Standard 1Understand the fundamental

concepts relevant to the development of a market

economy

SS.912.E.1.9SS.912.E.1.9Describe how the earnings of Describe how the earnings of

workers are determined workers are determined

Simple answer: supply and demand Simple answer: supply and demand determine wagesdetermine wages

Firms demand labor servicesFirms demand labor services

People supply labor servicesPeople supply labor services

Also, don’t ignore opportunity costsAlso, don’t ignore opportunity costs

Example: babysitterExample: babysitter

Why do firms hire people?Why do firms hire people?The demand for resources is a The demand for resources is a derivedderived demanddemand- it is dependent on the demand - it is dependent on the demand for the productfor the product

More specifically, why do firms hire More specifically, why do firms hire people?people?

If the firm already has 20 employees, why If the firm already has 20 employees, why hire one more?hire one more?

Because that employee’s marginal Because that employee’s marginal production adds to total productionproduction adds to total production

Example: 20 employees produce 50 units, Example: 20 employees produce 50 units, 21 employees produce 55 units, the 21 employees produce 55 units, the marginal productivity of the 21marginal productivity of the 21stst worker is 5 worker is 5 unitsunits

Would you hire the 21Would you hire the 21stst worker? worker?

From the previous example, what if From the previous example, what if those 5 new units sold for $10 each those 5 new units sold for $10 each and the worker cost $40?and the worker cost $40?

Marginal revenue (MR) = $10Marginal revenue (MR) = $10

Marginal product (MP) = 5Marginal product (MP) = 5

Marginal revenue product (MRP) = $50Marginal revenue product (MRP) = $50

Marginal cost (MC) = $40Marginal cost (MC) = $40

Decision rule for the firm: hire people as Decision rule for the firm: hire people as long as MRP > MC of workerlong as MRP > MC of worker

If you were currently working for If you were currently working for $25 an hour, would you be willing to $25 an hour, would you be willing to work more for $30 an hour?work more for $30 an hour?

The resource supply curve is upward The resource supply curve is upward sloping: higher wages increase quantity sloping: higher wages increase quantity suppliedsupplied

An individual person would work more OR An individual person would work more OR more people would be willing to work more people would be willing to work when wages increasewhen wages increase

S & D graph:S & D graph:

Short answer question:Short answer question:

Explain why it might make perfect Explain why it might make perfect economic sense to pay a professional economic sense to pay a professional athlete $20 million per year.athlete $20 million per year.

Other considerationsOther considerations

Union contractsUnion contracts

Monopsony power- a single or limited Monopsony power- a single or limited number of sellers (i.e. workers)number of sellers (i.e. workers)

Compensating wage differentialsCompensating wage differentials

Differences in productivityDifferences in productivity

Compensating Wage DifferentialCompensating Wage Differential

Video: Night at the MuseumVideo: Night at the Museum

As an employer, you may have to offer As an employer, you may have to offer higher (or lower) wages due to:higher (or lower) wages due to:

EnvironmentEnvironment

RiskRisk

LocationLocation

Differences in productivityDifferences in productivity

Video: Monsters, Inc.Video: Monsters, Inc.