Microeconomics Unit 5 The Resource Market

Unit 5: The Resource Market Define Key Terms The Resource (Factor) MarketDerived DemandAll markets where the factors of production (land, The demand for resources is determined (derived) by labor, capital) are sold by households to businesses the products they help produce. (ex: the demand for Demand for Laborcarpenters is derived by the demand of homes) The number of workers that businesses are willing and Marginal Revenue Product (MRP)able to hire at different wages The additional revenue generated by an additional Supply for Laborresource (worker). The number of workers that are willing and able to sell Marginal Resource Cost (MRC)their labor at different wages The additional cost of an additional resource (worker) Demand and Supply for Labor Draw a competitive market for plumbers. Label the equilibrium wage and quantity Resource Shifters and Equilibrium Shifters of Labor Demand1. Change in the demand for the product 2. Change in the productivity of the resource S1 S Wage 3. Change in the price of related resources (substitute and complementary resources) W1 Shifters of Labor Supply1. Number of qualified workers Wage- increases We 2. Government regulation/licensing Quantity- decreases 3. Personal values regarding leisure and societal roles If the equilibrium wage for electricians is $15 an hour D and the government established a minimum wage of Q1 Qe Quantity Labor $10 an hour, what will happen to the wage and Assume the government establishes a certification quantity? process that makes it harder to be a plumber. Show on They will stay the same. The minimum wage is below the graph what will happen to the wage and quantity equilibrium and is not binding for electricians Minimum Wage Labor Market Practice Draw the results of a minimum wage. Label the 1. If the demand for houses increases, the wage of quantity supplies (Qs) & the quantity demanded (Qd) carpenters will __↑__ and the quantity will __↑__. 2. Assume bricks and wood are substitute resources. Wage If the price of bricks increases, the price of wood Unemployment SL __↑___ and the quantity __↑___. 3. If the government removes all regulations for $20 becoming a dentist. The wages for dentists will A $20 minimum wage would increase Qs and __↓__ and the quantity will __↑___. We decrease Qd resulting in 4. If demand for accountants falls at the same time a surplus of labor that the supply increases, the wage will __↓__ and (unemployment) the quantity will __be indeterminate___. 5. Will a binding minimum wage lead to relatively less unemployment when the demand for labor is DL inelastic or when it is elastic? When the demand is inelastic there will be less unemployment. The Qd Qs Quantity of Labor quantity demanded will decrease a little since employers still need these workers Perfectly Competitive Labor Market and Firm Draw side-by-side graphs showing a perfectly competitive market and firm hiring workers Market Wage Firm S Firms are wage takers and hire where MRP = MRC Wage WM S= MRC D= MRP QM D Quantity Number of Workers Total Product Marginal Product 0 1 2 3 4 5 0 5 13 18 21 20 5 8 5 3 -1 QF Quantity Calculating MRP and MRC Plot the MRP and MRC for the firm Wage Marginal The firm should hire a worker Revenue as long as the revenue the Product 40 worker generates is greater $25 $40 $25 $15 $-5 than the cost to hire them. Firms hire where MRP = MRC. 30 20 SL=MRC DL=MRP 1.Assume perfectly competitive product and labor 10 markets. If the price of the product is $5 and the wage is $20, how many workers should be hired? 3 2.How much is the profit or loss? $90 - $60 = $30 3.Assume that this firm develops a process that makes 0 1 2 3 4 5 Workers only their workers more productive. The wage will __stay the same___ and the quantity will ___↑___. Combining Resources Monopsony Least cost rule when combing resourcesDraw a monopsony and label the unregulated Marginal Product Labor = Marginal Product of Capital wage and quantity Price of Labor Price of Capital Wage MRC Supply Profit maximizing rule for combing resourcesMRPX = MRPY = 1 MRCX MRCY Assume a company uses two resources, workers and robots, and the MRC for each is $20. Currently the MRP of the last worker hired is $30 and the MRP of the last robot is $10. The company should __↑__ the number of workers and __↓__ the number of robots. WM MRP = Demand QM Quantity