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

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

3. Use side-by-side graphs to draw a perfectly competitive labor market and firm hiring workers

4. Wage is set by the market
Demand/MRP falls SL
Wage
Wage
SL=MRC WE
DL=MRP DL Q Qe Q QE
Industry
Firm

5. What happens to the wage and quantity in the market and firm if new workers enter the industry?SL
Wage
Wage
SL=MRC WE
DL=MRP DL Q Qe Q QE
Industry
Firm

6. What happens to the wage and quantity in the market and firm if new workers enter the industry?SL
Wage
Wage
SL1
SL=MRC WE W1
SL1=MRC1
DL=MRP DL Q Qe Q1 Q QE Q1
Industry
Firm

7. Use economics to explain if you support this new law
Minimum Wage
Advise the President/Congress on the following:
Should the government increasing the federal minimum wage to $15 an hour?
Use economics to explain if you support this new law

8. Fast Food Cooks Wage S $15 $8 $6 D 5 6 7 8 9 10 11 12 Q Labor
The government wants to help workers because the equilibrium wage is too low D
Q Labor

9. Government sets up a “WAGE FLOOR.”
Fast Food Cooks
Wage S
$15 $8 $6
Government sets up a “WAGE FLOOR.”
Where? D
Q Labor

10. Minimum Wage Above Equilibrium! Wage S $15 $8 $6 D 5 6 7 8 9 10 11 12
Q Labor

11. Minimum Wage What’s the result? Q demanded falls.
Surplus of workers
(Unemployment) S
$15 $8 $6
What’s the result?
Q demanded falls.
Q supplied increases. D
Q Labor

12. 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.

13. Minimum Wage Practice

14. Combining Resources
Up to this point we have analyzed the use of only one resource.
What about when a firm wants to combine different resources?

15. Least Cost Rule $10 $5 MP MP (Workers)
How much additional output does each resource generate per dollar spent?
$10 $5
# of Workers/ Robots MP
(Robots)
MP/PR
(PriceR =$10)
MP (Workers)
MP/PW
(PriceW =$5)
1st 30 20
2nd 15
3rd 10
4th 5
If you only have $35, what combination of robots and workers will maximize output?

16. If you only have $35, the best combination is 2 robots and 3 workers
Least Cost Rule
MPx = MPy
$10 $5
Px Py
Resource x
Resource y
# Times
Going MP
(Robots)
MP/PR
(PriceR =$10)
MP (Workers)
MP/PW
(PriceW =$5)
1st 30 3 20 4
2nd 2 15
3rd 10 1
4th 5
.50
If you only have $35, the best combination is 2 robots and 3 workers

17. Profit Maximizing Rule for a Combing Resources1
MRPx = MRPy =
MRCx MRCy
This means that the firm is hiring where MRP = MRC for each resource x and y

18. 2010 Practice FRQ
3 apples and 2 oranges 18