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Bec doms ppt on pricing in resource markets
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12:11
Pricing in Resource Markets
Resource markets Resource demand The labor market
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Factor/Resource markets
Factors of production: land labor capital entrepreneurship
factor prices determined in resource markets
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resources markets
same concepts of demand and supply now applied to factors of production
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resource demand
producer will demand an additional unit of resource if
MR of resource > MC of
resource
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example: Wal Mart
labor market 1 more clerk costs $400 per week 1 more clerk increases revenue by $500 week hire 1 more clerk?
Yes! $500 > $400
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example: lawn service
capital market larger, faster mower costs extra $400/wk. but mow more lawns, extra $600/wk. in
revenue buy the mower?
Yes! $600 > $400
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terms
marginal revenue product (MRP) extra revenue from one more unit of resource
marginal resource cost (MRC) extra cost for one more unit of resource
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rule for resource demand
firm hires additional resources until MRC = MRP
cost of the extra resource =
extra revenue from the resource
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resource supply
you will supply your resources to the “best” option highest paying (if all else equal)
nonmonetary factors are important firms must compensate when jobs are
dirty, dangerous, illegal…..
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The Market for Resources
resource demand downward sloping producers less willing, able to buy resources at
higher prices
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resource demand is a DERIVED demand it depends on the demand for the final product
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examples
demand for nurses depends on demand for healthcare
demand for steel depends on demand for cars
demand for plywood depends on demand for houses
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Shifts in demand for a resource
demand for final product if product demand rises, MRP rises resource demand shifts right
productivity of resource better resource, higher MP & MRP resource demand shifts right
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examples
increase demand for healthcare increase demand for nurses increase demand for syringes
higher-skilled labor increases demand for labor
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price of other resources if price of substitute resource falls
-- substitute cheaper resource
-- demand for original resource shifts left
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example
bank ATMs vs bank tellers ATM costs falls
-- demand for bank tellers falls
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example
office buildings skyscrapers in Manhattan 3 stories in Oswego
why? cost of land vs. cost of construction
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if price of complement resource falls
-- use more of both resources
-- demand for original resource shifts right
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example
price of trucks (18-wheeler) fall increase demand for truck drivers
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note
sometimes resources are BOTH substitutes and complements: computers do some clerical functions AND need clerical workers to operate them
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technology decrease demand for some types of labor increase demand for other types of labor
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example
better/cheaper computer technology increases demand for programmers decrease demand for architects
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resource supply upward sloping suppliers more willing, able to provide resources
at higher prices
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Q res.
P res.S
D
P*
Q*
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resource prices
tend to equalize across alternative uses carpenters for houses carpenters for furniture
UNLESS other nonmonetary differences economics professors vs. business economists land in Manhattan vs. land in Oswego
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The Labor Market
Labor supply Labor demand Earnings differences
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Labor Supply
time is a scarce resource market work (for pay) nonmarket work (not for pay)
(cleaning, studying) leisure (for fun)
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work and utility
work is a disutility but allows you to buy stuff or to enjoy stuff
(clean house, dinner, good grades)
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tradeoff between consumption & leisure work to buy stuff or to make stuff but working leaves less time for leisure
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implications
higher wages= higher opp. cost of leisure, nonmarket work most surgeons don’t mow their lawn many college sports stars head to the draft early
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two effects: substitution effect income effect
Effect of a wage increase
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substitution effect
as wage rises opp. cost of other time uses rises spend more time on market work
Qs of labor rises as wages rise
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income effect
as wages rise income rises consumer more of what you like:
-- stuff, leisure
Qs of labor falls as wages rise
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if substitution effect > income effect labor supply is upward sloping
if substitution effect < income effect labor supply is downward sloping
which is it?
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labor supply
economists observe upward sloping for most wages downward sloping at very high wages
backward-bending supply curve
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wage
Q labor
S
subst. > inc. effect
subst. < inc. effect
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Changes in market labor supply
adult population births rates, immigration increase will shift labor supply right
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preferences willingness of groups to work women have increasingly entered labor force
-- shift labor supply right
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skills, education, training education increases opp. cost of not working for
pay
-- labor supply increases with education increase HS, college graduation
-- increase supply high-skill labor
-- decrease supply low-skill labor
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other sources of income nonwage income lowers labor supply less labor supply among those over 50 with the
growth of pensions, disability less labor supply among women with high-
earning husbands
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Labor demand
firm’s demand for labor car wash
perfectly competitive
marginal revenue product (MRP) change in total revenue when one more unit of
labor is hired
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example: car wash
price of car wash = $3 car washes per hour
Q labor TP MP MRP
0 01 5
2 93 124 145 15
54
3
21
1512
9
63
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how much labor to hire
MC of one more unit of labor marginal resource cost (MRC) wage
MR of one more unit of labor MRP
hire until MRP = wage
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if MRP > wage hire more labor and still add to profit
if MRP < wage last units labor taking away from profit, hire less
labor
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wage
Q labor
15
12
9
6
3
1 2 3 4 5
LD
if wage = $9
hire 3 units labor
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wage
Q labor
15
12
9
6
3
1 2 3 4 5
LD
wage = $6,hire 4
wage = $12,hire 2
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Earnings differences
based on both demand-side and supply side factors
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Human Capital
Skill set Education, training, experience
increases MP of labor & labor demand cost of education means supply of skilled labor
lower relative to unskilled labor result is a higher market wage
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ability/talent
Human capital, but hard to measure the best athletes, most popular movies stars,
CEOs command HUGE salary premium over others
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Efficiency wage theory
Higher pay leads to better productivity Why?
Better morale, lower turnover “Cherry pick” the best workers Workers do not want to risk losing job
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Non-wage job characteristics
Risk/danger Working conditions Work is meaningful or glamorousHolding all else constant, dangerous jobs pay more jobs with higher layoff probability pay more
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geography
wages higher in U.S. encourages immigration
teacher’s salaries vary significantly by state wages lower in South than Northeast
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discrimination
age, race, gender wage differentials remain EVEN after
controlling for other factors occupation education/experience risk
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unionization
union workers earn more than nonunion workers doing the same jobs janitors auto workers teachers