1. Unit V: Factor Market
***Factors = Resources = Inputs***

2. Firms DEMAND Labor Workers SUPPLY Labor
What is Derived Demand?
Example 1:
If there was a significant increase in the demand for pizza what would happen?
Derived Demand-
The demand for resources is determined (derived) by the products they help produce.
Firms DEMAND Labor
Workers SUPPLY Labor

3. MARGINAL REVENUE PRODUCT (MRP)
Analyzing Demand
MARGINAL REVENUE PRODUCT (MRP)
The demand for labor equals the additional revenue generated by an additional worker.
In perfectly competitive product markets the MRP equals the marginal product of the resource times the price of the product.
Ex: If the MP of the 3rd worker is 5 shoes and the price of each shoe is constant at $20 the MRP is…….
$100

4. MARGINAL RESOURCE COST (MRC)
Analyzing Demand
MARGINAL RESOURCE COST (MRC)
The additional cost of an additional worker.
In perfectly competitive labor markets the MRC equals the wage set by the market.
Ex: The MRC of an unskilled worker is $6.75.

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

6. Use the following data: How many workers should you hire?
Price = $10
Wage = $20
Total
Product
(Output)
Workers 1 2 3 4 5 6 7 7 17 24 27 29 30
How many workers should you hire?
What do you do first?

7. Use the following data:
Price = $10
Wage = $20
Total
Product
(Output)
Workers 1 2 3 4 5 6 7 7 17 24 27 29 30
What is happening to Total Product?
Why does this occur?
Where are the three stages?

8. Use the following data:
Price = $10
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Workers 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3
This shows the PRODUCTIVITY of each worker.
Why does productivity decrease?

9. Use the following data:
Price = $10
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Workers
Product
Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 10
Price constant because we are in a perfectly competitive market

10. Use the following data: Shows how much each worker is worth
Price = $10
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Additional
Revenue
per worker
Workers
Product
Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 10 70
100 30 20 10
-30
Shows how much each worker is worth

11. Use the following data:
Price = $10
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Additional
Revenue
per worker
Additional
Cost for each
worker
Workers
Product
Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 10 70
100 30 20 10
-30 20
How many should we hire?

12. Demand for specific resources depend on two things:
Use the following data:
Price = $10
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Additional
Revenue
per worker
Additional
Cost
per worker
Workers
Product
Price 1 2 3 4 5 6 7 70
170
240
270
290 30 27 - 70
100 30 20 1 -3 10
700
1000
300
200 10
-30 20
Demand for specific resources depend on two things:
The resource’s productivity (MP)
The additional revenue resulting from each additional resource (MRP)
Each worker is worth more

13. Use the following data:
Price = $10
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Additional
Revenue
per worker
Additional
Cost
per worker
Workers
Product
Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 10 70
100 30 20 10
-30 20
How would this change if the demand for the good increased significantly?
Price of the good would increase
Value of each worker would increase

14. Use the following data:
Price = $100
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Additional
Revenue
per worker
Workers
Product
Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3
100

15. Use the following data:
Price = $100
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Additional
Revenue
per worker
Workers
Product
Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3
100
Each worker is worth more!!
Demand for the resource increased
THIS IS
DERIVED DEMAND
700
1000
300
200
100
-300

16. How would this change if the productivity of each worker increased?
Use the following data:
Price = $10
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Additional
Revenue
per worker
Additional
Cost
per worker
Workers
Product
Price 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 10 70
100 30 20 10
-30 20
How would this change if the productivity of each worker increased?
Marginal Product would increase
Value of each worker would increase

17. Use the following data:
Price = $10
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Additional
Revenue
per worker
Workers
Product
Price 1 2 3 4 5 6 7 70
170
240
270
290
300 - 70
100 30 20 10
-30 10
700
1000
300
200
100
-300
Each worker is worth more!
More demand for the resource

18. MRP = Demand Curve for Resources

19. Shows how much each worker is worth
Price = $10
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Workers
Product
Price
MRP 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 10 70
100 30 20 10
-30
Shows how much each worker is worth

20. Plot the resource demand curve
Use the following data:
Price = $10
Wage = $20
Total
Product
(Output)
Marginal
Product
(MP)
Workers
Product
Price
MRP 1 2 3 4 5 6 7 7 17 24 27 29 30 - 7 10 3 2 1 -3 10 70
100 30 20 10
-30
Resource Demand Schedule
Plot the resource demand curve

21. Demand=MRP
Wage Rate
This shows the quantity of workers that will be hired at different wages
$100 80 60 40 20
D=MRP Q
Quantity of Workers

22. Shifters of Demand

23. 3 DETERMINANTS (SHIFTERS) OF RESOURCE DEMAND
1.) Changes in Product Demand
Price increase of the product increases MRP and demand for the resource (and vice versa)
2.) Changes in Productivity
Technological Advances increase Marginal Product and therefore MRP/Demand (and vice versa)
3.) Changes in Price of Other Resources
Substitutes
EX: What happens to the demand for assembly line workers in price of robots falls?
Compliments
Ex: What happens to the demand for pizza cooks if the price of ovens falls?

24. Perfectly Competitive Labor Markets

25. PURELY COMPETITIVE LABOR MARKET
Characteristics:
Many Firms hiring workers
No one firm large enough to manipulate the market.
Identical Skills
Firms are “Wage Takers”
Firms can hire as many workers as it needs at a wage set by the industry

26. Equilibrium Wage (the price of labor) is set by the market
EX: Supply and Demand for Carpenters
Wage
Labor Supply
$30hr
Labor Demand =
MRP
Quantity of Workers

27. Side-by-side graph showing Market and Firm
Draw and label both at wage set at $10 S
Quantity of Labor
Wage Rate (dollars)
S = MRC Wc
$10 Wc
($10)
D = MRP
( mrp’s)
d = mrp
(1000)
(5)
Labor Market
Individual Firm

28. Side-by-side graph showing Market and Firm
Draw and label both at wage set at $10
Marginal Resource
Cost (MRC) will be
constant and equal to
the wage set by
the market S
Quantity of Labor
Wage Rate (dollars)
S = MRC Wc
$10 Wc
($10)
D = MRP
( mrp’s)
d = mrp
(1000)
(5)
Labor Market
Individual Firm

29. Side-by-side graph showing Market and Firm
Draw and label both at wage set at $10
All workers
will supply their labor
at the wage set
by the market ($10). S
Quantity of Labor
Wage Rate (dollars)
S = MRC Wc
$10 Wc
($10)
D = MRP
( mrp’s)
d = mrp
(1000)
(5)
Labor Market
Individual Firm

30. Wage x Number of Workers Total Labor Cost = Wage Rate x # of workers
Where is Labor Costs?
Wage x Number of Workers S
Total Labor Cost = Wage Rate x # of workers
Quantity of Labor
Wage Rate (dollars)
S = MRC Wc
$10
$10
$10
$10
$10
$10 Wc
($10)
D = MRP
( mrp’s)
d = mrp
(1000)
(5)
Labor Market
Individual Firm

31. Minimum Wage

32. High supply leads to low wage
Fast Food Cooks
High supply leads to low wage
Wage
$10 8 7 6 $5 4 3 2 S
Not enough to live on, so… D 10
Q Labor

33. Fast Food Cooks $5 Wage $10 8 6 4 2 S7 6 $5 4 3 2 S
Government sets up a “WAGE FLOOR”
Where? D 10
Q Labor

34. Minimum Wage Floor $5 Above Equilibrium Wage $10 8 6 4 2 S $6.75 D3 2 S
$6.75
Above Equilibrium D 10
Q Labor

35. Surplus (Unemployment)
Minimum Wage
Wage
$10 8 7 6 $5 4 3 2
Surplus (Unemployment) S
$6.75
What’s the result?
Q demanded falls
Q supplied increases D
Q Labor

36. Analyzing Labor

37. Supply and Demand Why do some occupations get paid more than others?
Resource Demand Shifters (Based on MRP)
Demand (price) of the product
Productivity of the resource
Price of related resources
Resource Supply Shifters
Number of qualified workers
Education, training, & abilities required
Government regulation/licensing
Ex: What if waiters had to obtain a license to serve food?

38. Imperfect Competition: Monopsonies

39. MONOPSONY MODEL (A Monopoly for Labor) Characteristics:
Only one firm hiring a type of labor
Instead of a single seller, there is a single buyer
2. The type of labor is relatively immobile
3. Firm is a “Wage Maker”
To hire additional workers this firm MUST increase the wage.
Examples:
Central American Sweat Shops
Midwest small town with a large Car Plant
NCAA

40. Marginal Resource Cost
Assume that this firm CAN’T wage discriminate and must pay each worker the same wage.
Acme Coal Mining Co.
Wage rate (per hour)
Number of
Workers
Marginal Resource Cost
$4.00
4.50 1
5.00 2
5.50 3
6.00 4
7.00 5
8.00 6
9.00 7
10.00 8

41. Marginal Resource Cost
Assume that this firm CAN’T wage discriminate and must pay each worker the same wage.
MRC doesn’t
equal wage
Acme Coal Mining Co.
Wage rate (per hour)
Number of
Workers
Marginal Resource Cost
$4.00  -
4.50 1
 $4.50
5.00 2
 5.50
5.50 3
 6.50
6.00 4
 7.50
7.00 5 11
8.00 6
 13
9.00 7
 15
10.00 8
 17

42. MONOPSONISTIC LABOR MARKET
Wage Rate (dollars)
SL-The number of workers that are willing to work at different wage rates
Quantity of Labor

43. MONOPSONISTIC LABOR MARKET
Wage Rate (dollars)
Since firm is a “wage maker,” the MRC lies above the supply curve.
Quantity of Labor

44. MONOPSONISTIC LABOR MARKET Wage workers are willing to work for
MRC S
MRP = MRC
Wage workers are willing to work for
Wage Rate (dollars) Wm
MRP Qm
Quantity of Labor

45. MONOPSONISTIC LABOR MARKET
MRC S
The competitive
solution would
result in a higher
wage and greater
employment.
Wage Rate (dollars) Wc Wm
MRP Qm Qc
Quantity of Labor

46. MONOPSONISTIC LABOR MARKET
Monopsonists maximize
profits by hiring a smaller
number of workers and
paying a less-than-
competitive wage rate.
MRC S
The competitive
solution would
result in a higher
wage and greater
employment
Wage Rate (dollars) Wc Wm
MRP Qm Qc
Quantity of Labor