1. micro E conomics Unit 7 Slide 1 Created: Jan. 2009 by Jim Luke. Are you paid what you are worth? Anybody you know who is “overpaid”?

2. micro E conomics Unit 7 Slide 2 Created: Jan. 2009 by Jim Luke. Resource Markets & Pricing Still ‘Supply & Demand’   Difference: Firms Demand Households Supply

3. micro E conomics Unit 7 Slide 3 Created: Jan. 2009 by Jim Luke. Derived Demand Firms Demand   Motivation: Maximize Profits   No inherent desire or need for resource   Product market issues may affect demand

4. micro E conomics Unit 7 Slide 4 Created: Jan. 2009 by Jim Luke. Derived Demand & Supply Households Supply   Motivation: Maximize Utility   Depends on $ Opportunity Cost   derived from households' utility maximization Utility received may be a form of “payment”

5. micro E conomics Unit 7 Slide 5 Created: Jan. 2009 by Jim Luke. Should A Firm Hire Another Worker? Yes, if it adds to profits:   Worker adds to physical output:   Marginal Product   Value of Marginal Product when sold:   MP x Price = Marginal Revenue Product (MRP) a.k.a. Value of Marginal Produce   MRP is the marginal benefit   Cost of hiring the worker (worker’s wage) is marginal cost – called Marginal Resource Cost (MRC)   IF MRP > MRC  yes, hire the worker   Keep hiring until MRP = MRC

6. micro E conomics Unit 7 Slide 6 Created: Jan. 2009 by Jim Luke. Marginal Revenue Product and Marginal Resource Cost Profit Maximization when the quantity of resource purchased results in: MRP = MRC

7. micro E conomics Unit 7 Slide 7 Created: Jan. 2009 by Jim Luke. Shifts in Demand for Resources Anything that changes MR, MRP, or MRC:   Changes in Prices of other resources   Complements   Substitutes   Changes in Technology   Changes in Demand for Final Product

8. micro E conomics Unit 7 Slide 8 Created: Jan. 2009 by Jim Luke. Wages & “Economic Rents” Total Returns to Resources   Total Payment: = P x Q   Resource Opportunity Costs Next highest paying use or opportunity   Economic Rent is payment greater than opportunity cost   “Unearned” or “unnecessary” payment

9. micro E conomics Unit 7 Slide 9 Created: Jan. 2009 by Jim Luke. Why Actual Wages Differ From Value of Marginal Product Market Power  Sellers’ Power:  Unionization  Unique Skills or Inelastic Supply  Licensing

10. micro E conomics Unit 7 Slide 10 Created: Jan. 2009 by Jim Luke. Why Actual Wages Differ From Value of Marginal Product Market Power  Buyers’ Power:  Monopsony  Bargaining Power  Superior Information

11. micro E conomics Unit 7 Slide 11 Created: Jan. 2009 by Jim Luke. Why Actual Wages Differ From Value of Marginal Product Non-Market Reasons:  Discrimination  Efficiency Wages  Compensating Differentials  Risk  Image  Conditions  Security

12. micro E conomics Unit 7 Slide 12 Created: Jan. 2009 by Jim Luke. Good hours, excellent pay, fun place to work, paid, training, mean boss. Oh well, four out of five isn’t bad. -- Help wanted ad, PA newspaper, 1994