Transcript Chapter 18 (Markets for the Factors of

Unit IV: Factor Markets
Factor Markets
• When firms need to purchase a factor of
production, they buy them from the factor
market.
Derived Demand
• A firm’s demand for a factor of production is
derived from its decision to supply a good in
another market.
• If Q increases in the product market at every
price, demand in the factor market will
increase
• If Q decreases in the product market at every
price, demand in the factor market will
decrease
Changes in demand in the factor market
• If people really demand more horses in
parades…
• Then the city will buy more horses in the
factor markets
The Labor Market
What is the lowest wage you would be
willing to do this job…
The Labor Market
• Made up of firms and workers
• Demand
– Employers willingness to hire a worker at each
given wage
• Supply
– Workers willingness to work at each given wage
Scenarios
• Market = gym shoes
– The majority of the public now prefers to wear
sandals. What happens to the wage and quantity
of sweatshop gym shoe workers?
• The baby boomers become of working age.
What happens to the wage and quantity of
the general labor market.
• Market = basketballs
– Nike is gaining more and more of the market
power. What will happen to the wage and
quantity of Spalding workers.
Derived Demand Activity
• On a separate sheet of blank paper, please do
the following:
– Write a specific product market and affiliated
factor market (Adidas shoes and Rubber)
– Write a scenario that will affect the product
market (Adidas spends 50 million dollars on a new
advertisement campaign).
– MAKE IT UNIQUE BUT NOT CONFUSING!
– Pass the paper behind you (group at the
end…walk to the front)
Partner Activity
• Read your market and the scenario.
• Determine how this will impact the markets.
• Then, graph and provide a written description
of the market change.
– What happens to price/wage?
– What happens to quantity?
Bringing it Back
• Each group will read their market and scenario
they received.
– Every student must write the market and scenario
they hear in their notes
• Each group will then explain the affect the
scenario had on their labor market.
– Every student must write the effect in their notes.
Hiring Decision
First, we need to learn some important
terms
What is marginal product?
When an additional
input is used, how
does that impact the
total product?
So what is the marginal product
of_____________?
Land
Labor
Seeds
Time
The Marginal Product of Labor (MPL)
• Change in the amount of output from an
additional unit of labor.
The Production Function
Quantity
of Apples
Production
function
300
280
240
What is the MPL of the
2nd worker?
180
Answer = 80 Apples
100
0
1
2
3
4
5
Quantity of
Apple Pickers
The Production Function
Quantity
of Apples
Production
function
300
280
Notice that the MPL
decreases as the
quantity of workers is
increased
240
180
100
0
1
2
3
4
5
Quantity of
Apple Pickers
The Marginal Resource Cost (MRC)
• How much an additional input costs
The Value of the Marginal Product
• This is also called marginal revenue product
or MRP. (Most people use this term)
• How much additional revenue is earned when
one more input is added.
• Marginal Product X Price
• It also eventually diminishes as the number of
inputs increase
Market for Apples
Quantity
Total Revenue
300
280
240
What is the MRP of the
3rd worker??
180
Answer = $60
100
0
1
2
3
4
5
Quantity of
Apple Pickers
Market for Apples
Quantity
Total Revnue
300
280
Notice, the MRP of
labor decreases as
more workers are
added
240
180
100
0
1
2
3
4
5
Quantity of
Apple Pickers
How would you
determine how
many farmers to
hire?
Profit Maximizing Firm in Labor Market
• Hire workers where MRP = MRC
• Never hire a worker if their MRP is less than
their MRC (wage)!
• The MRP of labor (MRPL) curve is the labor
demand curve for a profit-maximizing firm.
MRP Curve
Wage
Competitive Firm
Market
wage
Marginal revenue product
(demand curve for labor)
0
Profit-maximizing quantity
Quantity of
Apple Pickers
Worksheet Practice…
Economic Rent
How much would you have to be
paid per hour to work this job?
Economic Rent
• An excess payment made for a factor of production
above the amount expected by its owner.
• On a graph, the “price” for any physical capital is “rent”
or “R”
But,
IThe
would
aeconomic
firm
gladly
is willing
rent
to
out
forgive
thisme
building
$150,000
for
to
the$50,000
firm
a year!
is $100,000
a year.
Least Cost Combination
Alternative Input Combinations
How do firms decide how many different
combinations of inputs to use?
If you were the grocery store owner,
which combination would you choose?
Costs to the firm
1 self-checkout station = $2,000
1 cashier = $1,600
Option A
Option B
• 20 self-checkout
stations
• 4 cashiers
• 10 self-checkout
stations
• 10 cashiers
Cost-Minimization Rule
• The firm would add and subtract each input
until the marginal product of the first input
per dollar spent is the same as the marginal
product of the second input per dollar spent
MP(input 1) / MRC(input 1) = MP(input 2) / MRC(input 2)
• Because of diminishing marginal returns:
– If the number is too high, the firm would increase
that input
– If the number is too low, the firm would decrease
that input
Lets do two practice scenarios
Scenario 1
• Lets do an example of when the marginal
product of labor per dollar is more than the
marginal product of capital per dollar
– Marginal product of labor = 20 units
– Marginal product of capital = 100 units
– Wage = $10
– Rental rate for capital = $100
MP(input 1) / MRC(input
MPL / Wage
1) == MP(input
MPK / Rent
2) / MRC(input 2)
Scenario 1
2 units of output per dollar spent on labor > 1 unit of output
per dollar spent on capital
• The firm would hire more workers and use less
capital
• This would lower the MP of labor per dollar
and increase the MP of capital per dollar
MPL / Wage = MPK / Rent
Scenario 2
• Lets do an example of when the marginal
product of labor per dollar is less than the
marginal product of capital per dollar
– Marginal product of labor = 20 units
– Marginal product of capital = 100 units
– Wage = $10
– Rental rate for capital = $25
MPL / Wage = MPK / Rent
Scenario 2
2 units of output per dollar spent on labor < 4 unit of output
per dollar spent on capital
• This hire would use less workers and rent
more capital
– This would increase the MPL/Wage
– This would decrease
the
MPK/Rental
rate
MPL / Wage
= MPK
/ Rent