Unit 6: The FACTOR MARKET(aka: The Resource Market or Input Market)*

Unit 6: The Factor MarketLength: 5-6 LessonsChapters: 12 & 13 in textbook Good News:Only two Graphs to learn (PC vs. Monopsony for factor market)Many concepts are just the application of things we have already learned.Basically just Supply and Demand*

Producers SupplyHouseholds DemandProduct Market*

Producers Demand Households Supply

Resource Market*

Perfectly Competitive Labor MarketCharacteristics: Many small firms are hiring workersNo one firm is large enough to manipulate the market.Many workers with identical skillsWage is constantWorkers are wage takersFirms can hire as many workers as they want at a wage set by the industry*PerfectCompetitionMonopsonyResource Markets

Perfectly Competitive Labor Market and FirmSLDL?WageQWageQ5000$10IndustryFirm

DERIVED DEMAND Example 1: If there was a significant increase in the demand for pizza, how would this affect the demand for cheese? Cows? Milking Machines? Veterinarians? Vet Schools? Etc.

Example 2: An increase in the demand for cars increases the demand for

Derived Demand- The demand for resources is determined (derived) by the products they help produce. *

Continue to hire untilMRP = MFCHow do you know how many resources (workers) to employ?*Remember the Paper Chain Activity

Push-Up Machine*

I am the inventor of a new generator that converts human push ups into safe and clean electrical energy. Each push up generative $1 worth of energy.Supply and demand in the labor market has resulted in a equilibrium wage of $10 (MRC = $10). The supply curve for the firm is perfectly elastic at $10how much will you work for? Assuming identical skills, hire the first worker (do push ups in a 4ft x 7ft box). Lets start hiring workers (Each worker must make sound effects)*The Push-Up Machine

The additional cost of an additional worker (or resource). In a perfectly competitive labor market the MFC equals the WAGE set by the market and is constant.Ex: The MFC of an unskilled worker is $8.75.Another way to calculate MFC is:*Marginal Factor Cost (MFC)

The additional revenue generated by an additional worker (resource). In perfectly competitive product markets the MRP equals the marginal product of the resource times the price of the product.Ex: If the Marginal Product of the 3rd worker is 5 and the price of the good is constant at $20 the MRP is.$100Another way to calculate MRP is:*Marginal Revenue Product (MRP)

Calculate MP and MRPThe Push-Up Machine

Quantity LaborTotal ProductMarginal ProductMRP @ $1 Price

SupplySupply and demand in the INDUSTRY GRAPH has resulted in a equilibrium wage of $10. How much MUST each worker work for?Why not ask for more? Why not less?

DemandIf each push up generates $1 worth of energy what is the MRP for each worker?How much is each worker worth to the firm?The Push-Up Machine

Why does the MRP eventually fall?Diminishing Marginal Returns.Fixed resources means each worker will eventually add less than the previous workers.The MRP determines the demand for labor The firm is willing and able to pay each worker up to the amount they generate.Each worker is worth the amount of money they generate for the firm.

The Push-Up Machine

Perfectly Competitive Labor Market and FirmDL?WageQWageQQEWEIndustryFirmSL

SLDLWageQWageQIndustryFirmQEWEQeDL=MRPSL=MFCSide-by-side graph showing Market and Firm

Industry Graph*

DEMAND RE-DEFINED*

Where do you get the Market Demand? QMcDonalds Burger King Other Firms3PQ2PQ25PQ30P$8$8$8$8DDDD

WageQLDem$121$102$83$65$47

WageQLDem$120$101$82$63$45

WageQLDem$129$1017$825$642$468

WageQLDem$1210$1020$830$650$480

Who demands labor?FIRMS demand labor.Demand for labor shows the quantities of workers that firms will hire at different wage rates. Market Demand for Labor is the sum of each firms MRP.DLQuantity of WorkersWage

As wage falls, Qd increases.As wage increases, Qd falls.*

Who supplies labor?Individuals supply labor.Supply of labor is the number of workers that are willing to work at different wage rates.Higher wages give workers incentive to leave other industries or give up leisure activities.Quantity of WorkersWageAs wage increases, Qs increases.As wage decreases, Qs decreases. Labor Supply*

Market EquilibriumWage (the price of labor) is set by the market.EX: Supply and Demand for CarpentersQuantity of WorkersWage Labor Supply = MFC Labor Demand =MRP$30hr*

Individual Firms*WageQQeDL= MRPSL= MFC

*Example:You hire workers to mow lawns. The wage for each worker is set at $100 a day.Each lawn mowed earns your firm $50. If you hire one worker, he can mow 4 lawns per day.If you hire two workers, they can mow 5 lawns per day together.What is the MFC for each worker?What is the first workers MRP? What is the second workers MRP? How many workers will you hire?How much are you willing to pay the first worker?How much will you actually pay the first worker? What must happen to the wage in the market for you to hire the second worker?

Youre the BossYou own a business.Assume the you are selling the goods in a perfectly competitive PRODUCT market so the price is constant at $10.Assume that you are hiring workers in a perfectly competitive FACTOR market so the wage is constant at $20. Also assume the wage is the ONLY cost.

Given the table (next slide) To maximize profit how many workers should you hire? *

WorkersTotalProduct(Output)Use the following data:01234567 0 7172427293027*Hint* How much is each worker worth?Wage = $20Price = $10*

Units ofLaborTotalProduct(Output)Use the following data:01234567 0 7172427293027What is happening to Total Product?

Why does this occur?

Where are the three stages? Wage = $20Price = $10*

Units ofLaborTotalProduct(Output)Use the following data:01234567 0 7172427293027Wage = $20Price = $10MarginalProduct(MP) - 7107321-3This shows the PRODUCTIVITY of each worker.

Why does productivity decrease?*

Units ofLaborTotalProduct(Output)Use the following data:01234567 0 7172427293027Wage = $20Price = $10MarginalProduct(MP) - 7107321-3ProductPrice 0 10101010101010Price constant because we are in a perfectly competitive market.*

Units ofLaborTotalProduct(Output)Use the following data:01234567 0 7172427293027Wage = $20Price = $10MarginalProduct(MP) - 7107321-3ProductPrice 0 10101010101010Marginal Revenue Product 0 7010070302010-30This shows how much each worker is worth*

Units ofLaborTotalProduct(Output)Use the following data:01234567 0 7172427293027Wage = $20Price = $10MarginalProduct(MP) - 7107321-3ProductPrice 0 10101010101010 0 7010070302010-30Marginal FactorCost 0 20202020202020How many workers should you hire?*Marginal Revenue Product

Factor Markets (Part 2)Drawing the Factor Demand Curve*

P.Q.Give an example of Derived Demand. Define MRP.Explain the difference between MRP and MR.Why does the MRP fall as more workers are hired?Identify the two ways to calculate MRP.Define MFC.Explain the difference between MFC and MC.How does a firm decide how many workers to hire?*

*

Why do people with only high school degrees make less money on average?Employers assume they have low productivity and will generate less additional revenue.*

Real Life Application Top 5 Fastest Growing Jobs (2000-2010)Computer Software Engineers, ApplicationsComputer Support SpecialistsComputer Software Engineers, SystemsComputer Systems AdministratorsData Communications AnalystTop 5 Fastest Declining JobsRailroad Switch OperatorsShoe Machine OperatorsTelephone OperatorsRadio MechanicsLoan Interviewers

WHY?Youve got to learn technology!*

Real Life Application *

Adjusting for InflationWage The price of labor defined as currency per unit of labor worked.NOMINAL Wage The price of labor not adjusted for inflation.REAL wage The price of labor adjusted for inflation; Economists use the CPI to adjust numbers from prices/wages from different times into a consistent unit of measure (ie. 2010 dollars)

Average Wage (1964-2006)

Wage TrendsOther US labor market trends:Workers with higher skills are paid more than unskilled workers. This gap is increasing.College graduates earn more than high school graduates and the gap has been increasing.Women, on average, are paid lower than men, although the gap has become more narrow over the years.

The MRP of a resource equals the Demand.*

Drawing the Demand Curve for Resources*

Units ofLaborTotalProduct(Output)Yesterday's Activity01234567 0 7172427293027Wage = $20Price = $10MarginalProduct(MP) - 7107321-3ProductPrice 0 10101010101010MRP 0 7010070302010-30Shows how many workers a firm is willing and able to hire at different wages.*

Units ofLaborTotalProduct(Output)Use the following data:01234567 0 7172427293027Wage = $20Price = $10MarginalProduct(MP) - 7107321-3ProductPrice 0 10101010101010MRP 0 7010070302010-30Demand for this resourcePlotting the D=MRP curve*

Wage RateQ$100

80

60

40

20D = MRPQuantity of WorkersDemand=MRP 1 2 3 4 5 6 7 8Why is it downward sloping? Because of the law of diminishing marginal returns*Each additional resource is less productive and therefore is worth less than the previous one

Wage RateQ$100

80

60

40

20D = MRPQuantity of WorkersDemand=MRP 1 2 3 4 5 6 7 8*This model applies to land, labor, and capitalNotice the inverse relationship between wage and quantity of resources demand

Wage RateQ$100

80

60

40

20D = MRPQuantity of WorkersWhat happens if demand for the product increases? 1 2 3 4 5 6 7 8MRP increases causing demand to shift right*D1 = MRP1

3 Shifters of Factor Demand1.) Derived Demand: Changes in the Demand for the Product Price increase of the product increases MRP and demand for the resource.2.) Changes in ProductivityTechnological Advances increase Marginal Product and therefore MRP Demand.3.) Changes in Price of Other ResourcesSubstitute ResourcesEx: What happens to the demand for assembly line workers if price of robots falls? Complementary ResourcesEx: What happens to the demand nails if the price of lumber increases significantly? *

Drawing the Demand Curve for Resources*

Units ofLaborTotalProduct(Output)Use the following data:01234567 0 7172427293027Wage = $20Price = $10MarginalProduct(MP) - 7107321-3ProductPrice 0 10101010101010AdditionalRevenue per worker 0 7010070302010-30AdditionalCost per worker 0 20202020202020How would this change if the demand for the good increased significantly?Price of the good would increase.Value of each worker would increase.*

Units ofLaborTotalProduct(Output)Use the following data:01234567 0 7172427293027Wage = $20Price = $100MarginalProduct(MP) - 7107321-3ProductPrice 0 100100100100100100100AdditionalRevenue per worker*

Units ofLaborTotalProduct(Output)Use the following data:01234567 0 7172427293027Wage = $20Price = $100MarginalProduct(MP) - 7107321-3ProductPrice 0 100100100100100100100AdditionalRevenue per worker 0 7001000700300200100-300Each worker is worth more!!

THIS ISDERIVED DEMAND.*

Units ofLaborTotalProduct(Output)Use the following data:01234567 0 7172427293027Wage = $20Price = $10MarginalProduct(MP) - 7107321-3ProductPrice 0 10101010101010AdditionalRevenue per worker 0 7010070302010-30AdditionalCost per worker 0 20202020202020How would this change if the productivity of each worker increased?Marginal Product would increase.Value of each worker would increase.*

Units ofLaborTotalProduct(Output)Use the following data:01234567 0 70170240270290300270Wage = $20Price = $10MarginalProduct(MP) - 7010070302010-30ProductPrice 0 10101010101010AdditionalRevenue per worker 0 7001000700300200100-300Each worker is worth more!

More demand for the resource.*

Identify the Resource and Shifter (ceteris paribus):Increase in demand for microprocessors leads to a(n) ________ in the demand for processor assemblers.Increase in the price for plastic piping causes the demand for copper piping to _________.Increase in demand for small homes (compared to big homes) leads to a(n) _________ the demand for lumber.For shipping companies, a(n) __________ in price of trains leads to decrease in demand for trucks.Decrease in price of sugar leads to a(n) __________ in the demand for aluminum for soda producers.Substantial increase in demand for skilled labor, leads to an ___________ in demand for education/training. *3 Shifters of Resource Demand

Identify the Resource and Shifter (ceteris paribus):Increase in demand for microprocessors leads to a(n) ________ in the demand for processor assemblers.Increase in the price for plastic piping causes the demand for copper piping to _________.Increase in demand for small homes (compared to big homes) leads to a(n) _________ the demand for lumber.For shipping companies, a(n) __________ in price of trains leads to decrease in demand for trucks.Decrease in price of sugar leads to a(n) __________ in the demand for aluminum for soda producers.Substantial increase in demand for skilled labor, leads to an ___________ in demand for education/training. increaseincreasedecreasedecreaseincreaseincrease*3 Shifters of Resource Demand

Resource Supply Shifters

Supply Shifters for LaborNumber of qualified workersEducation, training, & abilities requiredGovernment regulation/licensingEx: What if waiters had to obtain a license to serve food?3. Personal values regarding leisure time and societal roles.Ex: Why did the US Labor supply increase during WWII?Why do some occupations get paid more than others?

With your partner...Use supply and demand analysis to explain why surgeons earn an average salary of $137,050 and gardeners earn $13,560.Quantity of WorkersWage Rate SLDL Supply and Demand For Surgeons Supply and Demand For Gardeners Quantity of WorkersWage Rate SLDL

What are other reasons for differences in wage?

Labor Market Imperfections- Insufficient/misleading job information-This prevents workers from seeking better employment.Geographical Immobility- Many people are reluctant or too poor to move so they accept a lower wageUnions- Collective bargaining and threats to strike often lead to higher than equilibrium wages Wage Discrimination-Some people get paid differently for doing the same job based on race or gender (Very illegal!).

Glass Ceilings Interpret

Factor Markets (Part 3)The Perfectly CompetitiveLabor Market*

Review

Who demands in the Factor Market?Who supplies in the Factor Market?Define Derived DemandThe demand for resources is determined (derived) by the products they help produce.4. Identify the Shifters of Factor DemandDerived DemandProductivity of the ResourcesPrice of related resources

Use side-by-side graphs to draw a perfectly competitive labor market and firm hiring 50 workers at a wage of $100 per day.*

SLDLWageQWageQIndustryFirmQM1WM1QF1DL= MRPSL= MFCWage is set by the market demand (DL)The firms MRP falls

SLDLWageQWageQIndustryFirmQM1WM1QF1DL= MRPSL= MFCWhat happens to the wage and quantity in the market and firm if new workers enter the industry?

SL1DLWageQWageQIndustryFirmQM1WM1QF1DL=MRPSL1=MFC1What happens to the wage and quantity in the market and firm if new workers enter the industry?SL2WM2QM2SL2=MFC2QF2

Minimum WageAssume the government was interested in increasing the federal minimum wage to $15 an hourDo you support this new law? Why or why not*

SWageQ LaborDFast Food Cooks$15

$8

$6The government wants to help workers because the equilibrium wage is too low*5 6 7 8 9 10 11 12

SWageQ LaborDFast Food Cooks Government sets up a WAGE FLOOR.Where?*$15

$8

$65 6 7 8 9 10 11 12

SWageQ LaborDMinimum Wage Above Equilibrium!*$15

$8

$65 6 7 8 9 10 11 12

SWageQ LaborDWhats the result?Q demanded falls.

Q supplied increases.*$15

$8

$65 6 7 8 9 10 11 12Surplus of workers(Unemployment)Minimum Wage

Is increasing minimum wage good or bad?

GOOD IDEA-We dont want poor people living in the street, so we should make sure they have enough to live on.

BAD IDEA-Increasing minimum wage too much leads to more unemployment and higher prices.*

Minimum Wage Worksheet*

Combining Resources Up to this point we have analyzed the use of only one resource.What about when a firm wants to combine different resources?

If you only have $35, what combination of robots and workers will maximize output?Least Cost Rule$10$5How much additional output does each resource generate per dollar spent?

# Times GoingMP(Robots)MP/PR(PriceR =$10)MP (Workers)MP/PW(PriceW =$5)1st3032042nd2021533rd1011024th5.5051

If you only have $35, the best combination is 2 robots and 3 workersLeast Cost Rule$10MPx = MPyPx Py$5Resource xResource y

# Times GoingMP(Robots)MP/PR(PriceR =$10)MP (Workers)MP/PW(PriceW =$5)1st3032042nd2021533rd1011024th5.5051

Profit Maximizing Rule for a Combing Resources MRPx = MRPy =MFCx MFCy1This means that the firm is hiring where MRP = MFC for each resource x and y

Practice: What should the firm do comparing MRP and P for 2 resources2. MRPL = $5; PL = $10; MRPK = $10; PK = $153. MRPL = $25; PL = $20; MRPK = $15; PK = $154. MRPL = $12; PL = $12; MRPK = $50; PK = $405. MRPL = $20; PL = $15; MRPK = $100; PK =$40

MORELESSSTAY PUTMOREMOREMOREMORESTAY PUTSTAY PUTLESS1. MRPL = $15; PL = $6; MRPK = $10; PK = $10

Practice: What should the firm do Comparing MP and P for 2 resources2. MPL = 5; PL = $10; MPK = 10; PK = $153. MPL = 20; PL = $20; MPK = 15; PK = $154. MPL = 40; PL = $20; MPK = 100; PK = $505. MPL = 20; PL = $1; MPK = 60; PK =$2

MORE LABOR, Less CapitalMORE CAPITAL, Less LaborSTAY PUTMORE CAPITAL, Less LaborSTAY PUT1. MPL = 12; PL = $6; MPK = 10; PK = $10

2010 Practice FRQ(in problem set)*

Factor Markets (Part 4)The IMPERFECTLY CompetitiveLabor MarketAKA: Monopsony*

Use the concept of derived demand to explain this cartoonWhat about SUPPLY?*

Shifter Review3 Resource Demand Shifters (Based on MRP)Demand (price) of the productProductivity of the resourcePrice of related resources3 Resource Supply ShiftersNumber of qualified workersEducation, training, & abilities requiredGovernment 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?*

Imperfect Competition: MonopsonyCharacteristics: One firms hiring workersThe firm is large enough to manipulate the marketWorkers are relatively immobileFirm is wage makerTo hire additional workers the firm must increaseExamples:Central American Sweat ShopsMidwest small town with a large Car PlantNCAA*PerfectCompetitionMonopsonyResource Markets

Assume that this firm CANT wage discriminate (same idea as price discrimination) and must pay each worker the same wage.

Assume that this firm CANT wage discriminate and must pay each worker the same wage.

SLWageQEWEDL= MRPMFCMonopsony If the firm cant wage discriminate where is MFC?

Labor UnionsGoal is to increasing wages and benefits

How can Unions Increase Wages? Convince Consumers to buy only Union ProductsEx: Advertising the quality of union/domestic productsLobbying government officials to increase demandEx: Teachers Unions petition governor to increase spending.Increase the price of substitute resourcesEx: Unions support increases in minimum wage so employers are less likely to seek non-union workers

Labor Markets

Labor Markets and Globalization

Check your Tags

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 in 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.

Outsourcing- Advantages and Disadvantages DisadvantagesIncreases U.S. unemploymentLess US tax revenue generated from workers and corporations means less public benefitsForeign workers dont receive same protections as US workers

AdvantagesLowers prices for nearly all goods and servicesDecreases world unemploymentImproves quality of life and decreases poverty in less developed countries

Video 1: Outsourcing Child CareVideo 2: Stossle Outsourcing

$100$200$501$200 (Up to the amount he generates)$100 (The wage set by the market)Decrease to $50 or below

*Demand for Factor is DERIVED from demand for productMarginal Revenue Product (extra revenue from hiring last worker)MR is extra revenue from last productDiminishing Marginal ReturnsMR * MP (if P.C.), or change in TR / change in QLMarginal Factor Cost (extra cost from hiring last worker)MC is extra cost from last productMFC=MRP****3 apples and 2 oranges