1. Derived Demand of the Factor Market
Homework:
FRQ #1
Imperfect Competition Quiz Make-Ups!!!!!! Must be done ASAP!!!!!!!!
Derived Demand of the Factor Market
Students will demonstrate understanding of demand in the factor market by analyzing a set of scenarios and drawing conclusions in relation to their effect on wage rate and quantity of workers hired

2. Brainstorm… ALL ABOUT THE MARGINAL PRODUCT/REVENUE OF THE RESOURCE!
Based on your knowledge about the factors that shape the demand for labor in the resource market:
Why does a professional baseball player make more money than a teacher?
Why does a doctor make more money than a janitor?
Why does an engineer make more money than a waitress?
ALL ABOUT THE MARGINAL PRODUCT/REVENUE OF THE RESOURCE!

3. Derived Demand for Labor
The demand for a firm’s output and the firm’s demand for labor are directly related
Product Market: Firm’s Output
Labor Market: Firm’s Input S D
Price QO P QE
S = MRC
D = MRP WE QH
Wage QL

4. Derived Demand for Labor
If demand for the output increases, demand for the input must increase
Product Market: Firm’s Output
Labor Market: Firm’s Input S D
Price QO P QE
S = MRC
D = MRP WE QH
Wage QL
Price of the output increases!
Wage rate for the labor increases!
Quantity of the output increases!
Quantity of labor increases! W2 P2
D2 = MRP2 D2 Q2 Q2

5. Shifts in the Demand for Labor (Market)
Demand = MRP…
MRP = MPL × P
Change in price of firm’s output:
Demand in product market increases
Price of firm’s output increases
When price increases, MRP increases  labor’s product is now more valuable!
Wage rate will increase and quantity of workers will increase!

6. Shifts in the Demand for Labor (Market)
Demand = MRP…
MRP = MPL × P
Change in the supply of other inputs:
Supply of crucial input, say land for a farmer increases
Given the same quantity of workers, each can now product more output, ceteris paribus
If MPL increases, MRP increases  increase in the demand for labor
Wage rate will increase and quantity of workers will increase!

7. Shifts in the Demand for Labor (Market)
Demand = MRP…
MRP = MPL × P
Changes in technology*
99% of the time technology increases demand for labor
Farmer invests in new, automated reaper…
Given the same quantity workers, each can product more output, ceteris paribus
If MPL increases, MPR increases  demand for labor increases
Wage rate will increase and quantity of workers will increase!

8. Check for Understanding
Which of the following can shift the factor demand curve to the right?
An increase in the price of the good being produced
An increase in the factor’s marginal productivity
A technological advance
Answer: I, II, III

9. Check for Understanding
2. Factor market demand is referred to as a derived demand because:
a. it derives it’s name from the Latin factorus
b. it is derived from the market wage rate received by jjjjjjjjjworkers
c. it is derived from the productivity if workers
d. it is derived from the product market
e. it derives its shape from the price of the factor
Answer: D

10. Check for Understanding
3. The individual firm’s demand for labor is: a. the marginal revenue product of labor b. upwards sloping c. horizontal at the level of the product price d. perfectly inelastic e. equal to the marginal product of labor
Answer: A