1. How Wages Are Set

2. The Circular Flow Model Revisited
If no $ is going from the factor market to the household, then there is no $ to buy the product

3. Circular Flow Model Product Market $ $ Firms Households $ $
Factor Market

4. The Circular Flow Model Revisited
If no $ is going from the factor market to the household, then there is no $ to buy the product
Also, if the $ is too little to the household, then they cannot afford the product in the market

5. Circular Flow Model Product Market FINISHED GOODS PRODUCT PURCHASE
Firms
Households
UNFINISED GOODS
Factor Market
LABOR

6. The Circular Flow Model Revisited
If no $ is going from the factor market to the household, then there is no $ to buy the product
Also, if the $ is too little to the household, then they cannot afford the product in the market
Relative to the price of a finished product, a firm will not pay a worker more than the value of a finished product

7. Diminishing Returns
Firms do not always have the time or ability to update their machines or the buildings they operate in

8. Diminishing Returns
Firms do not always have the time or ability to update their machines or the buildings they operate in
As a result, the only way to increase production is by adding more workers and raw materials

9. Diminishing Returns
Firms do not always have the time or ability to update their machines or the buildings they operate in
As a result, the only way to increase production is by adding more workers and raw materials
At some point, they will reach a limit to their facilities, and will not be able to produce anymore

10. Diminishing Returns
Firms do not always have the time or ability to update their machines or the buildings they operate in
As a result, the only way to increase production is by adding more workers and raw materials
At some point, they will reach a limit to their facilities, and will not be able to produce anymore
This concept is diminishing returns

11. Diminishing Returns
Following the same example, with each additional worker added, you will produce fewer and fewer additional products

12. Diminishing Returns
Following the same example, with each additional worker added, you will produce fewer and fewer additional products
This concept is known as diminishing marginal productivity

13. Diminishing Returns
Following the same example, with each additional worker added, you will produce fewer and fewer additional products
This concept is known as diminishing marginal productivity
Ex. – with 5 workers the firm makes 100 items per day (20)

14. Diminishing Returns
Following the same example, with each additional worker added, you will produce fewer and fewer additional products
This concept is known as diminishing marginal productivity
Ex. – with 5 workers the firm makes 100 items per day (20)
With 6 workers the firm makes 118 items per day (19.6), with 7, 132 (18.85)

15. Diminishing Returns
Supply of Workers

16. Diminishing Returns Supply of Workers
The higher the average wage, the more people that will be willing to look for work

17. Diminishing Returns Supply of Workers
The higher the average wage, the more people that will be willing to look for work
This concept is known as labor force participation rate

18. Diminishing Returns Supply of Workers
The higher the average wage, the more people that will be willing to look for work
This concept is known as labor force participation rate
If we were to graph this rate on a chart with diminishing marginal productivity, we would be able to fined the equilibrium wage rate

19. Number of Workers and Jobs
Demand for Labor
Equilibrium Wage Rate
Wage Rate
Supply of Workers
Number of Workers and Jobs

20. Diminishing Returns Supply of Workers
The higher the average wage, the more people that will be willing to look for work
This concept is known as labor force participation rate
If we were to graph this rate on a chart with diminishing marginal productivity, we would be able to fined the equilibrium wage rate
This is the point where the number of jobs and workers are the same, thus setting the wage rate

21. Diminishing Returns
Comparing Wage Rates

22. Diminishing Returns Comparing Wage Rates
When looking at wages over a time period, you need to keep two things in mind

23. Diminishing Returns Comparing Wage Rates
When looking at wages over a time period, you need to keep two things in mind
Money wages – are the actual amount of money that one receives for their labor

24. Diminishing Returns Comparing Wage Rates
When looking at wages over a time period, you need to keep two things in mind
Money wages – are the actual amount of money that one receives for their labor
Real wages – refers to how much your money will buy