Unit 5: The Resource Market (aka: The Factor Market or Input Market) 1

Review Who demands in the Resource Market? Who supplies in the Resource Market? Define Derived Demand The demand for resources is determined (derived) by the products they help produce. 4. Identify the Shifters of Resource Demand Derived Demand Productivity of the Resources Price of related resources

Use side-by-side graphs to draw a perfectly competitive labor market and firm hiring workers

Wage is set by the market Demand/MRP falls SL Wage Wage SL=MRC WE DL=MRP DL Q Qe Q QE Industry Firm

What happens to the wage and quantity in the market and firm if new workers enter the industry? SL Wage Wage SL=MRC WE DL=MRP DL Q Qe Q QE Industry Firm

What happens to the wage and quantity in the market and firm if new workers enter the industry? SL Wage Wage SL1 SL=MRC WE W1 SL1=MRC1 DL=MRP DL Q Qe Q1 Q QE Q1 Industry Firm

Do you support this new law? Minimum Wage Assume the government was interest in increasing the federal minimum wage to $15 an hour Do you support this new law? Why or why not

Fast Food Cooks Wage S $15 $8 $6 D 5 6 7 8 9 10 11 12 Q Labor The government wants to “help” workers because the equilibrium wage is too low D 5 6 7 8 9 10 11 12 Q Labor

Government sets up a “WAGE FLOOR.” Fast Food Cooks Wage S $15 $8 $6 Government sets up a “WAGE FLOOR.” Where? D 5 6 7 8 9 10 11 12 Q Labor

Minimum Wage Above Equilibrium! Wage S $15 $8 $6 D 5 6 7 8 9 10 11 12 5 6 7 8 9 10 11 12 Q Labor

Minimum Wage What’s the result? Q demanded falls. Surplus of workers (Unemployment) S $15 $8 $6 What’s the result? Q demanded falls. Q supplied increases. D 5 6 7 8 9 10 11 12 Q Labor

Is increasing minimum wage good or bad? GOOD IDEA- We don’t 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?

Least Cost Rule $10 $5 MP MP (Workers) How much additional output does each resource generate per dollar spent? $10 $5 # Resources MP (Robots) MP/PR (PriceR =$10) MP (Workers) MP/PW (PriceW =$5) 1st 30 3 20 4 2nd 2 15 3rd 10 1 4th 5 .50 If you only have $35, what combination of robots and workers will maximize output?

If you only have $35, the best combination is 2 robots and 3 workers Least Cost Rule MPx = MPy $10 $5 Px Py Resource x Resource y # Times Going MP (Robots) MP/PR (PriceR =$10) MP (Workers) MP/PW (PriceW =$5) 1st 30 3 20 4 2nd 2 15 3rd 10 1 4th 5 .50 If you only have $35, the best combination is 2 robots and 3 workers

Profit Maximizing Rule for a Combining Resources 1 MRPx = MRPy = MRCx MRCy This means that the firm is hiring where MRP = MRC for each resource x and y

Practice: What should the firm do – hire more, hire less, or stay put? 1. MRPL = $15; PL = $6; MRPC = $10; PC = $10 2. MRPL = $5; PL = $10; MRPC = $10; PC = $15 3. MRPL = $25; PL = $20; MRPC = $15; PC = $15 4. MRPL = $12; PL = $12; MRPC = $50; PC = $40 5. MRPL = $20; PL = $15; MRPC = $100; PC =$40 MORE STAY PUT LESS LESS MORE STAY PUT STAY PUT MORE MORE MORE

2010 Practice FRQ 3 apples and 2 oranges 19