Unit 5

Resource Market

1

Review 1. Give an example of Derived Demand. 2. Define MRP.3. Explain the difference between MRP and MR.4. Why does the MRP fall as more workers are

hired?5. Identify the two ways to calculate MRP.6. Define MRC.7. Explain the difference between MRC and MC.8. How does a firm decide how many workers to

hire?9. List 10 words ends with “ink”

2

MRP (SL ) = MRC (DL )

3

Units ofLabor

TotalProduct(Output)

01234567

0 7172427293027

Wage = $20 / Price = $10

MarginalProduct

(MP)

- 710

7321

-3

ProductPrice

0 10

101010101010

0 7010070302010

-304

Marginal Revenue Product(MRP)

Shows how many

workers a firm is

willing and able to hire at different

wages.

0 7010070302010

-30

Units ofLabor

TotalProduct(Output)

01234567

0 7172427293027

MarginalProduct

(MP)

- 710

7321

-3

ProductPrice

0 10

101010101010

5

Marginal Revenue Product(MRP)

Plotting the MRP/Demand curve

Demand for this

resource

Wage = $20 / Price = $10

Drawing the Demand Curve for Resources

6

Demand = MRP

Why is it downward sloping? Because of the law of

DIMINISHING MARGINAL RETURNS

7

Each additional resource is less productive and therefore is

worth less than the previous one

Wage

QL

$100

80

60

40

20

Dl=MRP

Quantity of Workers 1 2 3 4 5 6 7 8

This model applies to LAND, LABOR, & CAPITAL

Video: Did You Know?

8

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.9

Does having an education mean that you will automatically have a higher

income?

10

Real Life Application Top 5 Fastest Growing Jobs (2000-2010)

1. Computer Software Engineers, Applications

2. Computer Support Specialists3. Computer Software Engineers, Systems4. Computer Systems Administrators5. Data Communications Analyst

Top 5 Fastest Declining Jobs1. Railroad Switch Operators2. Shoe Machine Operators3. Telephone Operators4. Radio Mechanics5. Loan Interviewers

“You’ve got to learn computers!”

11

WHY & NOW WHAT?

Real Life Application

12

Ten most profitable majors and the average starting salary (Aug, 2013): 1. Petroleum engineering $98,0002. Chemical engineering $67,5003. Nuclear engineering $66,8004. Electrical engineering $63,4005. Computer engineering $62,7006. Aerospace engineering $62,5007. Mechanical engineering $60,1008. Materials science & engineering $60,1009. Industrial engineering  $59,90010.Computer science $58,400

Shifting the Demand Curve for Resources

13

Resource Demand Shifters1. 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 Related 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?

14

Units ofLabor

TotalProduct(Output)

Price = $10 / Wage = $20

01234567

0 7172427293027

MarginalProduct

(MP) - 7107321

-3

ProductPrice

0

10101010101010

0 7010

070302010

-30

Marginal Resource

Cost

020202020202020 15

Marginal Revenue Product

How would change if the DEMAND for the good INCREASED

significantly?

Units ofLabor

TotalProduct(Output)

Price = $10 $100 / Wage = $20

01234567

0 7172427293027

MarginalProduct

(MP)

- 7107321

-3

ProductPrice

0 0 10100 10100 10100 10100 10100 10100 10100

Marginal Resource

Cost

16

Marginal Revenue Product

0 7001000

700300200100

-300

Each worker is

worth 10X more

THIS ISDERIVE

DDEMAN

D

2. Value of each worker would increase.

1. Price of product would increase.

What happens if DEMAND for the PRODUCT INCREASES?

MRP increases causing demand to shift right

17

Dl’=MRP’

Wage

QL

$100

80

60

40

20

Dl=MRP

Quantity of Workers 1 2 3 4 5 6 7 8

In other words, MRP represents

the value of each worker.

18

What’d change if the PRODUCTIVITY of each worker

INCREASED?Units ofLabor

TotalProduct(Output)

Price = $10 / Wage = $20

01234567

0 7172427293027

MarginalProduct

(MP) - 7107321

-3

ProductPrice

0

10101010101010

0 7010

070302010

-30

Marginal Resource

Cost

020202020202020

Marginal Revenue Product

TotalProduct(Output)

01234567

00 770

171702424027270292903030027270

Price = $10 / Wage = $20

MarginalProduct

(MP) -

70100

70302010

-30

ProductPrice 0

10101010101010

0 7001000

700300200100

-300

Marginal

Revenue

Product

Each worker is

worth more!

More demand

for resource.

2. Value of each worker would increase.

1. Marginal Product would increase.Units ofLabor

19

Identify the Resource and Shifter (ceteris paribus):1. Increase in demand for microprocessors leads to

a(n) ________ in the demand for processor assemblers.

2. Increase in the price for plastic piping causes the demand for copper piping to ________.

3. Increase in demand for small houses (comparing to big houses) leads to a(n) ________ the demand for lumber.

4. For shipping companies, __________ in price of trains leads to decrease in demand for trucks.

5. Decrease in price of sugar leads to a(n) _________ in the demand for aluminum for soda producers.

6. Substantial increase in education and training leads to an _________ in demand for teachers and trainers.

increaseincrease

decreasedecrease

increase

increase 20

Practice3 Shifters of Resource Demand

Shifting the Supply Curve for Resources

21

1. Number of qualified workersEducation, training, & abilities

required

2. Government regulation/licensingWhat if waiters had to obtain a license

to serve food?

3. Personal values regarding leisure time and societal roles.Why did the US Labor supply increase

during WWII?Why do some occupations get paid more than

others?

Resource Supply Shifters

Use supply and demand analysis to explain why

surgeons earn an average salary of $137,050 &

gardeners earn an average salary of $13,560.

Quantity of Workers

Wag

e Ra

te

SL

DL

Supply and Demand For Surgeons

Supply and Demand For Gardeners

Quantity of Workers

Wag

e Ra

te SL

DL

How many workers you should hire?

Workers Per DayPainting

s Per Day

Perfectly Competitive Resource Market

Wage = $30/day Price = $3/unit

0 1 2 3 4 5 6 7 8 9 10

0 3 10 20324661 70808885

How many workers you should hire?

Perfectly Competitive Resource Market

Wage = $25/day Price = $6/unitWorkers Per DayPainting

s Per Day

0 2 4 6 8 1012 14161820

0 3 8 142129 384654 6168

How many output you should produce?

Paintings Produced 0 1 2 3 4 5 6

Total Cost(in Dollars) 20 27 38 53 72 95 122

Perfectly Competitive Product Market

Price = $20/unit

27

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 wage Unions

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)

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.

Wag

e

QL

SL

DL

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

Wag

e SL

DL

SL1

DL1

DL1

DL1

QL

Wag

e

SL

DL

Wag

e

QL

SL

DL

SL1

QLW

age

SL

DLW

age

QL

SL

DL

Wag

e

QL

SL

DL