Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5. All Homework for unit 4 after the AP Test, Monday May 15. A week break of Wal-Mart and Daddy Day Care. Final two weeks the state of our current U.S. and global economy and Freakonomics. Your Choice last essay to be scored as a test on one of the last topics.

The Demand for Resources CHAPTER TWENTY-SEVEN

Product Market Burgers P Q D S S S S S D D D D P P P P D2D2 D2D2 D2D2 D2D2 D2D2 Factor Markets CELL Q Land Q Entrepreneurship Q Capital Q Labor Markets Move in Unison!

Determinants of Resource Demand or Factor Demand(CELL) Changes in Product Demand Changes in Productivity 1 - Quantities of Other Resources 1 - Quantities of Other Resources 2 - Technological Progress 2 - Technological Progress 3 - Quality of the Resource 3 - Quality of the Resource Prices of Other Resources

Quantity Product Market Factor Market CELL P S D Supply & Demand Product and Factor Markets P D S

Quantity Product Market Factor Market P S D What if Product Demand Falls Product and Factor Markets P D S CELL

Quantity Product Market Factor Market P S D What if Product Demand Falls Product and Factor Markets P D S CELL

Quantity Product Market Factor Market P S D What if Demand Falls Product and Factor Markets P D S CELL

Quantity Product Market Factor Market P S D Supply & Demand Product and Factor Markets P D S CELL

Quantity Product Market Factor Market P S D What if Factor Demand Increased? Product and Factor Markets P D S CELL

Quantity Product Market Factor Market P S D What if Factor Demand Increased? Product and Factor Markets P D S CELL

Quantity Product Market Factor Market P S D P D S Failure to Know Difference Between Product and Factor Markets Major Miss for the AP Exam CELL

Marginal Productivity Theory of Resource Demand Resource Demand as a Derived Demand Marginal Product (MPP=^TP/^Q) Marginal Revenue Product (MRP) Productivity (MRP=MPP*P o ) Product Price (MRP=^TR/^Q) Marginal Resource Cost (MRC) – in a purely competitive resource market MRC=Price Rule for Employing a Single Resource: MRP = MRC

Optimum Combination of Resources Rules for multiple inputs! Least-Cost Combo Rule Profit-Maximizing Combination MPP of Labor MPP of Capital MRC of Labor MRC of Capital MRP L MRC L MRP C MRC C 1 For nonmath people: if MRP = MRC then MRP/MRC = 1

Ha Ha Ha – Factor Markets are Fun!

1

The Product Market Households Individual Firms Signals D S

Product MarketHouseholdIndividual Firm D S s d d = MR s = MC Q* P* q* P* The Product Market signals both Households and Individual Firm the price of products. The signals indicate P* to both. Based on its cost of producing one more firms determine how much. Based on their demand consumer determine how many.

Factor Market Labor Individual FirmsWorkers D S MRC MRP d = MSB s = MSC Q* P* q* P* The Factor Market signals both Workers and Individual Firms the price of labor & the wage of labor. The signals indicate P* to both. Based on its revenue/worker(mrp) vs. its costs(mrc) firms determine how many workers to hire (mrp=mrc). Based on their Marginal Benefit vs. Marginal Cost workers determine whether or not they will work for this wage (msc=msb).

Wage Rate (dollars) Quantity of Labor Individual Firm Market S = MRC d = mrp WcWc D S D = MRP (  mrp’s) WcWc (1000) ($6.85) Supply & Demand: Labor in a Competitive Firm and Market Target Workers

Wage Rate (dollars) Quantity of Labor Individual Firm Market S = MRC d = mrp WcWc D S D = MRP (  mrp’s) WcWc (1000) ($6) Supply & Demand: Labor in a Competitive Firm and Market Marginal Resource Cost (MRC) will be constant and equal to resource price (the wage rate) Marginal Resource Cost (MRC) will be constant and equal to resource price (the wage rate)

Labor Market Theory The Real World Will Get You! Human Capital –Education = Income Sorting Mechanism –Hoops Radical View –Rich Dad Poor Dad Dual Labor Market –Good Job v Bad Job Market

3,500,000 Fast food workers lead the nation in minimum wage jobs McDonalds Corp #1 at hiring minimum wage workers in the world How many minimum wage workers does McDonalds own?

1 - Ability Differences 2 - Education and Training: Human Capital & Sorting Mechanism Theories Human Capital & Sorting Mechanism Theories 3 - Discrimination 4 - Tastes and Risks 5 - Unequal Distribution of Wealth Radical Theory Radical Theory 6 - Market Power 7 - Luck, Connections, and Misfortune Good Job, Bad Job Market Good Job, Bad Job Market EQUALITY-EFFICIENCY TRADEOFF CAUSES OF INCOME INEQUALITY-Unit V

Wage Rate (dollars) MRP DD S=MRC WmWm Quantity of Labor MRP DD MRC WcWc QmQm QcQc The MRC of a Monopsonist is Pulled Above the Supply Monopsonistic Labor Market

Wage Rate (dollars) MRP S Quantity of Labor MRP MRC MRP = MRC Profit Max Profit Max S(MRC)=DD(MRP) WmWm QmQm Q m units of labor hired less than in a Competitive Market Competitive Market Monopsonistic Labor Market Price paid for resources less than in a Competitive Market WcWc QcQc

WgWg QmQm Wage Rate (dollars) D Quantity of Labor Monopsonist & Minimum wage… WcWc QcQc S WmWm QgQg MRC

WuWu QuQu Wage Rate (dollars) D1D1 S Quantity of Labor WcWc QcQc D2D2...by increasing product demand...by increasing productivity the price of substitutes...by increasing product demand...by increasing productivity the price of substitutes Goodwill, Buy American Demand-Enhancement Model

WuWu QuQu Wage Rate (dollars) D S1S1 Quantity of Labor WcWc QcQc...restrictive membership membership policies policies...occupational licensing licensing Doctors, Lawyers Teachers…....restrictive membership membership policies policies...occupational licensing licensing Doctors, Lawyers Teachers…. S2S2 Occupational Licensing Exclusive or Craft Union Model

WuWu QuQu Wage Rate (dollars) D Quantity of Labor WcWc QcQc...by organizing virtually all workers and thereby control of the supply curve for labor...by organizing virtually all workers and thereby control of the supply curve for labor S Close Shop Model Inclusive Unionism

ECONOMIC RENT Note: Fixed Total Supply Perfectly Inelastic Supply means... Demand Determines Price! therefore...

Land Rent (dollars) Acres of Land Changes in the demand for land... Determination of Land Rent 0 Q Inelastic Supply... Copyright McGraw-Hill, Inc., 1999

Land Rent (dollars) Acres of Land S S 0 Q Inelastic Supply... combines with demand... Determination of Land Rent Changes in the demand for land...

Land Rent (dollars) Acres of Land R1R1 S S D1D1 0 Q Inelastic Supply... combines with demand... to determine RENT Determination of Land Rent Changes in the demand for land...

Land Rent (dollars) Acres of Land R1R1 S S D1D1 0 Q If demand decreases... Determination of Land Rent Changes in the demand for land...

Land Rent (dollars) Acres of Land R1R1 S S D2D2 D1D1 R2R2 0 Q If demand decreases... Rent decreases. Determination of Land Rent Changes in the demand for land...

Land Rent (dollars) D3D3 Acres of Land R1R1 S S D2D2 D1D1 R2R2 R3R3 0 Q If demand decreases... Rent decreases....and decreases...and decreases Determination of Land Rent Changes in the demand for land...

Land Rent (dollars) D3D3 Acres of Land R1R1 S S D4D4 D2D2 D1D1 R2R2 R3R3 0 Q If demand decreases... Rent decreases....and decreases...and decreases Determination of Land Rent Changes in the demand for land...

Brett Favre’s Salary All Pro Quarter Backs with 100+ Games Started without a miss $100,000,000 S 1 D 0 Q Perfectly Inelastic Supply... combines with demand... to determine Salary! Economic Rent & Stardom? Changes in the demand for a fixed resource... $200,000 Would play for $200,000 for love of the game! Pure Economic Rent $99,800,000!

Factor Market Theory Land earns Rent, or Economic Rent Labor earns Wages or Salary Capital earns Interest Entrepreneurship earns Economic Profit

Interest Rate and the Role of the Interest Rate: Interest & Total Output: RGDP Interest & Total Output: RGDP Interest & Capital Investment Interest & Capital Investment Interest & R&D Investment Interest & R&D Investment Nominal Interest Rates vs. Nominal Interest Rates vs. Real Interest Rates Real Interest Rates

Interest Rate i, (percent) Quantity of Loanable Funds Loanable Funds Theory of Interest 8% MD M1 MS Nominal i = Real i + Rate of Inflation 4% Inflation +4% Real Interest Rate 8% Nominal Interest Rate

The Money Market Rate of interest, i (percent) Amount of money demanded (billions of dollars) MS MD i

Rate of interest, i (percent) Amount of money demanded (billions of dollars) DmDm ieie SmSm S m1 Any Micro Or any Macro AP Question concerning Interest Rate uses this Graph!!!! Any Micro Or any Macro AP Question concerning Interest Rate uses this Graph!!!! The Money Market

Rate of interest, i (percent) Amount of money demanded (billions of dollars) MS – Fed controls MS OMO, RRR, DR, FFR MD – Fiscal Policy: G,T, Surplus, Deficit i

Transmission Graphs

Price level Real domestic output, GDP DmDm Investment Demand Real rate of interest, i Quantity of money demanded and suppliedAmount of planned investment, I Monetary Policy and Equilibrium GDP S m1 AS AD 1 P1P1 RiRRiR MEI – Marginal Efficiency of Investment As interest falls more Investment becomes Possible and Profitable! MEI

Real domestic output, GDP Quantity of money demanded and suppliedAmount of planned investment, I DmDm Investment Demand Monetary Policy and Equilibrium GDP S m1 AS AD 1 If the money supply increases to stimulate the economy.... Price level Real rate of interest, i P1P1 RiRRiR MEI

DmDm Investment Demand Monetary Policy and Equilibrium GDP S m1 AS S m2 AD 1 AD 2 Price level Real rate of interest, i Real domestic output, GDP Quantity of money demanded and suppliedAmount of planned investment, I P1P1 P2P2 RiRRiR MEI

Real domestic output, GDP Quantity of money demanded and suppliedAmount of planned investment, I DmDm Investment Demand Monetary Policy and Equilibrium GDP S m1 AS S m2 AD 1 AD 2 If the money supply increases again.... Price level Real rate of interest, i P1P1 P2P2 RiRRiR MEI

DmDm Investment Demand Monetary Policy and Equilibrium GDP AD 1 AD 2 AD 3 S m1 AS P1P1 S m2 P2P2 S m3 P3P3 Price level Real rate of interest, i Real domestic output, GDP Quantity of money demanded and suppliedAmount of planned investment, I RiRRiR MEI Long Run Effects: 1.Increased planned investment will lead to increased AS 2. Canceling effect: AD up, MD up, i up, and I down, = AD down 3. i down = international $ down, PL up = X down

Price level Real domestic output, GDP AD 1 AD 2 Fiscal Policy and Equilibrium GDP Real rate of interest, i S m1 Quantity of money demanded and supplied D m1 D m2 Amount of planned investment, I RiRRiR MEI PI 1 PI 2 Long Run Effects: 1.Decreased planned investment will lead to decreased AS 2. Canceling effect: I down, AD down, MD down, and i down, = AD up 3. i up = international $ up, PL down = X up

SCARCE RESOURCES PROPERTY RESOURCES LAND CAPITAL HUMAN RESOURCES LABOR What’s missing????

PROPERTY RESOURCES LAND CAPITAL HUMAN RESOURCES LABOR ENTREPRENEURIAL ABILITY SCARCE RESOURCES

ENTREPRENEURIAL ABILITY TAKES THE INITIATIVE

ENTREPRENEURIAL ABILITY TAKES THE INITIATIVE MAKES POLICY DECISIONS

ENTREPRENEURIAL ABILITY TAKES THE INITIATIVE MAKES POLICY DECISIONS SOURCE OF INNOVATION

ENTREPRENEURIAL ABILITY TAKES THE INITIATIVE MAKES POLICY DECISIONS SOURCE OF INNOVATION THE RISK BEARER

RESOURCE PAYMENTS PROPERTY RESOURCES LAND CAPITAL HUMAN RESOURCES LABOR RENT INTEREST WAGES ENTREPRENEUR PROFIT & LOSS