1 / 82

Demand and Supply in Resource Markets

ECONOMICS. Michael Parkin. Demand and Supply in Resource Markets. Learning Objectives. Explain how firms choose the quantities of labor, capital, and natural resources to employ Explain how people choose the quantities of labor, natural resources, and to supply. Learning Objectives (cont.).

Jims
Télécharger la présentation

Demand and Supply in Resource Markets

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. ECONOMICS Michael Parkin Demand and Supply in Resource Markets

  2. Learning Objectives • Explain how firms choose the quantities of labor, capital, and natural resources to employ • Explain how people choose the quantities of labor, natural resources, and to supply

  3. Learning Objectives (cont.) • Explain how wages, interest, natural resource prices, and normal profit are determined in competitive resource markets • Explain the concept of economic rent and distinguish between economic rent and opportunity cost

  4. Learning Objectives • Explain how firms choose the quantities of labor, capital, and natural resources to employ • Explain how people choose the quantities of labor, natural resources, and entrepreneurship to supply

  5. Resource Prices and Incomes Incomes are determined by resource prices: • the wage rate for labor • the interest rate for capital • the rental rate for land • the rate of normalprofit for entrepreneurship ...and the quantities of resources used.

  6. An Overview of aCompetitive Resource Market The supply and demand model will be used to explain how markets determine prices, quantities, and incomes of the productive resources.

  7. S Equilibrium Resource income D QR Demand and Supplyin a Resource Market Resource price (dollars per unit) PR 0 Resource of production (units)

  8. Labor Markets

  9. USA: Hourly earnings in real value

  10. USA: real compensation, including fringe benefits

  11. Labor Markets

  12. The Demand for Labor Labor demand is a derived demand. Derived demand is a demand for a productive resource, which is derived from the demand for the goods and services produced by the resource.

  13. Marginal Revenue Product Marginal revenue product is the change in total revenue that results from employing one more unit of labor. As the quantity of labor increases, its marginal revenue product diminishes--diminishing marginal revenue product.

  14. Marginal Revenue Product at Max’s Wash ’n’ Wax Marginal Marginal Marginal revenue revenue Quantity product product Total product of labor Output (MRP = P  MP)revenue (L) (Q)(additional washes (additional dollars(TR = P  Q) (additional dollars (workers) (car washes/hour) per worker) per worker) (dollars) per worker) a 0 0 b 1 5 c 2 9 d 3 12 e 4 14 f 5 15

  15. Marginal Revenue Product at Max’s Wash ’n’ Wax Marginal Marginal Marginal revenue revenue Quantity product product Total product of labor Output (MRP = P  MP)revenue (L) (Q)(additional washes (additional dollars(TR = P  Q) (additional dollars (workers) (car washes/hour) per worker) per worker) (dollars) per worker) a 0 0 b 1 5 c 2 9 d 3 12 e 4 14 f 5 15 5 4 3 2 1

  16. Marginal Revenue Product at Max’s Wash ’n’ Wax Marginal Marginal Marginal revenue revenue Quantity product product Total product of labor Output (MRP = P  MP)revenue (L) (Q)(additional washes (additional dollars(TR = P  Q) (additional dollars (workers) (car washes/hour) per worker) per worker) (dollars) per worker) a 0 0 b 1 5 c 2 9 d 3 12 e 4 14 f 5 15 5 20 4 16 3 12 2 8 1 4

  17. Marginal Revenue Product at Max’s Wash ’n’ Wax Marginal Marginal Marginal revenue revenue Quantity product product Total product of labor Output (MRP = P  MP)revenue (L) (Q)(additional washes (additional dollars(TR = P  Q) (additional dollars (workers) (car washes/hour) per worker) per worker) (dollars) per worker) a 0 0 0 b 1 5 20 c 2 9 36 d 3 12 48 e 4 14 56 f 5 15 60 5 20 4 16 3 12 2 8 1 4

  18. Marginal Revenue Product at Max’s Wash ’n’ Wax Marginal Marginal Marginal revenue revenue Quantity product product Total product of labor Output (MRP = P  MP)revenue (L) (Q)(additional washes (additional dollars(TR = P  Q) (additional dollars (workers) (car washes/hour) per worker) per worker) (dollars) per worker) a 0 0 0 b 1 5 20 c 2 9 36 d 3 12 48 e 4 14 56 f 5 15 60 5 20 20 4 16 16 3 12 12 2 8 8 1 4 4

  19. The Labor Demand Curve The labor demand curve is derived from the marginal revenue product curve. Firms hire employees until the wage rate equals the marginal revenue product.

  20. MRP D The Demand for Laborat Max’s Wash ‘n’ Wax Marginal revenue product Demand for labor 20 20 Wage rate (dollars per hour) Marginal revenue product (dollars per hour) 12 12 0 1 2 3 4 5 0 1 2 3 4 5 Labor (workers) Labor (workers)

  21. Two Conditions forProfit Maximization Profit is maximized when marginal revenue equals marginal cost. Likewise, profit is maximized when marginal revenue product equals the wage rate.

  22. Two Conditions forProfit Maximization When firms produce the output that maximizes profit, MR = MC. Also, the firm is employing the amount of labor that makes the marginal revenue product of labor equal to the wage rate.

  23. Two Conditions forProfit Maximization SYMBOLS Marginal product MP Marginal revenue MR Marginal cost MC Marginal revenue product MRP Resource price PR

  24. Two Conditions forProfit Maximization Two conditions for maximum profit: 1. MR = MC 2. MRP = PR

  25. Multiply by MP to give MRP = MR  MP Flipping the equation over Multiply by MP to give MC  MP = PR Flipping the equation over Two Conditions forProfit Maximization Equivalence of conditions: 1. MRP/MP = MR = MC = PR/MP 2. MR  MP = MRP = PR = MC  MP

  26. Changes in the Demand for Labor The demand for labor depends upon: • The price of the firm’s output • The prices of other productive resources • Technology

  27. A Firm’s Demand for Labor THE LAW OF DEMAND The quantity of labor demanded by a firm Decreases if: • The wage rate increases • Increases if: • The wage rate • decreases

  28. A Firm’s Demand for Labor CHANGES IN DEMAND A firm’s demand for labor Decreases if: • The firm’s output price decreases • A new technology decreases the marginal product of labor • Increases if: • The firm’s output price • increases • A new technology • increases the marginal • product of labor

  29. Market Demand The market demand for labor is derived by adding together the quantities demanded by all firms at each wage rate.

  30. Elasticity of Demand for Labor Elasticity of demand for labor measures responsiveness of the quantity of labor demanded to the wage rate. It is less elastic in the short-run.

  31. Elasticity of Demand for Labor Depends upon: • The labor intensity of the production process. • The elasticity of demand for the good. • The substitutability of capital for labor.

  32. Learning Objectives • Explain how firms choose the quantities of labor, capital, and natural resources to employ • Explain how people choose the quantities of labor, natural resources, and entrepreneurship to supply

  33. The Supply of Labor Labor vs. Leisure A reservation wage is the lowest wage at which someone is willing to supply labor.

  34. The Supply of Labor Substitution Effect • Higher wages induce people to work more Income Effect • Higher wages increase the demand for leisure, thus, inducing people to work less

  35. The Supply of Labor Backward-Bending Supply of Labor Curve • As wage rates rise, the income effect eventually becomes larger than the substitution effect Market Supply • The market supply of labor curve is the sum of the individual supply curves.

  36. SC SB SA SM The Supply of Labor Jill Jack Kelly Market 20 20 20 20 Wage rate (dollars/hour) 10 10 10 10 4 1 0 5 10 0 5 10 0 5 10 0 5 10 15 20 25 Labor (hours per day) Labor (hours per day) Labor (hours per day) Labor (hours per day)

  37. Changes in the Supply of Labor The key factors that change the supply of labor are: • Adult population • Capital in home production

  38. Learning Objectives (cont.) • Explain how wages, interest, natural resource prices, and normal profit are determined in competitive resource markets • Explain the concept of economic rent and distinguish between economic rent and opportunity cost

  39. Labor Market Equilibrium Trends in the Demand for Labor Technological change has increased the demand for labor Technology has destroyed some jobs, but created more higher paying jobs.

  40. Labor Market Equilibrium Trends in the Supply of Labor • Population increases. • The mechanization of home production has increased the supply of labor.

  41. Labor Market Equilibrium Trends in the Equilibrium Since demand has increased more than supply, both wages and employment have increased. Not everyone has benefited equally.

  42. Capital Markets Capital markets are the channels through which firms obtain financial resources to buy physical capital resources. The price of capitalis the interest rate. The real interest rate adjusts the interest rate for inflation.

  43. Capital Market Trends in the United States

  44. Capital Market Trends in the United States

  45. The Net Present Value of a Computer Tina runs a firm that sells advice to taxpayers — Taxfile, Inc. She is considering buying a $10,000 computer. The computer has a two-year life and will be worthless after that.

  46. The Net Present Value of a Computer The computer will increase revenues by $5,900 for the next 2 years. Should Tina buy the computer?

  47. The Net Present Value of a Computer Tina calculates the present value of the marginal revenue product of the new computer using the formula: MRP1 (1 + r) MRP2 (1 + r)2 + PV =

  48. $5,900 (1 + 0.04) $5,900 (1 + 0.04)2 + PV = The Net Present Value of a Computer Suppose Tina can borrow or lend at 4percent a year + PV = $5,673 $5,455 PV = $11,128

  49. The Net Present Value of a Computer Net present value is the present value of the future flow of marginal revenue product generated by the capital minus the cost of the capital. If it is positive — the firm should buy additional capital. If it is negative — the firm should not buy additional capital.

More Related