demand and supply
determine the equilibrium
price and quantity
$10
Economic rent
5
D
Opportunity costs
0
Begin 2 Market 3 Adjustment
5,000
10,000
4 Shifts 5 M & M
Hours of labor
per week
6 Labor
16 End
3.2a Opportunity Cost (0%), Economic Rent (100%)
The supply of grazing land
is shown by the perfectly
inelastic vertical supply
curve, indicating 10 million
acres have no alternative use
Since the supply of land is
fixed, the amount paid to
rent the land has no effect on
the quantity supplied: the
land’s opportunity cost is
zero and all earnings are
economic rent
The fixed supply
determines the equilibrium
quantity of the resource,
while demand determines the
equilibrium price
(a) All Resource Returns are Economic Rent
S
$1
Economic
rent
D
0
Begin 2 Market 3 Adjustment
10
4 Shifts 5 M & M
Millions of acres
per month
6 Labor
17 End
3.2b Opportunity Cost (100%), Economic Rent (0%)
(b) All Resource Returns are Opportunity Costs
S
$10
Opportunity
costs
D
0
Hours of labor
week
Begin 2 Market per
3 Adjustment
At the other extreme is the case in
which a resource can earn as much
in its best alternative use as in its
present use
 the supply curve is perfectly
elastic  horizontal  all
resource returns are
opportunity costs as shown by
the shaded area
Here, the horizontal, perfectly
elastic, supply determines the
equilibrium wage while demand
determines the equilibrium quantity
The more elastic the resource
supply, the lower the economic rent as
a portion of total earnings
1,000
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18 End
4.0 Factors Shifting Resource Demand
4.1 Shift Factors
4.2 Substitutes
Chocolate: Corn and Coca butter
4.3 Complements
Travel: Gasoline and SUVs
4.4 Technology
4.5 Final Product
Iraq War and Big Tires
EDx, y
Begin 2 Market 3 Adjustment

Qy
(Qy  Qy' ) / 2
Px
( Px  Px' ) / 2
4 Shifts 5 M & M
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19 End
4.1 Demand for Resources: Shift Factors
The resource demand curve is the resource’s
marginal revenue product. Shift factors include:
The price of related inputs.
A change in the price of a substitute resource
A change in the price of a complement resource
A change in technology
The market price for the output.
A change in the market demand for the output produced
Begin 2 Market 3 Adjustment
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4.2 Price of a Substitute Resource
 Substitutes --Positive Elasticity
Qy
 An increase in the price of one
(Qy  Qy' ) / 2
increases the demand for the

other
Dx, y
Px
( Px  Px' ) / 2
 A decrease in the price of one
decreases the demand for the
other
Corn and Coca butter are substitutes in the production of choclate.
E
 Examples
 Coca Butter
 Corn
$4 is the initial price in both markets (point A). Assume an
increase in cost of corn oil to $7, then demand for Coca butter will
rise, say for example to point B in the right panel
Begin 2 Market 3 Adjustment
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21End
4.2a Example: Demand for Coca Butter
Corn oil and coca butter are substitute resources in the
production of chocolate
Recently rising Corn Prices have increased cost of corn oil
leading firms to substitute coca butter in the production of
chocolate
Source
Begin 2 Market 3 Adjustment
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4.3 Price of a Complement Resource
Qy
(Qy  Qy' ) / 2
Px
( Px  Px' ) / 2
 Complements --Negative Elasticity
 An increase in the price of one decreases
the demand for the other
 Because they are used together.
EDx, y

Gasoline and Autos are complements in the production of travel.
If gasoline sharply rises in price (left hand panel) then demand for
autos will fall (right hand panel). B in the right panel
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
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23End
4.3a Complements: Gasoline & SUVs: I
 Americans have cut back gasoline
use in apparent response to
increasing prices, separate surveys
by the government and a
petroleum trade organization
showed Wednesday. Gasoline
prices — which average $2.801
nationwide, are up 57.7 cents from
last year, according to motorist
organization AAA. Gas use last
month was 0.6% less than a year
ago, the American Petroleum
Institute reported.
 High fuel prices have led to
decreased quantity demand for
gasoline and other refined oil
products.
Analysis of impact for other final markets:
Oil Hits $100, Jolting Markets, Squeeze's Effect Is
Amplified
Market
USA Today
Outline
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
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4.3b Complements: Gasoline & SUVs: II


Slumping SUV Sales Drive Losses at
GM
January 26, 2006
Lagging SUV sales continued to hurt
General Motors Corp. as the auto giant
posted a fourth-quarter net loss of $4.8
billion. The losses exceeded Wall Street
expectations and GM blamed the red
ink on high costs, shrinking market
share and sluggish sales of SUVs.
Slumping SUV Sales Drive Losses at
GM
Source
Source II
Market
Outline
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25 End
4.4 Changes in Technology
 Technological improvements can
boost the productivity of some
resources but can make others
obsolete
 Development of computer-controlled
machines increased the demand for
computer-trained machinists, but
decreased the demand for machinists
without computer skills
 The development of synthetic fibers –
rayon and orlon – increased the
demand for acrylics and polyesters,
but reduced the demand for natural
fibers
Begin 2 Market 3 Adjustment
Market
Outline
4 Shifts 5 M & M 6 Labor
26 End
4.5 Demand for the Final Product
 Because the demand is derived from the demand for the final output, any
change in the demand for output will affect resource demand
 For example, a decrease in the demand for automobiles will decrease
their market price and decrease the marginal revenue product of
autoworkers and other resources employed by the automobile industry
Begin 2 Market 3 Adjustment
Market
Outline
4 Shifts 5 M & M 6 Labor
27 End
4.5a Example: Iraq War & Big Tires

Mining companies are
complaining about a
shortfall in the supply of the
giant tires that go on large
dump trucks and other
heavy equipment. These
outsize tires stand as tall as
12 feet tall and can spread 4
feet wide. prices have
quadrupled for some of them
in the last year to more than
$40,000 a tire.
There are several reasons for the tire shortage. Demand is soaring, with greater needs by the military for the wars in
Iraq and Afghanistan and by construction firms rebuilding the hurricane-ravaged Gulf Coast.
In many ways, the tire shortage contributes to the soaring commodities prices. The price of copper, which is used in
electrical wiring and pipes, has climbed 45 percent this year, closing at $2.9595 a pound on Wednesday. Nickel, used
to make stainless steel, is up 37 percent during the same period, while gold is up 23 percent and zinc is up 65 percent.
Some companies have been forced to idle their heavy equipment
In the meantime, salvage firms are doing a thriving business in discarded tires and companies that retread tires are
struggling to keep pace with demand, with used tires in some cases fetching higher prices than new tires.
Begin
2 Market
3 Adjustment
4 Shifts 5 M & M
By SIMON
ROMERO Published:
April 20, 2006
6 Labor
28 End
5.0 Monopsony & Monopoly
5.1 Monopsony on Buyer Side,
A,B Characteristics
C. Graph
D. Example
E. Market Structure Matrix
5.2 Minimum Wage
A. Pro View
B. Con View
C. Videos of Pro and Con View
5.3 Bilateral Monopoly
Graph
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5.1 Monopsony Characteristics
Single Buyer: First and foremost, a monopsony is a monopsony because it is
the only buyer in the market. The word monopsony actually translates as "one
buyer." As the only buyer, a monopsony controls the demand-side of the market
completely. If anyone wants to sell the good, they must sell to the monopsony.
No Alternatives: A monopsony achieves single-buyer status because sellers
have no alternative buyers for their goods. This is the key characteristics that
usually prevents monopsony from existing in the real world in its pure, ideal
form. Sellers almost always have alternatives.
Barriers to Entry: A monopsony often acquires and generally maintains single
buyer status due to restrictions on the entry of other buyers into the market. The
key barriers to entry are much the same as those that exist for monopoly: (1)
government license or franchise, (2) resource ownership, (3) patents and
copyrights, (4) high start-up cost, and (5) decreasing average total cost.
Source of the material in the Monopsony slides
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5.1a Modern Monopsony
Like other extreme market structures (perfect competition and
monopoly) monopsony is only approximated in the real world.
Achieving the status of THE ONLY BUYER is not easy. Few if
any buyers actually achieve this status. However, several have
come close.
In modern times a few examples of markets that come very
close to monopsony come from the world of sports.Should a
talented quarterback wish to obtain a job as a professional
football player, then THE employer is the National Football
League (NFL). Of course, the NFL is not absolutely the ONLY
employer. Employment as a professional football player can
also be found with the Canadian Football League (CFL).
However, sufficient difference exists between these two
employers to give the NFL significant monopsony control.
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5.1b Monopsony Supply and Cost
Single-buyer status means that monopsony faces a positivelysloped supply curve, such as the one displayed in the exhibit to the
right. In fact, the supply curve facing the monopsony is the market
supply curve for the product.The far right curve in the exhibit is the
red supply curve (S) facing the monopsony. The far left curve is
the brown marginal factor cost curve (MFC). The marginal factor
cost curve indicates the change in total factor cost incurred due to
buying one additional unit of the good.
Because a monopsony is a price maker with extensive market
control, it faces a positively-sloped supply curve. To buy a larger
quantity of output, it must pay a higher price. For example, the
monopsony can hire 10,000 workers for a wage of $5. However, if
it wants to hire 20,000 workers, then it must raise the wage to
$6.10.
For this reason, the marginal factor cost incurred from hiring extra workers is greater
than the wage, or factor price. Suppose for example that the factor price needed to hire
ten workers is $5 and the factor price needed to hire eleven workers is $5.10. The
marginal factor cost incurred due to hiring the eleventh unit is $6.10. While the $6 factor
price means the monopsony incurs a $5.10 factor cost from hiring this worker, this cost
is compounded by an extra cost of $1 due to the higher wage paid to the first ten
workers. The overall increase in cost, that is marginal factor cost, is thus $6.10 (= $5.10
+ $1).
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5.1c Profit-maximizing employment of a monopsony
This firm faces a positively-sloped supply
curve, represented by the red supply curve (S).
Because higher wages are needed to attract
more labor, the positively-slope brown curve is
the marginal factor cost curve (MFC).
The third curve displayed in the exhibit is the
green negatively-sloped marginal revenue
product curve (MRP), which indicates the value
of the extra production generated by each
worker
.As a profit-maximizing firm, monopsony hires
the quantity that equates marginal factor cost
and marginal revenue product found at the
intersection of the MFC and MRP curves. This
quantity is 37,000 workers. The monopsony
then pays each worker $8.40.
•This price and quantity maximizes profit because the revenue generated
from hiring the last worker (marginal revenue product) is exactly equal to the
cost incurred from hiring the last worker (marginal factor cost).
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5.1d Example:One Company Town
Murray Energy, is the largest employer of Huntington
Utah, business patterns link
It is the Crandall Canyon mine operator
Arguably the high risk “retreat mining” project was a direct
function of the monopsony power of Murray Energy
Crandall Canyon cave-in 8/6/2007 reflects the dangers of
retreat mining NYTimes
Retreat mining was found to be the cause of the cave-in
WSJ article, Retreat Mining described
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5.1e Summary of the Key Market Structure Characteristics
# of
suppliers
Product
Entry/Exit
Standardized
Control over
Price
Perfect
Competition
Many
Yes
Very easy
None
Monopoly
One
Unique, no
close
substitutes
Blocked
Considerable
Monopsony
One buyer
No
alternatives
Barriers
Considerable
Monopolistic Many
Competition
Not much as
much differences
as they want you
to think
Relatively
easy
Some, but within
narrow limits
Oligopoly
Not much
Significant
obstacles
Limited by
interdependence,
but considerable
with collusion
Few
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End
5.2a MONOPSONY & MINIMUM WAGE: Con
The standard analysis of a
minimum wage price floor
assumes a perfectly
competitive market with a
large number of sellers and
buyers
when a minimum wage is
imposed on this efficient,
competitive market the
minimum wage disrupts this
competitive equilibrium and
creates a surplus of
unemployed workers.
A $12 minimum wage in the diagram creates 13,500 unemployed
workers, workers who are willing and able to work at the $12
minimum wage, but who cannot find employment.
Sourceof the material in the slides on Monopsony and Minimum Wage
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5.2b MONOPSONY & MINIMUM WAGE: Pro
Now consider how a $10 minimum wage affects a monopsony
market.
By imposing a minimum wage, the portion of the supply curve
that carries a factor price less than $10 is no longer relevant. The
factor supply curve now consists of two segments. The first
segment is horizontal at the $10 wage. The second segment is
the original factor supply curve above the $10 wage.
The change in factor supply also cause changes in the marginal
factor cost. The marginal factor cost curve coincides with the
horizontal segment of the factor supply curve up to 50,000
workers. At 50,000 workers the marginal factor cost curve then
turns vertical until it joins the original marginal factor cost curve.
The profit-maximizing outcome is where marginal factor cost and
marginal revenue product intersect. This occurs at the $10
minimum wage and 50,000 workers. This is, by no coincidence,
the intersection of the marginal revenue product curve and the
factor supply curve. This is, by no coincidence, the perfectly
competitive, efficient, outcome. And none of this is coincidence
because $10 minimum wage is designed to generate that
particular outcome.
How does this minimum wage outcome compare with the monopsony outcome? The wage
rate is obviously greater ($10 compared to $8.40). However, employment is ALSO greater
(50,000 workers compared to 37,000 workers). And there is NO unemployment? The
minimum wage did not created unemployment. In fact, MORE workers are employed and they
ALL receive a higher wage. It is a win-win situation for ALL workers in the market.
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37 End
5.2c Videos: Pro & Con
Click the black area for
the Con View
Begin 2 Market 3 Adjustment
Click the graph for the
Pro View
4 Shifts 5 M & M
6 Labor
End
5.3 Bilateral Monopoly
A market containing a single buyer and a single
seller, or the combination of a monopoly market and
a monopsony market. A market dominated by a
profit-maximizing monopoly tends to charge a higher
price. A market dominated by a profit-maximizing
monopsony tends to pay a lower price. When
combined into a bilateral monopoly, the buyer and
seller both cannot maximize profit simultaneously and
are forced to negotiate a price and quantity. Then
resulting price could be anywhere between the higher
monopoly price and the lower monopsony price.
Where the price ends ups depends on the relative
negotiating power of each side.
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5.3a Bilateral Monopoly: Example
Industrial Labor: a number of modern labor markets
contain a dominate employer on the buying side and
a dominate labor union on the selling side.
Negotiations between large corporations and labor
unions over wages and working conditions, such as
those between General Motors and the United
Autoworkers Union, approximate the bilateral
monopoly model.
While these markets are not, strictly speaking,
comprised of pure monopoly sellers and pure
monopsony buyers, the do have a definite bilateral
monopoly flavor.
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
40 End
5.3b Bilateral monopoly labor market: TV Screen Writers
Consider the current (Nov 2007)
Screen writers srtike
On the buying side are the Hollywood
producers represented by the Alliance
of Motion Picture and Television
Producers.. Assuming that everyone
who writes TV scripts either works for
the Alliance or they do not work at all,
then this makes the Alliance a
monopsony buyer.
On the selling side are the screen
writers represented by the Writers
Guild of America Assuming The Guild
speaks for ALL of the screen writers,
then it essentially is controlling the
supply-side of this particular labor
market. This makes the Guild a
monopoly seller.
YouTube Video, Supporter
Outline
Ch 12
Begin 2 Market
3 Adjustment
4 Shifts 5 M & M
6 Labor
41 End
5.3c Bilateral monopoly labor market: TV Screen Writers
What results from this bilateral monopoly is the need
for negotiation between the monopoly (Writers Guild)
and the monopsony (TV Producers). Without the
Writers Guild monopoly on the selling side, the Alliance
of TV Producers monopsony maximizes profit by
paying 37,000 workers a wage of $8.40 per hour.
Without the Alliance of TV Producers monopsony on
the buying side, the Writers Guild monopoly maximizes
profit (that is, member income) by charging a wage of
$15 per hour to employ 30,000 workers.
The two sides need to negotiate a price. But what
price? Unlike other output analyses, there is no way of
knowing the price.
It could be $8.40, it could be $15, or (more likely) it
could be anywhere between. Where the price ends up
depends on the relative negotiation power of each
side. If the TV Producers are extremely powerful, with
oodles of profit, with tons of inventory available, or with
an extremely talented team of negotiators, then the
price might end up close to $8.40. However, if the
Writers Guild has charismatic negotiators, has
unwavering support from every employee, and has a
large bank account, then the price might end up close
to $15.
There is no way of knowing in advance.
Ch 125 M & M
Begin 2 Market 3 AdjustmentOutline
4 Shifts
6 Labor
42 End
6.0 Labor Supply
6.1 The work/leisure trade off
6.2 Labor Supply
A. Substitution Effects
B. Income Effect
6.3 Back ward bending Labor Supply
6.4 Market Supply
6.5 Wage Differentials
Occupation
Education
AE Profiles
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
43 End
6.1a Three Uses of Time
Individuals can use their time in three
ways
Undertake market work  selling time in
the labor market in return for income
Undertake nonmarket work  using time to
produce their own goods and services
Spend time as leisure  all nonwork uses of
their time
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
44 End
6.1b Work and Utility
 Work is not a pure source of utility, rather it is a
source of disutility  the opposite of utility
 Net utility of work -- the utility of consumption
made possible through work minus the disutility of
the work itself; usually makes some amount of
work an attractive use of part of an individual’s
time
 In the case of market work, the individual’s income
buys goods and services
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
45 End
6.1c Utility Maximization
Within the limits of a 24-hour day, seven days a
week, individuals can balance their time among
market work, nonmarket work, and leisure in
order to maximize utility
The rational consumer will attempt to
maximize utility by allocating time so the
expected utility of the last unit of time spent in
each activity is identical
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
46 End
6.1d Implications
The higher your market wage, other things
constant, the higher your opportunity cost of
leisure and nonmarket work
The higher the expected earnings right out of
high school, other things constant, the higher
the opportunity cost of attending college
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
47 End
6.2 Labor Supply
An increase in the wage affects an
individual’s choice between market
work and other uses of time in two
ways:
Substitution Effect
Income Effect
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
48 End
6.2a Substitution Effect
As wage increases,
market work is
substituted for
other activities 
The substitution
effect of a wage
increase
Begin 2 Market 3 Adjustment
EDx, y

Qy
(Qy  Qy' ) / 2
Px
( Px  Px' ) / 2
4 Shifts 5 M & M
6 Labor
49End
6.2b Income Effect
A higher wage means a higher income for the
same number of hours, so demand for all
normal goods increases
Leisure is a normal good, so higher income
increases the demand for leisure and the
allocation of time to market work declines
The income effect of a wage increase tends to
reduce the quantity of labor supplied to market
work
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
50 End
6.3 Backward Bending Labor Supply Curve
The individual
supply curve slopes
upward until a wage of
$12 is reached: at $12,
the substitution effect
dominates – the
quantity of labor
supplied increases
After a wage of $12,
the labor supply curve
bends backward and
the income effect
dominates – the
quantity of labor
supplied decreases
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
51 End
6.4 Market Labor Supply Curve
The labor supply curves of different individuals do not bend
backwards at the same time – here we have three individual supply
curves that sum to a market supply curve that slopes upward over the
realistic range of wages
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
52 End
6.5 Causes of Wage Differentials
Wage differences across markets trace to
differences in a number of factors
Differences in training, education, age, and
experience
Differences in ability
Differences in risk
Geographic differences
Job discrimination
Union membership
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
53 End
6.5a Wage Differentials By Occupation
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
54 End
6.5b Wages Differentials by Education
Training, Education, Age, and Experience
Some jobs pay more because they require a
long and costly training period
 Fewer
individuals are willing to incur the time
and expense required
 Results in a smaller market supply
However, extensive training increases the
productivity of labor
 There
is increased demand for these skills
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
55 End
6.5c Data: Age, Education, and Pay
Age Earning
Profiles By Level
of Education
A College Degree
leads to a
dramatically
higher earnings
level than a high
school graduate
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
56 End
6.5d Application of AE Profiles
In wrongful death lawsuits, the plaintiff
economist uses data on salary by
occupation to estimate the total
earnings of the decedent over the
remainder of their work-life expectancy.
(An estimate of the number of years an
individual would have participated in the
labor force.)
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
57 End
6.5e Application
Total earnings can be estimated in two ways
First Method: Obtain recent earnings.:
Year
2000
2001
2002
2003
2004
Recent
Earnings
$ 34,000
$ 34,500
$ 35,700
$ 38,100
$ 42,000
 Then project forward based on the average increase in those
wages :. The Geometric Mean is one easy formula for average
annual increase:
($42,000/$34,000)^(1/4) = 1.0542 5.42%
General Formula for Geometric Mean: (Et/E1)(1/t-1)
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
58 End
6.5f Potential Problem with First Method
Some individuals may be
on that portion of ageearnings profile where
earnings are either
increasing rapidly or
starting to decrease
Thus for young decedents
with a long remaining
work-life the appropriate
method is to consult ageearnings profile to obtain
earnings growth for each
educational attainment,
and for each stage of the
age interval
Prof. Jacob Mincer
(Columbia University) was
the first to quantify the age
earning profile for return to
education
Figure 9.3
Money Earnings
(Mean), for Full-Time,
Year-Round Male
Workers, 1999
Copyright © 2003 by Pearson Education, Inc.
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6-36
6 Labor
59End
Some Age
Earnings
Factors
The exhibit
illustrates
that for each
educational
attainment
level picking
the factor of
the lowest age
group will
give an
upward bias
to the
estimate of
the total
earnings.
An example
of Age
Earnings
Adjustment
factors
is in the
exhibit
Source: “An Empirical
Evaluation of Different
Methods for Estimating
Earnings Losses,” with
J. Lambrinos, The
Journal of Risk and
Insurance, Vol. 56, No.
4, December 1989, 733-
Using the
factor for
each age
interval will
be more
accurate.
739.
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
60 End
End of Presentation
EDx, y

Qy
(Qy  Qy' ) / 2
Px
( Px  Px' ) / 2
Click a pic to review
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
61 End
Example: Demand for Corn
Factor shifting the demand curve for corn
Oil and Corn are substitute resources in the production of
gasoline
In summer 2008 oil was $145 a barrel and the demand for corn
was high, but in 2009 oil prices fell and the demand for corn fell
.
Source
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
62 End
Example: Carbon Based Fuel Tax
An energy policy that taxes carbon based fuel
Congress is considering several measures that would impose a so-called cap-and-trade system,
which would limit the amount of carbon dioxide companies are allowed to emit.
Changes the relative price of nuclear power
a cap-and-trade system would probably push up wholesale electricity prices in deregulated markets,
as coal- and natural-gas-burning utilities jack up prices to recover the additional cost of allowance
purchases.
Nuclear operators stand to gain from greenhouse-gas legislation in two ways. For starters, their
plants don't spew carbon dioxide, so they would not have to buy emissions allowances, giving them
a competitive advantage over competitors that burn fossil fuels.
Use the Etch-a-graph tool to analyze the effect in the market for nuclear power and the
market for carbon based fuels.
Source
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
63 End
Etch-A-Graph
Carbon Fuels: ---------------- Nuclear Power:
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
Directions:
Represent
the effect of
the cap-andtrade
proposal in
the
corresponding graph,
Then press
“Print
Screen” on
the keyboard,
then click
here to paste
the screen
capture.
Click here
and Tell us
which
proposal you
favor and
why
6 Labor
64 End
Bilateral Monopoly
Diagram how the coop is alleged to
force prices down for raw milk and to
force prices up for processed milk
products
Source
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
65 End
Example: Monopoly Pricing
At a time when food prices are soaring world-wide, so is the price of fertilizer, producing huge profits for leading
fertilizer makers and stirring anger among farmers in the U.S. and India.
Fertilizer prices are rising faster than those of almost any other raw material used by farmers. In April, farmers paid
65% more for fertilizer than they did a year earlier, according to the U.S. Department of Agriculture. That compares
with price increases of 43% for fuel, 30% for seeds and 3.8% for chemicals such as weedkillers and insecticides over
the same period, according to Agriculture Department indexes.
Those skyrocketing costs are making it harder for farmers to expand their harvests in response to the global food
crisis that has sparked rioting, rationing and export controls in many countries. Food prices have soared in recent
months as the world's growing demand for grain, which has exceeded production for much of this decade, has
reduced stockpiles to extremely low levels.
Farmers say too much market power is concentrated in the hands of a small group of companies in the U.S., Canada
and Russia that dominate global production of potash and phosphate.
In an interview Monday, Mr. Doyle called recent complaints about prices an emotional reaction. Fertilizer prices began
rising in earnest about a year ago after a nearly decadelong period of stability. "People don't like higher prices," Mr.
Doyle said. But "you never hear from anyone complaining when prices are low.“
He added during the call that continued price rises will "be a shock" to some consumers.
In the U.S., Potash Corp. and Mosaic are the sole surviving members of a phosphate export cartel called the
Phosphate Chemicals Association. Under a 90-year-old law designed to promote American exports, the companies
are allowed to legally market and sell their product overseas as a single entity at a price set in consultation with one
another. Similarly, Canada has Canpotex, and Russia has Belarus Potash Co., another export cartel.
While the individual cartels can't legally collaborate among themselves on pricing, they regularly -- and legally -- follow each others'
price increases. After the Russian cartel recently said potash prices would rise to $1,000 a ton, Potash Corp.'s Mr. Doyle said
Canpotex would soon match that price.
Denis Evstratenko, a UBS metals and mining analyst, said the cartels have little incentive to undercut one another in the current
environment.
To protect American consumers, members of the U.S. cartel are required by law to compete against each other in
selling their wares at home. But in today's global markets, the global price sets a benchmark so American farmers pay
essentially what the cartels dictate.
Source
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
66 End
LHS Graph:
Example: Monopoly Pricing
Represent
Market
Prices if
Fertilizer
Producers
act as a
Monopoly
RHS Graph:
Represent
Market
Prices if
Fertilizer
Producers
act as a
Perfect
Competitors
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
67 End
Example Boeing and Recession
Mr. Stewart is one of 27,000 Boeing machinists who voted to walk out on Sept. 6, when both Boeing and the world were in a much different
place. Boeing had a bulging order book and was straining to meet production goals. The economy was sagging under the housing crisis, but
had not yet buckled.
Since then, instability in the financial sector has pushed the U.S. into what many believe could be a recession.
The labor standoff in the midst of the financial turmoil may seem like lunacy to outsiders, but not to Mr. Stewart.
Many striking workers say the broader economic gloom is only fueling their determination to lock in job security now. The machinists, who
earned an average of $65,000 a year with overtime, are supplementing their $150-a-week strike pay with part-time jobs.
The union complains that its members have already lost too much work because of Boeing's outsourcing. The company says it won't make
guarantees about job security that could wind up hurting its competitiveness down the road.
American labor can point to few victories recently. Sectors like textiles and auto manufacturing have watched jobs move overseas or into
nonunion plants. Last year, the United Auto Workers made key concessions on pension issues, in part because of concerns about the financial
health of big U.S. auto makers.
But machinists at Boeing have clout that few other American workers can match. The plane maker, which has its headquarters in Chicago, has
only one chief competitor, European Aeronautic Defence & Space Co.'s Airbus, and its products are so sophisticated that they have yet to
come under pressure from low-cost countries in Asia.
Source: Boeing Strikers Dig In Heels Even as Economy Turns Sour By J. LYNN LUNSFORD WSJ 10/23/08
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
68 End
LHS
Graph:
Example: Rent Control
Represent
Market
Rent of
$2,767
RHS
Graph:
Represent
Market
Rent of
$2,767, and
the rent of
$1,241 for
rentstabilized
Back
units
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
69 End
READ:
Beijing
Hotels…..
WSJ
7/18/2008
Example: Output & Factor Markets
LHS
Graph:
Represent
the change
in the
Beijing
Market for
Hotel
Rooms
Begin 2 MarketBack
3 Adjustment
4 Shifts 5 M & M
6 Labor
RHS
Graph:
Represent
the Effect
on Hotel
Staff
70 End
Wages
Example: Demand for Bulls
Factor shifting the demand curve for large size bulls
Corn feed and large size bulls are complement resources in the
production of beef.
In summer 2008 corn prices soared and cattle farmers reduced their
demand for large sized bulls.
.
Prime Cut Backs, Farmers
Seek a Little Less Bull
(WSJ 8/12/08)
Source
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
71 End
Lecture Outline Ch 11
1.0 Begin
2.0 Resource Demand & Supply 16-21
Marginal Revenue Product: Price Taker 17, Price Maker 18
Marginal Resource Cost 19
Equilibrium Wage and Employment 21
3.0 The Resource Market 5-7
Price Differentials: Temporary/Permanent 8-11
Opportunity Cost & Economic Rent 12-15
4.0 Shifts in Resource Demand
Substitutes 23 , Complements 24
Technology 25, Final Product 26
Examples: Big Tires 27 , Gasoline 28
5.0 Monopsony on Buyer Side, Monopoly on Seller Side
Characteristics 48-49,
Wage & Employment Determination 50-51
Minimum Wage 53-54, Bilateral Monopoly 55-58
6.0 Labor Supply and Utility Maximization 31-39
Labor Supply 35
Income 36, and Substitution Effects 37
Back ward bending 38, Market Supply 39
Wage Differentials 40-47
Occupation 41, Education 43, AE Profiles 44-47
End
Begin 2 Market 3 Adjustment
4 Shifts 5 M & M
6 Labor
72 End