unit 5: factor markets why does a coach get paid $6 million?
TRANSCRIPT
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UNIT 5:FACTOR MARKETS
Why does a coach get paid $6 million?
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1. Define derived demand2. Define & graph Demand for Labor (DL)
& Supply for Labor (SL)
3. Define & graph Marginal Revenue Product (MRP) and Marginal Resource Cost (MRC)
4. Effects of shifts in the market supply or demand for resources
5. Define & graph a perfectly competitive labor markets
6. Review & graph imperfectly competitive labor markets
In this section we will examine:
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Basic Graphing in Factor Markets
&MRP = MRC Rule
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Factor Market Overview
Basic view of the market for resource is a mirrored image of the product market.
SProduct
DP
Pric
e
QProduct5000
$10
Industry
SLabor
DLabor
Wag
e
QResource/Labor5000
$10
Industry
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Vocab: Derived Demand
The demand for a factor of production is a derived demand.
It is derived from the demand for the goods and services the factor of production is used to produce.
In other words, if the demand for a good such as wheat increases, then the productivity increases, which leads to an increase in labor.
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Vocab: Marginal Revenue Product
Value of Marginal Product (VMP) is the additional revenue that results from the additional product produced when more inputs are added.
The value of marginal product is simply: Marginal product x the price for those
additional units.
Value of MarginalProduct
=Change inMarginal Product
Price of those
additional units
x
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Vocab: Marginal Revenue Product
Marginal Revenue Product (MRP) is the change in revenue that results from the addition of one extra unit when all other resources are kept equal.
The MRP is often used to calculate the affect of adding employees, as companies want to add employees up to the point at which additional labor won't bring in enough revenue to cover costs.
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Marginal Revenue Product (MRP)
The additional revenue generated by an additional worker (resource).
Another way to calculate MRP is:
Marginal Revenue Product (MRP):
MarginalRevenueProduct =
Change inTotal Revenue
Change inInputs
How much are those unit of labor worth in term of
additional revenue?
MarginalRevenueProduct = Marginal Revenue Marginal Productx
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Marginal Revenue Product (MRP)
Marginal Revenue Product:
Assumes $3 per wash.
MarginalRevenueProduct
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Also called the marginal revenue product curve.
DL=MRP
Factor Market: Vocab
The orange line is the firm’s value of the marginal revenue product of labor curve.
Thus the demand for labor is the marginal revenue product curve.
Marginal Revenue Product:
Assumes $3 per wash.
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Vocab: Marginal Resource Cost (MRC)
Marginal Resource Cost (MRC):The additional cost of an additional resource.
Another way to calculate MRC is:
MarginalResource
Cost=
Change inTotal Cost
Change inInputs
How much extra does each resource
cost me?
Materials
Technology Labor
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Vocab: Marginal Resource Cost (MRC)
Marginal Cost Labor (MCL):The additional cost of an additional worker.
Another way to calculate MCL is:
MarginalCost Labor =
Change inTotal Cost
Change inLabor
How much extra does each laborer
cost me?
Labor
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Basic View of MRP & MRC
MRC = SResource
MRP = DResource
Cost of R
esource
QResource5000
$10
Firm
It is almost a mirrored image of the product market graph.
Most beneficial amount of inputs to employ.
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Basic View of MRP & MRC
Use supply and demand analysis to explain why surgeons earn an average salary of $137,050 and gardeners earn $13,560.
Quantity of Workers
Wag
e Rate
SL
DL
Supply and Demand For Surgeons Supply and Demand For Gardeners
Quantity of Workers
Wag
e Rate
SL
DL
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MRP = MRC RULE
Continue to hire until…
MRP = MRC
How do you know how many resources (workers) to employ?
This is similar to the MC = MR
rule in the product market
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MRP = MRC RULE
How do you know how many resources (workers) to employ?
0
1
2
3
4
5
6
7
PIZZA (only 1 Oven)
0
2
7
10
12
13
13
10
-
Quantity of Workers
Total Product(Pizzas)
Marginal Product
Wage = $20 Price = $10
Marginal Revenue Product
-
Marginal Resource
Cost
This example assumes a perfectly
competitive product market
This example assumes a perfectly
competitive labor market. More on this
later
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MRP = MRC RULE
0
1
2
3
4
5
6
7
PIZZA (only 1 Oven)
0
2
7
10
12
13
13
10
- 2
5
3
2
1
0
-3
Quantity of Workers
Total Product(Pizzas)
Marginal Product
Wage = $20 Price = $10
Marginal Revenue Product
- 20
50
30
20
10
0 -30
Marginal Resource
Cost
20
20
20
20 20
20
20
How do you know how many resources (workers) to employ?
The firm should NOT hire more than 4 workers.
(MRP = MRC)Thus this logic applies to all
inputs.
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MRP = MRC RULE
Quantity of Labor
$20
100 4
SL=MRC
As long as MRP > MRC the firm will
continue to hire inputsWageLABOR MARKET
Quantity of Labor
WageFIRM
$20
SL
DL DL=MRP
The firm will stop hiring inputs at the 4th worker since any more workers (given
current other fixed inputs) will result in diminished returns on the marginal unit
produced.
Note: One would not stop hiring here since there is additional marginal
revenue per unit of product to achieve.
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SHIFTERS OF RESOURCE DEMAND
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Shifters of Resource Demand
1.) Changes in the Demand for the Product • Price increase of the product increases MRP and
demand for the resource.
3.) Changes in Price of Other Resources• Substitute Resources
Ex: What happens to the demand for assembly line workers if price of robots falls?
• Complementary ResourcesEx: What happens to the demand for nails if
the price of lumber increases significantly?
2.) Changes in Productivity• Technological advances increase
Marginal Product and therefore MRP/Demand.
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PERFECTLY COMPETITIVE LABOR MARKET
We are stuck making the same wage as
everyone else in this labor market!
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Types of Factor MarketsPerfect
Competition Monopsony
Perfectly Competitive Labor Market
Characteristics: Many small firms are hiring workers
No one firm is large enough to manipulate the market.
Many workers with identical skills Wage is constant: firms are wage takers
Firms can hire as many workers as they want at a wage set by the industry
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Types of Factor MarketsPerfect
Competition Monopsony
Perfectly Competitive Labor MarketNumber of
Workers Wanted Wage that Must Be Paid
To Attract an Extra Worker Marginal Cost of Labor
(MCL) 1 $4.00 +$4.00 2 $4.00 +$4.00 3 $4.00 +$4.00 4 $4.00 +$4.00
MRC = Wagesame as
MCL = Wage
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Wage
Q
Wage
Q
Industry FirmQE
WE
Qe
Perfectly Competitive Labor Market
Generally this condition is found in low skilled labor markets.
SL
DLDL=MRP
SL=MRC
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Wage
Q
Wage
Q
Industry FirmQE
Qe
What happens to the wage and quantity in the market and firm if new workers enter the industry?
W1
Q1Q1
Perfectly Competitive Labor Market
SL
SL1
DLDL=MRP
SL=MRC
SL1=MRC1
WE
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Perfectly Competitive Labor Market
Suxs to be a
Wage Taker
I am stuck making the
same wage as everyone else!
In perfectly competitive labor markets there is sometimes the pressure to unionize workers in an effort to increase the wage above the market equilibrium wage.United
Auto Workers
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Practice: What should the firm do – hire more, hire less, or stay put?
1. MRPL = $15; PL = $6 2. MRPL = $10; PL = $10
2. MRPL = $5; PL = $10 4. MRPL = $10; PL = $15
3. MRPL = $25; PL = $20 6. MRPL = $15; PL = $15
4. MRPL = $12; PL = $12 8. MRPL = $50; PL = $40
MORE
LESS
STAY PUT
MORE
MORE
STAY PUT
STAY PUT
LESS
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IMPERFECT LABOR MARKET
Monopsony
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Types of Factor MarketsPerfect
Competition Monopsony
Monopsony Labor Market
Characteristics: Few large firms are hiring workers
One firm is large enough to manipulate the labor market.
Wage is NOT constant: firms are wage makers If the monopsonist wants to increase the number of
workers that it hires, it must increase the wage that it pays to all of its workers, including those whom it currently employs.
Monopsonist (Greek: mono”single” - opsonia”purchase”)
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Imperfect Labor Market
Monopsonist (Greek: mono”single” - opsonia”purchase”)
An employer is said to be a monopsonist if the employer must increase the wage offered to workers in order to attract additional workers.
1. A non-discriminating monopsonist is an employer who must increase the wage offered to workers in order to attract more workers.
2. A discriminating monopsonist is one that pays the higher wage only to the extra worker for whom the employer raised the wage. Could be illegal!!
There are two types of monopsonists:
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Imperfect Labor Market
MonopsonistNon-discriminating monopsonist: true cost to the firm of adding an extra worker (MRC) will be greater than the wage paid to that worker. [MRC > Wage]
MRC = MRP
MRC doesn’t equal wage
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Imperfect Labor Market
MonopsonistNon-discriminating monopsonist: true cost to the firm of adding an extra worker (MRC) will be greater than the wage paid to that worker. [MRC > Wage]
Number of Workers Wanted
Wage that Must Be Paid To Attract an Extra Worker
Marginal Cost of Labor (MCL)
1 $4.00 +$4.00 2 $4.10 +$4.20 3 $4.20 +$4.40 4 $4.30 +$4.60
MRC
MRC
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“Glass Ceilings”
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The Labor Market:Minimum Wage Laws &
Unions
How can raising
minimum wage cause higher
unemployment?
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Wage
Q
Wage
Q
IndustryQE
WE
Qe
Perfectly Competitive Labor Market
Generally this condition is found in low skilled labor markets.
If viewed to be too low. The government attempts to
adjust the wage.SL
DLDL=MRP
SL=MRC
$10Minimum
Wage
Qmin
Wminimum
Surplus of Labor
QDL QSL
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Unionized Labor Market
1. A labor union restricts the supply of labor and the supply of labor curve shifts leftward to LS1.
2. The wage rate rises to $15 an hour, but employment decreases to 200 workers.
3. Jobs are traded off for a higher wage rate.
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Unionized Labor Market
4. If union action increases labor productivity, the demand for union labor increases and the demand for labor curve shifts rightward to LD1.
5. The wage rate rises to $20 an hour and employment increases to 250 workers.
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LEAST COST RULE
Up to this point we have analyzed the use of only one resource.
What about when a firm wants to combine different resources?
MPx = MPyPx Py
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If you only have $35, the best combination is 2 robots and 3 workers
Robots MP(Robots)
MP/PR(PriceR =$10)
Workers MP (Workers)
MP/PW(PriceW =$5)
1 30 3 1 20 4
2 20 2 2 15 3
3 10 1 3 10 2
4 5 .50 4 5 1
$10 $5
Least Cost Rule
How much additional output does each resource generate per dollar spent?
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If you only have $35, the best combination is 2 robots and 3 workers
Robots MP(Robots)
MP/PR(PriceR =$10)
Workers MP (Workers)
MP/PW(PriceW =$5)
1 30 3 1 20 4
2 20 2 2 15 3
3 10 1 3 10 2
4 5 .50 4 5 1
$10MPx = MPy
Px Py $5
Least Cost Rule
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Profit Maximizing Rule for a Combining Resources
MRPx MRPy MRCx MRCy 1
This means that the firm is employing resources where
MRP = MRC for each resource.
= =
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2010 Practice FRQ
42
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