1. Factor Markets
Unit 5

2. Factors of Production Land Labor Capital Entrepreneurship
Why do the Factor Prices Matter? → The Allocation of Resources
Suppose High School counselors are telling students IT jobs are the new jobs to take if you want to make good money. If students across the country are being told the same thing, we will see more students join this field.
The incentive of making money pushed more people into this “factor market”
Therefore, the price of labor reallocated young adults into a certain field.

3. Factors of Production
The allocation of resources will then impact factor incomes and therefore the distribution of income in our country.
If wages have been rising, ceteris paribus, then the proportion of national income that goes into the labor factor would increase.

4. Derived Factor Demand

5. The demand for factors of production is derived from the demand for the products they produce.
When looking at FACTORS, the Y-axis will be set to the cost/price of the factor and the X-axis will be set to the quantity of the factor.
If the demand for coffee increases, the price of the coffee will increase
The value of baristas will then also increase.
Therefore, the demand for baristas will increase.
The amount that firms would be willing to pay for the additional units of input is determined by the value of each units contribution to the production process.

7. How did we get this demand curve? Marginal Product * Price
Marginal Revenue Product: the extra revenue that each additional factor adds to total revenue.
Often, we will add the variable factor into the abbreviation of the MRP.
For example, if “L” is labor, then the MRPL curve represents the demand curve for the firm when only one factor of production is variable.
How did we get this demand curve? Marginal Product * Price

8. How Many Workers Should I Hire?

9. What Are We Producing?
CORN!

10. How are we producing CORN?
Field 1
Field 2
FIXED
Seed Drill 1
Seed Drill 2
CORN
CORN
CORN
CORN
Team 1 Farmworkers
Team 2 Farmworkers
Variable
LOAN
Work Period = 30 seconds

11. What do we need?
Team One
Worker
Recorder
Mathematician
Team Two

12. How many farmworkers should we hire to maximize profits?
Wage = $5 per farmworker
Price = $8 per bushel of corn
The number of workers up to the point where MRP=MFC!
Total Factor Cost = Wage per Worker X Number of farmworkers.
The number of times CORN is written in 30 seconds.
The additional amount of CORN produced by each additional farmworker.
Total Revenue Product = Price per Bushel X Number of Bushels of CORN.
Marginal Revenue Product = Price per Bushel X MPP.
Marginal Factor Cost = Wage per Worker X number of additional farmworkers hired each round.

13. Time for Math! Sample Calculation…
Wage = $5 per farmworker
Price = $8 per bushel of corn 10 10
$80 $5
$80 $5
Time for round 2!
Each team picks an additional farmworker.

14. Time for Math! Sample Calculation…
Wage = $5 per farmworker
Price = $8 per bushel of corn 10
$80 $5 14 4
$112
$10
$32 $5
Time for round 3!
Each team picks an additional farmworker.

15. Time for Math! Sample Calculation…
Wage = $5 per farmworker
Price = $8 per bushel of corn 10
$80 $5 14 4
$112
$10
$32 $5 15 1
$120
$15 $8 $5
Time for round 4!
Each team picks an additional farmworker.

16. Time for Math! Sample Calculation…
Wage = $5 per farmworker
Price = $8 per bushel of corn 15 1
$120
$15 $8 $5 10
$80 $5 10
$80 $5 14 4
$112
$10
$32 $5 14 4
$112
$10
$32 $5
>
< 15
$120
$20 $0 $5
Do we need to run round 5?

17. Determining Returns to Scale
Round 2
Round 1
Field 1
Field 2
Seed Drill 1
Seed Drill 2
CORN
CORN
CORN
CORN
Team 1 Farmworkers
Team 2 Farmworkers
LOAN
Labor and capital increased by 100% in round 2. Did output increase by 100%, more than 100%, or less than 100%?
Work Period = 30 seconds

18. ATC = (Wage X # of workers) + (Rent X # of drills)
Returns to Scale
Essential Question Two: Are the returns to scale for a firm increasing, decreasing, or constant when doubling the quantity of labor and capital used in production?
Wage = $5 per farmworker
Rent per seed drill = $10 15 34
It is increasing; output more than doubles when labor and capital are doubled and average total cost falls from $1.00 per bushel to $0.88.
ATC = (Wage X # of workers) + (Rent X # of drills)
# of units of output

19. Marginal Factor Cost

20. The MFC, sometimes also known as the Marginal Resource Cost (MRC), is the additional cost of employing an additional input.

21. Marginal Factor Cost Ex
Marginal Factor Cost Ex. Suppose accountants in the area are available to offer tax advice for a nightly fee of $150.

22. Comparing Maximization Rules
Profit-maximizing firms will increase output so long as doing so adds more to revenue than to cost : MR=MC
Profit-maximizing firms will hire labor up to the point where marginal revenue product equals marginal factor cost : MRP=MFC
Here, we are just stating the idea in terms of Q of OUTPUT
Here, we are just stating the idea in terms of Q of FACTORS to produce the Q output

23. Factors of Resource Demand

24. In addition to DERIVED DEMAND, there are other factors that influence the demand for labor.
Changes in the PRODUCT DEMAND An increase in the price of a product would also shift MRP and the resources used in production. This would result in the hiring of more resources as the optimal Q is increasing.
Example:
An increase in the price of airplanes would also increase MRP of airplane builders AND would shift the demand curve to the right.
Therefore, the optimal Q of labor increases.

25. In addition to DERIVED DEMAND, there are other factors that influence the demand for labor.
Changes in PRODUCTIVITY An increase in education increases MP, and thus MRP (MRP = MR * MP). This increase in worker education can make a firm more profits and cause them to employ more workers.
Changes in the PRICE OF OTHER RESOURCES Substitute Goods – If the price of farm MACHINERY decreases compared to the price of farm HANDS, then the MRPL will decrease. Complementary Goods – If the price of wood used to build houses decreases, more homes will be built, increasing the D for construction workers. MRPL will increase.

26. Supply & Demand in the Labor Market

27. Lebron - Supply
This is Lebron James
He plays for the LA Lakers. As per his new $154 million deal with the LA Lakers, Lebron James is set to receive $154,000,000 for 4 seasons
This year, just from his NBA salary, Lebron will make ~37 million dollars.*
* **
 $38,500,000 per season, $498,512 per game, $117,378 per quarter, $9,781 per minute and $163 per second**

28. Lebron - Supply
Currently, Lebron holds career high titles in : -assists per game
-field goal percentage -three-point percentage
Over his career : -the MVP Award four times -appeared in the All-Star game every year since made the playoffs 12 seasons in a row
-his teams have won the NBA championship three times.

29. The Lakers - Demand Why would the Lakers pay THAT much?!
      
The Lakers - Demand
Why would the Lakers pay THAT much?!
“The Lebron Effect”
Historically, the cities that housed Lebron made tons of money!
A 2017 study published by the American Enterprise Institute (AEI) found the following impacts on Miami & Cleveland
The number of eateries and bars within the mile of the stadium where he played at the time increased by 13%
Employment within those establishments increasing by 23.5%.

30. The Lakers - Demand Why would the Lakers pay THAT much?!
Predicted Economic Impact in LA
Adedamola Aboola of Black Enterprise shows the impact on the Lakers from this move:
Ticket Prices: Season tickets were selling for $3,499 each, skyrocketed to $5,800 just 20 minutes after the announcement
Last season, StubHub tickets for the Lakers’ home opener could be bought for as low as $60. Now, they start at $545 on StubHub. That’s roughly an 800 percent increase.**
$396 million economic impact on the city
In addition, the city will gain about 3,000 jobs and $29 million in state tax revenue. **

31. Perfectly Competitive Labor Market

32. For a PC LABOR market, many firms are hiring workers with similar skills/abilities
PC Firms are also price takers when it comes to wages → wage takers
Firms do not have market power and are only hiring a small percentage of the overall labor force in this market, and therefore can have no impact on the market wage.

33. Warm Up 2
Pride Textiles produces and sells towels in a perfectly competitive market. Pride Textiles hires its workers in a perfectly competitive labor market. Assume that the market wage rate for workers is $80 per day.
State the conditions necessary for hiring the profit-maximizing amount of labor.
At the profit-maximizing level of output, suppose that the marginal product of the last worker hired is 20 towels per day. Calculate the price of a towel.
Draw a correctly labeled graph of the labor supply and demand curves for Pride Textiles, and show the equilibrium amount of labor hired.
Given your answer to part (b), if the price of a towel increases, explain how Pride's profit-maximizing quantity of labor will be affected.

34. Correct labels: Q on x axis and and W or Wage on Y axis
Downward sloping MRP curve
Horizontal supply curve at 80
Identify and label equilibrium amount of labor
4. It increases. If P increases, MRP increases and intersects the rising supply (MFC) curve at a higher Q…or MRP increase, and if MRP>W, hiring increases
State the conditions necessary for hiring the profit-maximizing amount of labor. MRP = MFC
(b) At the profit-maximizing level of output, suppose that the marginal product of the last worker hired is 20 towels per day. Calculate the price of a towel. Price = $4. $80 MFC so MRP = $80. $80 MRP / 20 towel MPP = $4 price
(c) Draw a correctly labeled graph of the labor supply and demand curves for Pride Textiles, and show the equilibrium amount of labor hired.

35. When would wages NOT be at the competitive Eq?

36. Wage Discrimination
Wage discrimination: If workers get paid less not because they have different skill levels, but because of their race, ethnic origin, sex, age, or other characteristics.

37. Monopsony
Monopsony : when there is only one company hiring and workers are relatively immobile. When you're the only employer, workers have to take what you offer, or they're out of luck.
Pro Athletes (Lebron) are out there making millions! College athletes are making money for their school but are just “making” tuition
Do they have any other options?

38. Minimum Wage
The government is essentially placing a price floor for wages.
If the government sets an effective Minimum Wage, the wage would increase.
If the wage increases, this impacts suppliers, so the quantity hired in the labor market (and then the firm) will decrease.

39. Minimum Wage: Pros and Cons?
Some classical economists argue against nearly all forms of government manipulation in competitive market. They say the minimum wage not only leads to unemployment, but it actually hurts the people it claims to help.
A minimum wage deters employers from hiring unskilled workers, hiring only skilled or semi-skilled workers instead.
These economists argue that minimum wage does little or nothing to alleviate poverty, since instead of earning a minimum wage, unskilled workers end up earning no wage at all.
The economists that support minimum wage argue that real life labor markets aren't as competitive or transparent as classical economists suggest. They believe that employers have the upper hand when it comes to negotiating wages and that individual workers lack bargaining power.

40. Efficiency Wages
Some business owners believe that increasing wages will increase efficiency and pay over the equilibrium.

41. Labor Unions
Labor Union: an organization that advances the collective interest of employees and strives to improve working conditions and increase wages.
They do this through collective bargaining.
Representatives for the workers negotiate with employers and if their demands aren't met, workers go on strike, and stop production altogether. 
Labor Union participation has declined greatly since the 1950s.

42. Factors of Labor Supply
Number of qualified workers
Immigration
Baby Booms
Government Regulation
Licensing becomes easier/more difficult
Personal and societal values
Leisure Time VS Work Time
Income Increase/Decrease

43. Monopsony Labor Market
A monopsony has an upward sloping supply curve for labor
This means the must increase wages to increase hires
MFC > wage
Monopsonies still use the MFC = MRP for profit-maximizing labor quantity
We then use the corresponding wage, or the intersection of Supply at this quantity.

44. Bilateral Monopoly When a market has a monopoly AND a monopsony!
Often, labor unions are seen as examples
This is a unique situation and must rely partially on human behaviors, so we aren’t able to graph out the FINAL wage.

45. The Demand for Land & Capital

46. Land & Capital
Both factors of production also have marginal revenue product
Diminishing returns also applies, creating a downward slope
When referring to the MFC/MRC for land or capital, we refer to the rental rate
To Maximize Profits:
Employ units of land up to the point of MRPLand = Rland
Employ units of capital up to the point of MRPcapital = Rcapital
*With R as Rental Rate*

47. Rental Rate
Explicit – if the land or capital is being rented from another firm or individual the rental fee paid is an explicit monthly/yearly cost.
Implicit – if the land or capital is already owned by the firm, there may not be a clear monthly cost, but there is opportunity cost.
Time put into fixing the machine
What could the firm make renting the land to another company?

48. Land & Capital The supply of land is very inelastic
Elasticity for Resource Demand Formula (Erd)
% ∆ in resource quantity
% ∆ in resource price
Land & Capital
The supply of land is very inelastic
The supply of capital is very elastic

49. Resource Elasticity & Least Cost

50. Determinants of Elasticity of Demand
Resource Substitutes - easier the substitute, increase elasticity
Elasticity of Product Demand - Goes back to Derived Demand
Ratio of Resource Cost to a Total Cost - the larger the proportion of total productuction costs accounted for by a resource, increase elasticity
BECAUSE any change in resource cost will be more noticeable.

51. *This might remind you of utility maximization!*
Least Cost Rule
Costs are minimized when the last dollar spent on each resource yields the same marginal product.
MPL = MPK
PL PK
*This might remind you of utility maximization!*

52. Theories of Income Distribution
Income is distributed across the factors of production based upon the marginal productivity of the factors.
Theories of Income Distribution

53. Income Distribution
This idea helps us determine why wages aren’t equal.
Compensating Differentials Individuals that have similar training and experience but work in a different environment. Example: Who would have a higher salary? A police officer in New York City or in Mount Airy?
Differences in Talent
Differences in Human Capital Differences in experience, education, and training A teacher with a PhD would be paid more than a teacher with a Bachelors.

54. Other Factors Labor Unions Market Power Discrimination
Efficiency Wages
Minimum Wages