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 product2. Productivity of the resource3. Price of related resources

3 Resource Supply Shifters

4. Number of qualified workersEducation, training, & abilities required

5. Government regulation/licensingEx: 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

Imperfect 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

PerfectCompetiti

onMonopsony

Resource Markets

Ko’s Coal Mining Co.Wage rate (per hour)

Number ofWorkers

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

Assume that this firm CAN NOT wage discriminate and must pay each worker the

same wage.

MRC Wage

SL=wage

Wage

QE

WE

DL=MRP

MRC

Monopsony If the firm can’t wage discriminate, where is MRC?

Quantity for Labor

Labor UnionsTheir 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 non-union workers

Labor Markets

The Effects of Unions in Monopsony1

.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.

The Effects of Unions in Competitive Labor Market

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.

QL

Wage

SL

DL

QL

Wage

SL

DL

QL

Wage

SL

DL

SL1

DL1

DL1

DL1

QL

Wage

SL

DL

Wage

QL

SL

DL

SL1

QL

Wage

SL

DL

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

a) Identify the profit-maximizing quantity of labor for TreeMart.

b) Identify the wage rate TreeMart pays to hire the profit-maximizing quantity of labor.

c) Identify the quantity of labor hired in each of the following situations.

(i) TreeMart operates in a competitive labor market.

(ii) The government imposes a minimum wage of $12.5. Explain.

Woodland is a small town in which everyone works for TreeMart, the 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.

25

2017.5

1512.5

10

25 50 100 150 200 250 300

Wage($)

Quantity of LaborMarginal Revenue Product

Supply of Labor

Marginal Factor Cost

2011 AP MicroEcon FRQ Form B #3

100 units

$10

200 units150 units

MFC curve becomes horizontal at the minimum wage up to a quantity of 150.

2010 AP MicroEcon FRQ Form B #2

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.

Number of Workers Marginal Revenue Product Per Day

1 $450

2 $500

3 $450

4 $400

5 $300

6 $100

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 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.

$450/$5 per unit = 90 units

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.

$300.

The hiring of the third worker.

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.

(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.

Number Of Workers Per Day

0 1 2 3 4 5 6

Output Of Hats Per Day

0 10 26 36 44 49 52

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?