1. The other side of the circular flow model
Factor Markets
The other side of the circular flow model

2. In the Factor Market…. Businesses demand resources
Households supply the resources
Four Factors of Production
Land-resources provided by nature
Labor-work done by human beings
Capital – 2 kinds (new)
Physical Capital – “capital”, manufactured resources
Human Capital – improvement in labor created by education & knowledge
Entrepreneurship – risk taking activities that bring resources together to produce and innovate

3. Derived Demand
Demand for factors (resources) is driven by the demand for the product that the firm produces
Ex: People want more bottled watered then the need for plastics, labor, water, etc. by firms increases.

4. Marginal Analysis – Yet again
Marginal Revenue Product (MRP)
Change in total revenue from adding an extra unit of labor
MRP=ΔTR/ΔL
If product market is perfectly competitive
MRP=(MP)(P)

5. Marginal Analysis – Continued
Marginal Resource Cost (MRC)
Change in total cost from adding an extra unit of labor
MRC=ΔTC/ΔL
If labor market is perfectly competitive you can use
MRC=wage

6. Profit-Maximizing
To maximize profit, firms will hire additional units of a resource up to the point where marginal revenue product (MRP) is equal to marginal resource cost (MRC).
MRP=MRC
Similar to the MR=MC rule used to determine profit-maximizing output
Activity 4-1 part A

7. Firm’s MRP Curve
The downward sloping portion of the firm’s MRP curve is its demand curve for labor IF the labor market is perfectly competitive
In a perfectly competitive market, MRC=wage
Optimal amount of labor is where the horizontal supply curve, S=MRC intersects the MRP curve
Downward sloping because if firm stops hiring at a point on the upward-sloping portion, it will miss some labor units that have MRP>MRC
Activity 4-1, part B & C

8. Cost-Minimizing Input Combinations
In LR, firm must decide the combination of resources
Want to maximize profits
Needs to minimize costs
Two resources: Labor and Capital
Economically efficient
Produce given output at lowest total cost
Produce the most possible given total cost
Requires resource combinations where marginal product per dollar is the same for all resources
To maximize profit, MRP=MRC for each input
Economic efficiency is necessary but not sufficient condition for profit maximization
Activity 4-2

9. A Monopolist firm in the Labor Market
Still hires in a perfectly competitive labor market. Hire all the workers it wants at the market wage rate
Marginal Revenue Product (MRP) curve is demand for Labor
In order to sell more product, a monopolist has to …….
MR  as it hires more labor
Extra workers are less valuable
Activity 4-3 and 4-4
Lower its price. Remember the wedge shape and downward sloping demand curve?

10. Recap: S & D for Labor in a Competitive Labor Market
Firm that is hiring is a wage-taker
Wage is determined by the market and is where S and D curves intersect
Market labor demand curve slopes downward. Why?
Market labor supply curve slopes upward. Why?
D curve = MRP (marginal revenue product) for market and individual firm
Firm labor supply curve is horizontal. Why?
Firm labor supply curve is also it MRC (marginal resource cost) curve. S=MRC
Visual 4-4
Market demand for labor decreases as wages go up. Demand for labor increases as wages go down.
Market supply of labor increases as wages go up. Supply of labor decreases as wages go down.
Firm can hire as many workers as it wants at the market wage. There is not need to pay more than the market wage to attract more workers.

11. Imperfectly Competitive Labor Markets (Ch. 15 – Add on)
Monopsony – factor market structure which only has a single buyer
Labor Market Monopsony Characteristics
Single buyer of particular type of labor
Workers have few employment options other than working for monopsony
Firm is a wage-maker. Varies directly with the # of workers employed
Varying degrees of monopsony
One firm
Few firms
Few employment options due to geographic location (small town) and can’t relocate. Finding other employment would mean having to learn new skill set.

12. Graphing a Monopsony Upward sloping S Curve
Firm must pay higher wages if it wants to hire additional workers
Higher than the wage rate
S Curve = Average Cost of Labor Curve
MRC Curve
Higher than the S Curve because if it wants to hire more workers it must raise wages and pay everyone more
MRC=new higher wage + wage increase for those workers hired at a lower wage

13. Profit-Maximizing Q of Labor
Profit maximizing quantity of labor
MRP = MRC
Optimal wage comes from labor supply curve at that quantity of labor
Draw line down from MRP = MRC to S curve
Monopsonist maximizes profit by
Hiring smaller # of workers
Paying less-than-competitive wage rate
Society loses output and workers receive a wage rate that is less than their MRP
Activity 4-5
Activity 4-6

14. Economic Rent
Economic Rent is different than how “rent” is usually thought of
Economic Rent – the amount by which the price of a resource exceeds the minimum price necessary to make a resource available