Transcript The Demand for Resources

Unit 5
Resource Market
(aka: The Factor Market or Input Market)
1
Use the concept of DERIVED DEMAND
to explain this cartoon
What about SUPPLY?
2
Shifter Review
3 Resource Demand Shifters (Based on MRP)
1. Demand (price) of the product
2. Productivity of the resource
3. Price of related resources
3 Resource Supply Shifters
1. Number of qualified workers
Education, training, & abilities required
2. Government regulation/licensing
Ex: What if waiters had to obtain a license to
serve food?
3. Personal values and traditions regarding leisure
time and societal rolls.
Ex: Why did the US Labor supply increase
during WWII?
3
Resource Markets
Imperfect Competition:
Perfect
Competition
Monopsony
Characteristics:
 One firm hiring workers
 The firm is large enough to manipulate the market
 Workers are relatively immobile
 Firm is wage maker
 To hire additional workers the firm must increase wage
Examples:
• Central American Sweat Shops
• Midwest small town with a large Car Plant
• NCAA
4
Assume that this firm CAN NOT wage discriminate
and must pay each worker the same wage.
Ko’s Coal Mining Co.
Wage rate
(per hour)
Number of
Workers
Total
Resource Cost
Marginal
Resource Cost
$4.00
0
$0
-
4.50
1
4.50
$4.50
5.00
2
10.00
5.50
5.50
3
16.50
6.50
6.00
4
24.00
7.50
7.00
5
35.00
11
8.00
6
48.00
13
9.00
7
63.00
15
10.00
8
80.00
17
MRC
Wage
If the firm can’t wage discriminate, where is MRC?
Wage
MRC
SL=wage
WE
DL=MRP
QE
Quantity for Labor
Labor Unions
Their goal is to increasing
wages and benefits
How do Unions Increase Wages?
1. Convince Consumers to buy only Union Products
Ex: Advertising the quality of union/domestic
products
2. Lobbying government officials to increase
demand
Ex: Teacher’s Union petitions governor to
increase spending.
3. Increase the price of substitute resources
Ex: Unions support increases in minimum wage
so employers are less likely to seek nonunion workers
Labor Markets
1. The Union is successful in requiring
that new teachers have to pass a state
competency test to be employed.
2. The Labor Union successfully conducts
a national advertisement to get people
to buy union products.
3. The Union educates workers in new
methods of production, which leads to
increased productivity.
4. The union promotes national legislation
to increase tariffs placed on foreign
products.
5. The Labor Unions bargains for and
wins an increase in the wage rate
above the equilibrium wage rate.
6. The labor union signs an agreement
that employers can only hire union
members.
Wage
Wage
Wage
Wage
Wage
Wage
1. The Union is successful in requiring
that new teachers have to pass a state
competency test to be employed.
2. The Labor Union successfully conducts
a national advertisement to get people
to buy union products.
3. The Union educates workers in new
methods of production, which leads to
increased productivity.
4. The union promotes national legislation
to increase tariffs placed on foreign
products.
5. The Labor Unions bargains for and
wins an increase in the wage rate
above the equilibrium wage rate.
6. The labor union signs an agreement
that employers can only hire union
members.
SL1 SL
DL
QL
SL
DL
DL1
QL
SL
DL
DL1
QL
SL
DL
DL1
QL
SL
DL
QL
SL1 SL
DL
QL
Labor Markets and
Globalization
Why is Globalization Happening?
• Globalization is the result of firms seeking
lowest costs. Firms are seeking greater
profits.
• Parts are made in China because labor is
significantly cheaper.
What is Outsourcing?
• Outsourcing is when firms send jobs overseas.
What types of jobs are outsourced?
• For many years it was only unskilled jobs, but
now other skilled jobs are sent overseas.
Advantages and Disadvantages
Disadvantages
 Increases U.S. unemployment
 Less US tax revenue generated from workers
and corporations means less public benefits
 Foreign workers don’t receive same
protections as US workers
Advantages
 Lowers prices for nearly all goods and
services
 Decreases world unemployment
 Improves quality of life and decreases
poverty in less developed countries
2011 AP MicroEcon FRQ Form B #3
Wage($)
25
20
17.5
15
12.5
10
Marginal
Factor Cost
Woodland is a small town in which
everyone works for TreeMart, the
Supply
of Labor local lumber company. TreeMart is a
monopsonist in the labor market and
a perfect competitor in the lumber
market. In the short run, labor is the
only variable input. The labor market
for TreeMart is given in the graph.
Marginal Revenue Product
Quantity of Labor
25 50 100 150 200 250 300
a)
Identify the profit-maximizing quantity of labor for TreeMart. 100 units
b) Identify the wage rate TreeMart pays to hire the profit-maximizing quantity of
labor. $10
c)
Identify the quantity of labor hired in each of the following situations.
(i) TreeMart operates in a competitive labor market. 200 units
(ii) The government imposes a minimum wage of $12.5. Explain. 150 units
MFC curve becomes horizontal at the minimum wage up to a quantity of 150.
2010 AP MicroEcon FRQ Form B #2
Number of Workers
Marginal Revenue Product Per Day
1
$450
2
$500
3
$450
4
$400
5
$300
6
$100
The table above gives the short-run marginal revenue product of labor per day for a
perfectly competitive firm.
The firm is currently selling its product at the market price of $5.
a) Calculate the marginal (physical) product of the third worker.
b) Define the law of diminishing marginal returns and explain why it occurs.
c) Diminishing marginal returns first occur with the hiring of which worker for the
firm?
d) What is the highest daily wage that the firm is willing to pay to hire the fifth
worker?
e) What will happen to the demand for labor if the market price of the product
increases? Explain.
2010 AP MicroEcon FRQ Form B #2
Number of
Workers
Marginal Revenue
Product Per Day
1
$450
The firm is currently selling its product at the
market price of $5.
2
$500
a)
3
$450
4
$400
5
$300
The table gives the short-run marginal revenue
product of labor per day for a perfectly
competitive firm.
Calculate the marginal (physical) product of
the third worker.
$450/$5 per unit = 90 units
b) Define the law of diminishing marginal
6
$100
returns and explain why it occurs.
1. as more and more units of a variable input are added to
a fixed input, the output increases at a decreasing rate.
2. the overuse of the fixed input.
c) Diminishing marginal returns first occur with the hiring of which worker for the
firm? The hiring of the third worker.
d) What is the highest daily wage that the firm is willing to pay to hire the fifth
worker? $300.
e)
What will happen to the demand for labor if the market price of the product
increases? Explain.
The demand for labor will increase because the increase in
the product price raises the marginal revenue product of labor.
2008 AP MicroEcon FRQ Form B #3
3. GW Company produces and sells hats in a perfectly competitive market at a price of
$2 per hat. Assume that labor is the only variable input and the wage rate is $15 per unit
of labor per day. The table below shows GW’s short-run production function for hats.
Number Of
Workers Per Day
Output Of Hats
Per Day
0
1
2
3
4
5
6
0 10 26 36 44 49 52
(a) After which worker do diminishing marginal returns begin?
(b) Calculate the marginal physical product of the fifth worker.
(c) Calculate the marginal revenue product of the third worker.
(d) How many workers will GW hire to maximize profit?
(e) If GW Company has fixed costs equal to $20, what will be the company’s short-run
economic profits from hiring two workers?
(f) If the price of hats increases, what will happen to the number of workers hired in the
short run? Explain.
2010 AP MicroEcon FRQ Form A #2
2. The John Lamb Company, a profit-maximizing firm producing widgets, is in a
perfectly competitive widget market. Assume John Lamb employs a fixed number of
employees and rents a machine for a variable number of hours from a perfectly
competitive market.
(a) Using correctly labeled side-by-side graphs of the factor market for machines and
the John Lamb Company, show each of the following.
(i) The equilibrium rental price of machines in the factor market, labeled as PR
(ii) John Lamb’s equilibrium rental quantity of machines, labeled as QL
(b) Assume that the popularity of widgets declines, decreasing the demand for widgets.
What will happen to each of the following?
(i) Marginal product curve for machine-hours
(ii) Marginal revenue product curve for machine-hours. Explain.
(c) John Lamb is employing the cost-minimizing combination of inputs. The marginal
product of labor is 28 widgets per worker hour and the wage rate is $14 per hour. The
marginal product of the machine is 60 widgets per machine-hour. What is the hourly
rental price of a machine?