Unit 5: The Resource Market Copyright ACDC Leadership 2015

3 Shifters of Resource Demand Identify the Resource and Shifter (ceteris paribus): Increase in demand for microprocessors leads to a(n) ________ in the demand for processor assemblers. Increase in the price for plastic piping causes the demand for copper piping to _________. Increase in demand for small homes (compared to big homes) leads to a(n) _________ the demand for lumber. For shipping companies, __________ in price of trains leads to decrease in demand for trucks. Decrease in price of sugar leads to a(n) __________ in the demand for aluminum for soda producers. Substantial increase in education and training leads to an ___________ in demand for skilled labor. increase increase decrease decrease increase increase Copyright ACDC Leadership 2015

Perfectly Competitive Labor Market and Firm SL Wage Wage ? $10 DL Q Q 5000 Copyright ACDC Leadership 2015

= Marginal Resource Cost (MRC) Sometimes called Marginal Factor Cost (MFC) Remember factor inputs are resources The additional cost of an additional resource (worker). In perfectly competitive labor markets the MRC equals the wage set by the market and is constant. Ex: The MRC of an unskilled worker is $8.75. Another way to calculate MRC is: Marginal Resource Cost = Change in Total Cost Inputs Copyright ACDC Leadership 2015

Marginal Revenue Product The additional revenue generated by an additional worker (resource). In perfectly competitive product markets the MRP equals the marginal product of the resource times the price of the product. Ex: If the Marginal Product of the 3rd worker is 5 and the price of the good is constant at $20 the MRP is……. $100 Another way to calculate MRP is: Marginal Revenue Product = Change in Total Revenue Inputs Copyright ACDC Leadership 2015

The Push-Up Machine I am the inventor of a new generator that converts human push ups into safe and clean electrical energy. Each push up generates $1 worth of energy. Supply and demand in the labor market has resulted in a equilibrium wage of $10 (MRC = $10). The supply curve for the firm is perfectly elastic at $10…how much will you work for? Assuming identical skills, hire the first worker (do push ups in a 5ft x 7ft box).

The Push-Up Machine Calculate MP and MRP Quantity Labor Total Product Marginal Product MRP @ $1 Price Copyright ACDC Leadership 2015

The Push-Up Machine Why does the MRP eventually fall? Diminishing Marginal Returns. Fixed resources means each worker will eventually add less than the previous workers. The MRP determines the demand for labor The firm is willing and able to pay each worker up to the amount they generate. Each worker is worth the amount of money they generate for the firm. Copyright ACDC Leadership 2015

MRP = MRC Continue to hire until… How do you know how many resources (workers) to employ? Continue to hire until… MRP = MRC Copyright ACDC Leadership 2015

Perfectly Competitive Labor Market and Firm SL Wage Wage ? WE DL Q Q QE Industry Firm Copyright ACDC Leadership 2015

Side-by-side graph showing Market and Firm SL Wage Wage SL=MRC WE DL=MRP DL Q Qe Q QE Industry Firm

Perfect Competition Product Market vs. Resource Market Price S=MC Product Market Firm Producing Oranges D=MR Q Wage Qe Resource Market Firm Hiring Orange Pickers SL=MRC DL=MRP Q Qe Copyright ACDC Leadership 2015

2008 AP Exam 57. C

2012 AP Exam 56. B

Individual Firms Wage SL=MRC DL=MRP Qe Q 15 Copyright ACDC Leadership 2015 15

2008 AP Audit Exam 41. A 42. C

The MRP of a resource equals the Demand. Copyright ACDC Leadership 2015

To maximize profit how many workers should you hire? You’re the Boss You and your partner own a business. Assume the you are selling the goods in a perfectly competitive PRODUCT market so the price is constant at $10. Assume that you are hiring workers in a perfectly competitive RESOURCE market so the wage is constant at $15. Also assume the wage is the ONLY cost. To maximize profit how many workers should you hire? Copyright ACDC Leadership 2015 18

Use the following data: How much is each worker worth? Price = $10 Wage = $15 Total Product (Output) Workers 1 2 3 4 5 6 7 7 17 24 27 29 30 *Hint* How much is each worker worth? Copyright ACDC Leadership 2015 19

Use the following data: Price = $10 Wage = $15 Total Product (Output) Units of Labor 1 2 3 4 5 6 7 7 17 24 27 29 30 What is happening to Total Product? Why does this occur? Where are the three stages? Copyright ACDC Leadership 2015 20

Use the following data: Price = $10 Wage = $15 Total Product (Output) Marginal Product (MP) Units of Labor 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 This shows the PRODUCTIVITY of each worker. Why does productivity decrease? Copyright ACDC Leadership 2015 21

Use the following data: Price = $10 Wage = $15 Total Product (Output) Marginal Product (MP) Units of Labor Product Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 10 Price constant because we are in a perfectly competitive market. Copyright ACDC Leadership 2015 22

Use the following data: Price = $10 Wage = $15 Total Product (Output) Marginal Product (MP) Marginal Revenue Product Units of Labor Product Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 10 70 100 30 20 10 -30 This shows how much each worker is worth Copyright ACDC Leadership 2015 23

How many workers should you hire? Use the following data: Price = $10 Wage = $15 Total Product (Output) Marginal Product (MP) Marginal Revenue Product Marginal Resource Cost Units of Labor Product Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 10 70 100 30 20 10 -30 15 How many workers should you hire? Copyright ACDC Leadership 2015 24

Side-by-side Graphs Use side-by-side graphs to draw a perfectly competitive labor market and firm hiring workers Copyright ACDC Leadership 2015

Wage is set by the market Demand/MRP falls SL Wage Wage SL=MRC WE DL=MRP DL Q Qe Q QE Industry Firm Copyright ACDC Leadership 2015

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 Copyright ACDC Leadership 2015

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 Copyright ACDC Leadership 2015

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? Copyright ACDC Leadership 2015

Least Cost Rule $10 $5 MP MP (Workers) How much additional output does each resource generate per dollar spent? $10 $5 # of Units 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? Copyright ACDC Leadership 2015

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 Copyright ACDC Leadership 2015

Profit Maximizing Rule for Combining Resources 1 MRPx = MRPy = MRCx MRCy This means that the firm is hiring where MRP = MRC for each resource x and y Copyright ACDC Leadership 2015

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 Copyright ACDC Leadership 2015

2010 Practice FRQ 3 apples and 2 oranges Copyright ACDC Leadership 2015

Copyright ACDC Leadership 2015

2008 Practice Form B FRQ 3 apples and 2 oranges Copyright ACDC Leadership 2015

2008 Practice Form B FRQ 3 apples and 2 oranges Copyright ACDC Leadership 2015