Dominican Republic GDP- $5,800 Costa Rican- GDP Per Capita- $12,600 United State- GDP Per Capita -$53,000 Average Hourly Salary Construction-Dominican Republic- $3.00 Average Hourly Salary Tour Guide Costa Rica- $8.00 1

Factor Market 1)What factors influence how much an individual earns? What determines a wage?? –Or, why do some jobs earn more than others? 2) Do employees have the power to set wages? –When? For what industries? 3)Do employers have the power to set wages? –When? For what industries? 4) What are some examples of fair wage disparity? What are some examples of unfair wage disparity? 2

The Factor Market 3

Factors of Production A Factor of Production can continuously earn income while producing more goods 2 Types of Factors 1) Physical Capital- Buildings, Machines 2) Human Capital- People, Education, Training- Human Capital will be the focus of this chapter! 4

Factors of Production What is the difference between chocolate chips and a baker in the production of cookies? 5

The Factor Market The Factor Market has two major differences from the product market. 1) The Factor Market is where a majority of people earn their income (trillions of dollars in the US) 2) Demand in the Factor Market is derived 6

FACTOR DEMAND (LABOR DEMAND) 7

Factor Demand Example 1: If there was a significant increase in the demand for pizza, how would this change the demand for its factors of production? Example 2: An increase in the demand for health care increases the demand for what factors? 8

Factor Demand Derived Demand- The demand for factors (resources) is determined (derived) by the products they help produce. 9

DEMAND OF LABOR What is Demand for Labor? Demand is the different quantities of workers that businesses are willing and able to hire at different wages. What is the Law of Demand for Labor? There is an INVERSE relationship between wage and quantity of labor demanded. 10

Who demands labor? FIRMS demand labor. Demand for labor shows the quantities of workers that firms will hire at different wage rates. Firms will only pay employees a wage equal to or less than that employees productivity. DL Quantity of Workers Wage As wage falls, Qd increases. As wage increases, Qd falls. 11

Marginal Product Let’s review… what is marginal product Marginal product is how much additional product an additional worker provides Or Change in Product/Change in Inputs 12

How much value does my Marginal Product have? Hard with students Easier with more tangible items Let’s think cookies If a bakery hires me and I make 10 additional cookies that sell for 2 dollars each. –My marginal product’s value is $20 or my product makes $20 of marginal revenue. The bakery would pay me up to $20 If Mr. Brooks is hired and makes 5 cookies that sell for 2 dollars each. –His marginal product’s value is $10 or his product makes $10 of marginal revenue. The bakery would pay Mr. Silver up to $10.

The additional revenue generated by an additional worker (resource). Marginal Revenue Product =Marginal Product x Price of Product Employers will never pay an employee more than his or her MRP 14 Marginal Revenue Product( AKA Value of the Marginal Product of Labor

If the Marginal Product of the 3 rd worker is 5 and the price of the good is constant at $20 the MRP is……. Another way to calculate MRP is: Marginal Revenue Product = Change in Total Revenue Change in Inputs 15 Marginal Revenue Product( AKA Value of the Marginal Product of Labor

Cupcake Wars Each team has 10 seconds to write the word “cupcake” as many times as possible. Each time cupcake is written the firm earns $10. How much will I pay my employees? 16

Calculate MPL and MRP Cupcake Wars Quantity Labor Total ProductMarginal Product of Labor $10 Price

GRAPHING TIME Graph your Marginal Revenue Product. X axis- Quantity of Labor Y axis- Wage Rate If I paid employees $20 per round how many employees would I hire? 18

Why does the MRP eventually fall? Diminishing Marginal Returns. Fixed resources means each worker will eventually add less than the previous workers. Cup Cake Wars

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. MRP= Demand for Labor Cup Cake Wars

The MRP of a resource equals the Demand. 21

With your partner... Use supply and demand analysis to explain why surgeons earn an average salary of $137,050 and cashiers earn $11,000. How could wages change for either profession?

With your partner... Use supply and demand analysis to explain why surgeons earn an average salary of $137,050 and cashiers earn $15,000. How could wages change for either profession? Quantity of Workers Wage Rate S L DLDL Supply and Demand For Surgeons Supply and Demand For Fast Food Cashiers Quantity of Workers Wage Rate S L DLDL

Industry in Equilibrium Wage (the price of labor) is set by the market. EX: Supply and Demand for Fast Food Workers Quantity of Workers Wage Labor Supply Labor Demand = MRP $8.75hr THE WAGE RATE 24

Units of Labor Total Product (Output) Use the following data: Wage = $20Price = $10 Marginal Product (MP) Product Price Marginal Factor Cost How many workers should you hire? 25 Marginal Revenue Product

Units of Labor Total Product (Output) Use the following data: What is happening to Total Product? 2.Why does this occur? 3.Where are the three stages? Wage = $20Price = $10 26

Units of Labor Total Product (Output) Use the following data: Wage = $20Price = $10 Marginal Product (MP) This shows the PRODUCTIVITY of each worker. Why does productivity decrease? 27

Units of Labor Total Product (Output) Use the following data: Wage = $20Price = $10 Marginal Product (MP) Product Price 0 10 Price constant because we are in a perfectly competitive market. 28

Units of Labor Total Product (Output) Use the following data: Wage = $20Price = $10 Marginal Product (MP) Product Price 0 10 Marginal Revenue Product This shows how much each worker is worth 29

Units of Labor Total Product (Output) Use the following data: Wage = $20Price = $10 Marginal Product (MP) Product Price 0 10 MRP Shows how many workers a firm is willing and able to hire at different wages. 30

Units of Labor Total Product (Output) Use the following data: Wage = $20Price = $10 Marginal Product (MP) Product Price 0 10 MRP Demand for this resource Plotting the MRP/Demand curve 31

Perfectly Competitive Labor Market and Firm DLDL ? Wage Q Q QEQE WEWE IndustryFirm SLSL

SLSL DLDL Wage Q Q IndustryFirm QEQE WEWE QeQe D L =MRP S L =MFC Side-by-side graph showing Market and Firm

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 MFC of a minimum wage worker is $8.75. Another way to calculate MFC is: Marginal Factor Cost = Change in Total Cost Change in Inputs 34 Marginal Factor Cost (MFC)- The Wage Rate

Continue to hire until… MRP = MFC (Wage Rate) Consider that this also occurs when MR=MC - How do you know how many resources (workers) to employ? 35

Perfectly Competitive Labor Market Characteristics: Many small firms are hiring workers No one firm is large enough to manipulate the market. Many workers with identical skills Wage is constant Workers are wage takers Firms can hire as many workers as they want at a wage set by the industry 36 Perfect Competition Monopsony Factor Markets

Drawing the Demand Curve for Factors 37

Wage Rate Q $ D=MRP Quantity of Workers Demand=MRP Why is it downward sloping? Because of the law of diminishing marginal returns 38 Each additional factor is less productive and therefore is worth less than the previous one

Wage Rate Q $ D=MRP Quantity of Workers What happens if demand for the product increases? MRP increases causing demand to shift right 39 D 1 =MRP 1

Question? What could be factors that shift the MRP (Factor Demand)? 40

3 Shifters of Factor Demand 1.) Changes in the Demand for the Product (Change in Price) Price increase of the product increases MRP and demand for the factor. (and vice versa) 2.) Changes in Productivity Technological Advances increase Marginal Product and therefore MRP/Demand. 3.) Changes in Price of Other Factors Substitute Resources Ex: What happens to the demand for assembly line workers if price of robots falls? Complementary Resources Ex: What happens to the demand for nails if the price of lumber increases significantly? 41

Units of Labor Total Product (Output) Use the following data: Wage = $20Price = $10 Marginal Product (MP) Product Price 0 10 Marginal Revenue Product Additional Cost per worker 0 20 How would this change if the demand for the good increased significantly? 1.Price of the good would increase. 2.Value of each worker would increase. 42

Units of Labor Total Product (Output) Use the following data: Wage = $20Price = $100 Marginal Product (MP) Product Price Marginal Revenue Product 43

Units of Labor Total Product (Output) Use the following data: Wage = $20Price = $100 Marginal Product (MP) Product Price Marginal Revenue Product Each worker is worth more!! THIS IS DERIVED DEMAND. 44

Units of Labor Total Product (Output) Use the following data: Wage = $20Price = $10 Marginal Product (MP) Product Price 0 10 Marginal Revenue Product Additional Cost per worker 0 20 How would this change if the productivity of each worker increased? 1.Marginal Product would increase. 2.Value of each worker would increase. 45

Units of Labor Total Product (Output) Use the following data: Wage = $20Price = $10 Marginal Product (MP) Product Price 0 10 Marginal Revenue Product Each worker is worth more! More demand for the resource. 46

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 homes (compared to big homes) 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 skilled labor Shifters of Resource Demand

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 homes (compared to big homes) 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 skilled labor. increase decrease increase 48 3 Shifters of Resource Demand

Factor Supply (Labor Supply) 49

SUPPLY OF LABOR What is Supply for Labor? Supply is the different quantities of individuals that are willing and able to sell their labor at different wages. What is the Law of Supply for Labor? There is (Usually) DIRECT (or positive) relationship between wage and quantity of labor supplied. 50

Labor Supply Supply of labor is the number of workers that are willing to work at different wage rates. Higher wages can give workers incentives to leave other industries or give up leisure activities (Activities done outside of work) Quantity of Workers Wage As wage increases, Qs increases. As wage decreases, Qs decreases. Labor Supply 51

Questions What could be shifters of factor supply (workers) (MRC)? 52

Factor Supply Shifters Supply Shifters for Labor 1.Number of qualified workers Education, training, & abilities required Immigration 2.Government regulation/licensing Ex: What if waiters had to obtain a license to serve food? Immigration policies 3. Personal values regarding leisure time and societal roles. Ex: Why did the US Labor supply increase during WWII? Why do some occupations get paid more than others?

Where do you get the Market Demand? Q McDonalds WageQ L Dem $121 $102 $83 $65 $47 Burger KingOther Firms WageQ L Dem $120 $101 $82 $63 $45 WageQ L Dem $129 $1017 $825 $642 $468 WageQ L Dem $1210 $1020 $830 $650 $480 Market 3 P Q 2 P Q 25 P Q 30 P $8 DDDD

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. Why? Ex: The MFC of a minimum wage worker is $8.75. Another way to calculate MFC is: Marginal Factor Cost = Change in Total Cost Change in Inputs 55 Marginal Factor Cost (MFC)- The Wage Rate

Perfectly Competitive Labor Market and Firm DLDL ? Wage Q Q QEQE WEWE IndustryFirm SLSL

SLSL DLDL Wage Q Q IndustryFirm QEQE WEWE QeQe D L =MRP S L =MFC Side-by-side graph showing Market and Firm

Continue to hire until… MRP = MFC (Wage Rate) Consider that this also occurs when MR=MC - How do you know how many resources (workers) to employ? 58

Perfectly Competitive Labor Market Characteristics: Many small firms are hiring workers No one firm is large enough to manipulate the market. Many workers with identical skills Wage is constant Workers are wage takers Firms can hire as many workers as they want at a wage set by the industry 59 Perfect Competition Monopsony Factor Markets

60 Example Problem: You hire workers to mow lawns. The wage for each worker is set at $100 a day. Each lawn mowed earns your firm $50. If you hire one work, he can mow 4 laws per day. If you hire two workers, they can mow 5 lawns per day together. 1.What is the MRC for each worker? 2.What is the first worker’s MRP? 3.What is the second worker’s MRP? 4.How many workers will you hire? 5.How much are you willing to pay the first worker? 6.How much will you actually pay the first worker? 7.What must happen to the wage in the market for you to hire the second worker?

Perfectly Competitive Labor Market and Firm DLDL ? Wage Q Q QEQE WEWE IndustryFirm SLSL

SLSL DLDL Wage Q Q IndustryFirm QEQE WEWE QeQe D L =MRP S L =MRC Side-by-side graph showing Market and Firm

Let’s Review Factors Factors- Machines, Labor – continuous input. Wage rate set by labor supply and demand Firms and employees are wage takers, not wage setters. Marginal Resource Cost- Cost of an additional worker Marginal Revenue Product- the additional revenue created by the additional worker (Price of product times Marginal Product of Labor 63

Let’s Review Factors A firm will produce until MRP=MRC In Perfect Competition: –MRP=Demand –MRC=Supply 64

SLSL DLDL Wage Q Q IndustryFirm QEQE WEWE QeQe D L =MRP S L =MRC Side-by-side graph showing Market and Firm

Monopsony One buyer of labor When does this occur? Their supply curve is the industry supply curve. One firm is now a wage setter (factor cost setter) instead of wage taker (factor cost taker) 66

Examples of Monopsony Mining Companies in mining towns The US Military Walmart in small towns? 67

68 $ L S In this example the one individual will work when the wage is 5, and so on. WageQuantity

69 $ E S Marginal Factor Cost is now different than labor supply, it’s higher! Meaning the employer can gain additional workers at additional cost. The employer can choose the wage rate! MRC WageQuantityTotal Resource Cost Marginal Resource Cost 400N/A

Where would a monopsony produce Quantity-MRP=MRC But what wage would people be willing to accept at that quantity The monopsonist will move down to the supply curve- hiring fewer people at a lower wage – creating deadweight. 70

Monopsony- Inefficient Labor Market Deadweight created Fewer jobs at lower wages

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?

If you only have $35, what combination of robots and workers will maximize output? Least Cost Rule # Times Going MP (Robots) MP/P R (PriceR =$10) MP (Workers) MP/P W (PriceW =$5) 1st nd rd th $10$5 How much additional output does each resource generate per dollar spent?

If you only have $35, the best combination is 2 robots and 3 workers Least Cost Rule # Times Going MP (Robots) MP/P R (PriceR =$10) MP (Workers) MP/P W (PriceW =$5) 1st nd rd th $10 MP k = MP L P k P L $5 Resource kResource L

Profit Maximizing Rule for a Combing Resources MRP k = MRP L = MRC k MRC L 1 This means that the firm is hiring where MRP = MRC for each resource k and L

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

2010 Practice FRQ 77

Work and Wages 79

What are some 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 (Market Power) 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!).

Other reasons for wage disparity Compensating differentials Differences in talent Differences in the quality of human capital Idea of “efficiency wage” Marginal productivity theory of income distribution 81

82 Wage Disparities in Practice

83 Earnings Differentials by Education, Gender, and Ethnicity, 2002

“Glass Ceilings”

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.Name 10 Colleges 85

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. 86

Does having an education mean that you will automatically have a higher income? 87

Real Life Application Top 5 Fastest Growing Jobs ( ) 1.Computer Software Engineers, Applications 2.Computer Support Specialists 3.Computer Software Engineers, Systems 4.Computer Systems Administrators 5.Data Communications Analyst Top 5 Fastest Declining Jobs 1.Railroad Switch Operators 2.Shoe Machine Operators 3.Telephone Operators 4.Radio Mechanics 5.Loan Interviewers WHY? “You’ve got to learn computers!” 88

Real Life Application 89

Video: Did You Know? 90