Transcript AP Micro Ch 14 Resource Market

14
The Demand and
Supply of
Resources
Big Questions
1.
2.
3.
4.
What are the factors of production?
Where does the demand for labor come from?
Where does the supply of labor come from?
What are the determinants of demand and
supply in the labor market?
5. What role do land and capital play in
production?
The Factors of Production
• Factors of production
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Inputs used in the production of goods and services
Land—physical location
Labor—employees
Capital—equipment, buildings, machinery
• Derived demand
– Demand for inputs used in the production process
– Demand for inputs is derived from the demand for the
output those inputs produce. Demand for labor will
increase if the demand for the good the labor
produces increases.
Demand for Labor
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Individuals are suppliers of labors
Firms are demanders (purchasers) of labor
The price of labor is the wage rate
A supply-demand analysis is still useful for determining
the amount of labor traded and the price of labor
Demand for Labor
• Marginal product of
labor (MPL)
– The change in output
associated with hiring
one additional worker
Demand for Labor
• Value of the Marginal Product (VMP)
• Also known as Marginal Revenue Product (MRP)
– MPL multiplied by the price of the output it produces
– Sometimes called marginal revenue product
– Think of this as the total revenue generated by the worker
Deciding How Many Laborers
to Hire
Value of the Marginal Product
Changes in the Demand
for Labor
• Changes in technology and Pproductivity
– New low-cost technology can substitute for workers
– More technology will decrease the demand for labor
Changes in the Demand
for Labor
• Technology replacing labor: good or bad?
• Short run
– May seem bad if workers lose jobs
• Long run
– Society benefits! Production is cheaper and safer.
Workers will hopefully find other jobs, allowing
production in other sectors to increase.
The Labor Demand Curve
The Supply of Labor
• The labor supply curve shows the relationship
between the price of labor (wage rate) and the
quantity supplied of labor
• Labor-leisure trade-off
– The opportunity cost of working is giving up leisure
– The opportunity cost of leisure is giving up earnings
from work
– However, income is often required to enjoy leisure
Labor-Leisure Trade-off
• If wages rise, what happens?
• People may be willing to work more hours
– The opportunity cost of leisure is now higher
– This is called the substitution effect—when wages
increase, you substitute in labor and substitute out
leisure
• People may be willing to work less hours
– Suppose you just need $1,000 per week to be
satisfied. With a pay raise, you could earn this amount
working fewer hours, and enjoy more leisure hours
– This is called the income effect. You use your extra
income to purchase more leisure (a normal good).
Labor-Leisure Trade-off
• What is the slope of the labor supply curve? Do
people work more or less when wages increase?
• At lower wages
– The substitution effect usually dominates. Higher
wages lead to more working hours as leisure becomes
more costly.
• At high wage levels
– The income effect may dominate. This can actually
lead to a backward-bending labor supply curve. May
not happen with most people and most wages.
The Labor Supply Curve
Economics in A Day without a
Mexican
• Immigration and labor markets
• What would happen if the
supply of labor decreased
because immigrants
disappeared?
Labor Market Equilibrium
• Surplus of labor
– Qs > Qd. This is unemployment!
• Shortage of labor
– Qd > Qs. The number of
workers firms want to hire is
greater than the number willing
to work
Labor Market Equilibrium
Changes in Equilibrium
Changes in Equilibrium
Outsourcing
• Outsourcing
– The shifting of jobs from within the firm to an outside
company.
– Why? An outside company may have cheaper labor.
This is especially true for overseas companies.
– May be done locally or globally
Outsourcing Globally
• Global results of outsourcing
– Ability to outsource increases pool of workers
– Decreases wages for domestic workers
– Unemployment in the industry rises
• Outsourcing winners
– Workers in country with increased labor demand
– Firm that is hiring cheaper labor
• Outsourcing losers
– Workers who may have lost their job or experienced
wage reductions
Outsourcing in the Long Run
• In the short run, it appears that outsourcing can
be painful for some individuals
• Outsourcing in the long run
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Allows specialization
Increases efficiency
Lowers costs (and prices)
Helps firms and consumers
• Are workers helped?
– Outsourcing relocates jobs to efficient workers
– Increases labor demand in the long run
Economics in Outsourced
• This great clip shows what can happen when jobs
can be outsourced to use cheaper labor
• Some jobs may be lost, but prices will fall due to
lower costs
Monopsony
• Monopsony
– A market situation in which there is only one buyer
– Contrast with monopoly, where there is one seller
• Monopsony results
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Monopsonist has market power
Pushes prices down
Monopsonist labor buyer will push wages low
(If people only have one choice of employment, that
employer will pay low wages)
Monopsony and the WNBA
• NBA
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Teams are all owned separately
Many competing purchasers of NBA labor
Higher wages
Average salary of NBA player in 2011
was $5.15 million
• WNBA
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At first, teams are all owned by the NBA
One purchaser of WNBA labor (monopsony)
Lower wages
Salary cap for WNBA TEAM in 2013 was $869,000
The Market for Land
• Supply of land is fixed, so supply is perfectly
inelastic (vertical)
– Increases in demand result in price increases, but
not quantity increases
The Market for Land
• Economic rent
– The difference between what a factor of production
earns and its next-best alternative
– Ability of investors to beat their opportunity costs
• Economic rent example
– Apartment near campus has higher price than
apartment 10 miles from campus
– Higher demand for living near campus
Supply and Demand for Land
The Market for Capital
• Demand for capital
– Determined by the value of
marginal product of capital
– Downward sloping—
marginal product declines
with increased amounts of
capital employed
When to Use More Labor,
Land, or Capital
• A firm can decide the best of use of its resources
by comparing the VMP per dollar spent on each
of the three inputs
– If the firm is going to spend more on inputs, it wants to
spend money on the most productive input
– The firm wants to maximize revenue per dollar spent
Land, Labor, and Capital
Example
Summary
• The demand for each factor of production is a derived
demand that stems from a firm’s desire to supply a good
in another market.
• Labor demand is contingent upon the value of the
marginal product that is produced, and the value of the
marginal product is equivalent to the firm’s labor demand
curve.
• The supply of labor depends on the wage rate that is
offered, and also on each person’s goals and other
opportunities. At high-wage levels the income effect may
become larger than the substitution effect and cause the
supply curve to bend backward.
Summary
• Labor markets reconcile the forces of demand
and supply into a wage signal that conveys
information to both sides of the market
• At wages above the equilibrium, the supply of
workers exceeds the demand for labor. This
results in a surplus of available workers.
• At wages below the equilibrium, the demand for
labor exceeds the available supply of workers
and a shortage develops
Summary
• Outsourcing
– There is no definitive result for outsourcing of labor in
the short run.
– In the long run, outsourcing moves jobs to workers
who are more productive, and thus increases the
overall productivity of workers everywhere.
• A monopsonist in the labor market is able to
leverage market power by paying workers less.
• Economic rent is the difference between what a
factor of production earns and what it could earn
in the next-best alternative.
Practice What You Know
The demand for labor will increase if
A. The wage rate decreases
B. If there is a decrease in the number of firms
hiring
C. The demand for the product produced by the
labor increases
D. If labor becomes less productive
Practice What You Know
A firm will keep hiring workers as long as the
wages paid to workers is less than the
A.
B.
C.
D.
Wages the workers could earn elsewhere
Price of the goods being produced
Marginal Product of Labor (MPL)
Value of Marginal Product (VMP)
Practice What You Know
What could lead to a backward-bending labor supply
curve?
A. The income effect dominating the substitution
effect at high wages
B. The substitution effect dominating the income
effect at high wages
C. Laborers always working more hours when
wages are higher
D. Firms choosing to hire less workers when
market wages are higher
Practice What You Know
What is true about outsourcing?
A. Outsourcing generally helps the firm by raising
the price of the goods sold
B. Outsourcing may decrease wages for domestic
workers
C. Outsourcing will decrease the overall supply of
workers that a firm can employ
D. There are no significant economic trade-offs
with regards to outsourcing
Practice What You Know
What is true about monopsony?
A. Unlike a monopolist, a monopsonist has no
market power
B. Monopsony exists when there is one seller of a
good, service, or resource
C. If a market becomes monopsonized, there will
be an increase in the demand for labor.
D. A monopsonist has the incentive to use market
power to lower the price of a resource