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

Review 1.Who demands in the Resource Market? 2.Who supplies in the Resource Market? 3.Define Derived Demand The demand for resources is determined (derived) by the products they help produce. 4. Identify the Shifters of Resource Demand 1.Derived Demand 2.Productivity of the Resources 3.Price of related resources

SLSL DLDL Wage QLQL QLQL Industry D L =MRP Wage is set by the Market QEQE WEWE Firm What happens to the wage and quantity in the market and firm if new workers enter the industry? S L1 W1W1 Q1Q1 S L =MRC QeQe Q1Q1 S L1 =MRC 1 Side-by-side Graphs of a Perfectly Competitive Labor Market & Firm

Minimum Wage Assume the government was interest in increasing the federal minimum wage to $15 an hour 4 Do you support this new law? Why or why not?

S Wage Q Labor D $15 $8 $6 The government wants to HELP workers because the equilibrium wage is too low 5 Fast Food Cooks Government sets up a “__________.” WHERE? Surplus of workers (Unemployment) What’s the result? QS increases. QD decreases. Above Equilibrium Wage Floor

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. 6

Minimum Wage Worksheet 7

Combining Resources Up to this point we have analyzed the use of only one resource. What about a firm wants to combine different resources? For consumers, we want Utility Maximization, which means every penny we spend worth the money. For producers, we want Cost Minimization, which means every worker we hire worth the money.

If you only have $25, what combination of movies and go carts maximizes your utility? Utility Maximization # Times Going Marginal Utility (Movies) MUm/Pm ($10) Marginal Utility (Go Carts) MUc/Pc ($5) 1st3010 2nd205 3rd102 4th $10$5 You’d buy 2 movies & 1 go cart.

Resource x If you only have $35, what combination of robots and workers will maximize output? # of labor employed MP (Robots) MP/P X (PriceR=$10) MP (Workers) MP/P Y (PriceW=$5) $5 How much additional output does each resource generate per dollar spent? Resource y If you only have $35, the best combination is 2 robots & 3 workers $10 MPx MPy Px Py = Least Cost Hiring Rule

If you only have $40, what combination of robots & workers will maximize output? # of labor employed MP (Robots) MP/P X (Price=$10) MP (Workers) MP/P Y (Price=$5) $5 $10 Least Cost Rule

If you only have $40, what combination of robots & workers will maximize output? # of labor employed MP (Robots) MP/P X (Price=$10) MP (Workers) MP/P Y (Price=$15) $15 Least Cost Rule $10

Continue to hire until… MRP = MRC How do you know how many resources (workers) to employ? 13 (≥)(≥)

Profit Maximizing Rule (Least-Cost Rule) for Combining Resources This means that the firm is hiring where MRP = MRC for each resource x & y MRP x MRC x = = 1 MRP y MRC y

Practice: What should the firm do? hire more, hire less, or stay put? MRP L = $15P L = $6MRP C = $10P C = $10 MRP L = $5P L = $10MRP C = $10P C = $15 MRP L = $25P L = $20MRP C = $15P C = $15 MRP L = $12P L = $12MRP C = $50P C = $40 MRP L = $20P L = $15MRP C = $100P C = $40 MRP MRC >1 MRP MRC <1 MRP MRC =1 Hire MoreStay PutHire Less

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2010 Practice FRQ 18