Transcript chapter 11
Chapter 25: Pricing in Resource
Markets
• Resource markets
• Resource demand
• The labor market
Factor/Resource markets
• Factors of production:
•
land
labor
capital
entrepreneurship
factor prices determined in resource
markets
resources markets
• same concepts of demand and
supply
now applied to factors of
production
resource demand
• producer will demand an additional
unit of resource if
MR of
resource
>
MC of
resource
example: Wal Mart
• labor market
• 1 more clerk costs $400 per week
• 1 more clerk increases revenue by
•
$500 week
hire 1 more clerk?
Yes! $500 > $400
example: lawn service
• capital market
• larger, faster mower costs extra
•
•
$400/wk.
but mow more lawns, extra $600/wk.
in revenue
buy the mower?
Yes! $600 > $400
terms
• marginal revenue product (MRP)
•
extra revenue from one more unit
of resource
marginal resource cost (MRC)
extra cost for one more unit of
resource
rule for resource demand
• firm hires additional resources until
MRC = MRP
cost of the extra resource =
extra revenue from the resource
resource supply
• you will supply your resources to the
•
“best” option
highest paying (if all else equal)
nonmonetary factors are important
firms must compensate when jobs
are
dirty, dangerous, illegal…..
The Market for Resources
• resource demand
downward sloping
producers less willing, able to buy
resources at higher prices
• resource demand is a DERIVED
demand
it depends on the demand for the
final product
examples
• demand for nurses
•
•
depends on demand for healthcare
demand for steel
depends on demand for cars
demand for plywood
depends on demand for houses
Shifts in demand for a resource
• demand for final product
•
if product demand rises, MRP rises
resource demand shifts right
productivity of resource
better resource, higher MP & MRP
resource demand shifts right
examples
• increase demand for healthcare
•
increase demand for nurses
increase demand for syringes
higher-skilled labor
increases demand for labor
• price of other resources
if price of substitute resource falls
-- substitute cheaper resource
-- demand for original resource
shifts left
example
• bank
ATMs vs bank tellers
ATM costs falls
-- demand for bank tellers falls
example
• office buildings
•
skyscrapers in Manhattan
3 stories in Oswego
why?
cost of land vs. cost of
construction
if price of complement resource
falls
-- use more of both resources
-- demand for original resource
shifts right
example
• price of trucks (18-wheeler) fall
increase demand for truck drivers
note
• sometimes resources are BOTH
substitutes and complements:
computers do some clerical
functions AND
need clerical workers to operate
them
• technology
decrease demand for some types
of labor
increase demand for other types of
labor
example
• better/cheaper computer technology
increases demand for
programmers
decrease demand for architects
• resource supply
upward sloping
suppliers more willing, able to
provide resources at higher prices
P res.
S
P*
D
Q*
Q res.
resource prices
•
•
tend to equalize across alternative uses
carpenters for houses
carpenters for furniture
UNLESS other nonmonetary differences
economics professors vs. business
economists
land in Manhattan vs. land in Oswego
The Labor Market
• Labor supply
• Labor demand
• Earnings differences
Labor Supply
• time is a scarce resource
market work (for pay)
nonmarket work (not for pay)
(cleaning, studying)
leisure (for fun)
work and utility
• work is a disutility
but allows you to buy stuff
or to enjoy stuff
(clean house, dinner, good grades)
• tradeoff between consumption &
leisure
work to buy stuff or to make stuff
but working leaves less time for
leisure
implications
• higher wages
= higher opp. cost of leisure,
nonmarket work
most surgeons don’t mow their
lawn
many college sports stars head to
the draft early
Effect of a wage increase
• two effects:
substitution effect
income effect
substitution effect
• as wage rises
•
opp. cost of other time uses rises
spend more time on market work
Qs of labor rises as wages rise
income effect
• as wages rise
•
income rises
consumer more of what you like:
-- stuff, leisure
Qs of labor falls as wages rise
• if substitution effect > income effect
•
•
labor supply is upward sloping
if substitution effect < income effect
labor supply is downward sloping
which is it?
labor supply
• economists observe
•
upward sloping for most wages
downward sloping at very high
wages
backward-bending supply curve
S
wage
subst. < inc.
effect
subst. > inc.
effect
Q labor
Changes in market labor supply
• adult population
births rates, immigration
increase will shift labor supply
right
• preferences
willingness of groups to work
women have increasingly entered
labor force
-- shift labor supply right
• skills, education, training
education increases opp. cost of
not working for pay
-- labor supply increases with
education
increase HS, college graduation
-- increase supply high-skill labor
-- decrease supply low-skill labor
• other sources of income
nonwage income lowers labor
supply
less labor supply among those
over 50 with the growth of
pensions, disability
less labor supply among women
with high-earning husbands
Labor demand
• firm’s demand for labor
• car wash
•
perfectly competitive
marginal revenue product (MRP)
change in total revenue when one
more unit of labor is hired
example: car wash
•
•
price of car wash = $3
car washes per hour
Q labor
TP
0
1
0
5
2
3
4
5
9
12
14
15
MP
MRP
5
4
3
2
1
15
12
9
6
3
how much labor to hire
• MC of one more unit of labor
•
•
marginal resource cost (MRC)
wage
MR of one more unit of labor
MRP
hire until MRP = wage
• if MRP > wage
•
hire more labor and still add to
profit
if MRP < wage
last units labor taking away from
profit, hire less labor
wage
15
if wage = $9
hire 3 units labor
12
9
6
3
LD
1
2
3
4
5
Q labor
wage
15
wage = $12,
hire 2
12
9
wage = $6,
hire 4
6
3
LD
1
2
3
4
5
Q labor
Earnings differences
• based on both demand-side and
supply side factors
Human Capital
•
•
•
•
Skill set
Education, training, experience
increases MP of labor & labor demand
cost of education means supply of skilled
labor lower relative to unskilled labor
result is a higher market wage
ability/talent
• Human capital, but hard to measure
• the best athletes, most popular
movies stars, CEOs command HUGE
salary premium over others
Efficiency wage theory
• Higher pay leads to better
•
productivity
Why?
Better morale, lower turnover
“Cherry pick” the best workers
Workers do not want to risk losing
job
Non-wage job characteristics
• Risk/danger
• Working conditions
• Work is meaningful or glamorous
Holding all else constant,
• dangerous jobs pay more
• jobs with higher layoff probability
pay more
geography
• wages higher in U.S.
•
•
encourages immigration
teacher’s salaries vary significantly
by state
wages lower in South than Northeast
discrimination
• age, race, gender
• wage differentials remain EVEN after
controlling for other factors
occupation
education/experience
risk
unionization
• union workers earn more than
nonunion workers doing the same
jobs
janitors
auto workers
teachers
26. Markets for Capital and Natural
Resources
• Financial markets
• Natural Resource markets
Financial Markets
• Demand for financial capital
• Supply of financial capital
• interest rate
• financial capital = loanable funds
Demand for Financial capital
• firms demand funds to finance
•
capital purchases
higher interest rate, more expensive
to borrow
lower Q demanded of funds
interest rate
D
Q funds
Shifts in demand for funds
• population growth
increase demand for goods,
increase demand for capital,
increase demand for funds
• technology
increase demand for new capital,
increase demand for funds to
finance it
• Government borrowing
Federal gov’t deficits shift demand
to the right
Supply of Financial capital
•
•
people’s savings decisions
tradeoff between consuming today &
consuming tomorrow
• Time preference
higher interest rates
encourage saving
higher opportunity cost of current
consumption
higher Q supplied of funds
Shifts in supply of funds
• population
•
higher population, more saving
supply shifts right
income
higher income, more savings
supply shifts right
• expected future income
save today based on future needs
-- retirement, college
save to smooth consumption over
time
expect income to rise
-- save less today, supply falls
expect income to fall
-- save more today, supply rises
Financial market equilbrium
interest rate
S
i*
D
Q*
Q funds
Natural Resource markets
• renewable resources
•
land, forests, livestock
nonrenewable resources
fossil fuels, metals
Market for land
• supply is fixed for type or location
perfectly inelastic
rent
S
r*
D
Q*
Q land
economic rent
• rent for land is special
•
land is available even if rent=0
demand affects P, not Q
economic rent
rent above what is required to
induce Q supplied of factor
rent
S
economic rent
r*
D
Q*
Q land
• Pure economic rent
Income earned by resource with a
perfectly inelastic supply
Economic Rent
• amount of resource earnings ABOVE
opportunity cost
• or
resource earnings – minimum
required earnings
• “gravy”! “bonus”!
example: Shaquille O/Neal
• 2000: $35 million
• what is minimum for which he would
•
play basketball and endorse stuff?
suppose $1 million
economic rent: $34 million
when do resources earn rent?
• less elastic (more inelastic) the
supply,
more rent as a % of total earnings
Differential rent
• Rents earned to superior units of a
•
resource
Where quality of resource affects
productivity
Examples
Highly fertile farmland
Highly skilled trial lawyer
Inframarginal rent
• Total rent when units of resource
•
differ in their opportunity costs
What causes differences?
Differences in objectives
Differences in constraints
examples
• Nursing
•
Find the work rewarding
Other constraints in the job market
Teaching summer school
Presence of small children
Children in college
upward-sloping supply
earnings split
P res.
S
P*
rent
opp.
cost
D
Q*
Q res.
Supply of nonrenewable resource
• at point in time Q is fixed
• but over time
use
-- decrease supply
new discoveries
-- increase supply
technology for better use
-- decrease demand
example: metals
• nonrenewable resource
• discover new sources
• use substitutes (plastic)
• Recycling technology
Market-guided conservation
• Markets have built-in incentives for
•
efficient resource use
If a resource becomes scarce
Prices rise
• Copper is up 50% in 2006
• If prices rise
People use less (conserve)
People substitute
Firms look for new sources
Firms look for alternatives
Problems with markets &
nonrenewable resources
•
•
•
Externalities
Extraction of oil, metals, natural gas
have huge negative externalities
Market results in too much extraction
Government policies
Major tax breaks to domestic energy
producers
Prices may not be sending the right
signals
Doomsday scenarios
• Aka
• “We are running out of everything
and we are all going to die”
Paul Ehrlich
The Population Bomb,
1968
•
•
"a major food shortage in the United
States in the 1970s. . .hundreds of
millions of people are going to starve
to death."
By 1999 U.S. population would be
only 23 million
(actual 1999 U.S. population = 288
million)
Limits to Growth
1974
World will run out of
• gold by 1981
• mercury by 1985
• tin by 1987
• zinc by 1990
• petroleum by 1992, and
• copper, lead, and natural gas by 1993
An economist’s refutation:
• Julian Simon
• The Ultimate Resource (1983)
• Hoodwinking the Nation (1999)
• Doomsayers underestimate human
ingenuity
Simon vs. Ehrlich
• Made a bet in 1980 for $1000
• Simon bet price of 5 key metals
•
would be LOWER in 1990
Signaling less scarcity
Simon won. Ehrlich paid
Simon offered to renew the bet,
Ehrlich refused
Real concerns about resources
today:
• Has natural gas production peaked
• Will oil production soon peak?
Hubbert’s curve
•
•
Are we running out of copper?
Are we past the tipping point on global
warming?
BUT….
• Doomsayers need to take some
responsibility for lack of world action