FACTOR MARKETS Chapter 24

Two types of markets Product Markets – determined by the supply and demand for the products or services that are created by firms Factor Markets – determined by the supply and demand for the factors of production: Labor Land Capital Entrepreneurship

The Relationship Between the 2 Markets In 2014, the 25 highest paid NBA players earned an average salary of $17 million. In that year, all the players in the WNBA were paid a total salary of $10 million. Why? If demand for the product changes, the demand for the factors that produce the product will change. The demand for smartphones is rising quickly. Manufacturers need more: highly trained manufacturing workers, technicians, developers, sales and service professionals. These workers will have more value.

The 3 Determinates of Factor Demand “Shifters” 1. Product Price – an increase in price will increase the MRP (change in “Derived Demand”) MRP – Marginal Revenue Product – the change in revenue by employing an additional unit of a factor In an office of 10 car salesmen, the hiring one additional person increased revenues from $300k per month to $350k. The 11 th employee has a MRP of $50,000 If the price of cars increases/decreases, the MRP of that 11 th employee will rise/fall accordingly

2. Factor Productivity – An increase in factor productivity (MPP) will increase the potential revenue that the factor can contribute. New technology can change factor productivity of labor. MPP – Marginal Physical Product – The addition units of product that created by the addition of one unit of a factor By hiring Cody, our plant increase production from 500 units to 550 units. Cody’s MPP is 50 units.

3. Price of Related Resource Factors A change in the price of a factor that is a substitute or a complement to the factor being examined, will effect positively or negatively those related factors. A decrease in the price of Levi’s jeans will cause a decrease in the price of Target’s jeans (a substitute factor) If the price of computers fall, the wages of a computer programmer will fall (complementary factor)

How all this works…. I own a small retail business and I want to increase my revenues. I can lease a new cash register or hire a new floor sales employee for the same cost per month. I first rent the cash register to get customers through the store more quickly (I think I am losing sales due to long lines). At the end of the month, my revenues increase from 40,000 to 43,000 dollars. The next month, I give back the cash register and hire Johnny to be a floor salesman. Even though the lines are longer, my revenues went from 40,000 to 46,000. The factor of Johnny’s labor is more valuable than the factor of capital (register) for my business. Least Cost Rule

Elasticity of Demand for Labor 1. The number of substitute factors for labor If all the workers a McDonalds walk out…huge impact? If all the NFL players walk out…huge impact? 2. The price elasticity of demand for the product the labor produces The are many sub shops within a 5 mile radius so the demand for them is elastic, so will the demand for sub makers 3. The percentage that labor costs make up of total costs The labor cost for Hair Salon Stylists is 85% of the total cost to run a salon. Their labor is elastic.

Shifters or Determinates of Labor Supply 1. Wage rates in alternative labor markets, or the number of available workers How did you select your major? Is there a big supply of graduates in your major? 2. Non-money aspects of a job The more dirty, dangerous, stressful, and less pleasant the job, the less supply of labor for that job. Also, free time factors. Ex: Migrant Workers

More shifters… 3. Government Regulation/Requirements Licensing and regulation for labor Doctors must be board certified Plumbers and electricians Lawyers must pass the BAR exam Accountants must pass the CPA exam

Monopsony A lone buyer in a factor market They have an influence over the cost and amount of the factor that will be used. They are price setters in the market factor Examples of Monopsony's: Walmart initially building stores in rural America Ford Motor Company – Employing 45% of all workers in Dearborn, MI Texas Education Agency – all teachers and curriculum in that state

Why Differences in Wage Rates? The difference in workers’ MRP – The more value that workers labor, the more they can command (Nick Saban in college football) Differences in non-money aspects of jobs – The “pleasantness” factor (Garbage Collectors) Rareness of the skills required – If you can throw a baseball 100 mph, you are special! If you have a photographic memory…you are special!

Training Costs – Heart surgeons require years of school and training to do what they do. They command very high wage rates. Relocation Costs – Cost associated with moving your possessions and leaving family and friends. The salary of a nurse in Iowa is $53,500 per year. In Minnesota it is $71,000 per year. If there were no relocation costs/factors than the two should be the same.

A student video that summarizes factor markets