The Economics of Resource Markets

1. The Economics of Resource Markets Chapter 7 Highlights

2. The Circular Flow of Economic Activity • Households • sell resources in the resource market • buy products in the product market • Businesses • buy resources in the resource market • sell products in the product market

3. Figure 7-1. Basic Circular Flow Business Sales Revenues Product market Consumer Spending Business firms Consumers in Households Resource market Business Costs Income

4. Dollar Flows • Consumer spending becomes business sales revenues • Business expenses become household income

5. WORKING MODEL OF THE ECOMONY International Participants Payments for Goods & Services Product Market Receive Goods & Services Injection Investment Government Banks BUSINESS HOME Savings Taxes Leakage Land,Labour, Capital, Entrepreneurs Rent, Wages, Interest, Profit Factor Market S+T > I+G = Recession I+G > S+T = Inflation International Participants Leakage S + T = I + G Injection

6. Circular Flow Explanation • Flow of resources in the market shows how the market works… • In market system, voluntary exchanges continually take place in circular flow model • System works that what is an expense to one is ultimately an income to the other

7. Two Leakages Explained Savings and Taxes • Savings does not help unless it is invested back into the flow (economy). • Financial intermediaries: why are they called this? • (because they take savings of one group and make it available to another to borrow or invest) • Financial Intermediaries are: banks, savings & loan, credit unions, stock market, insurance companies. • If savings is greater than investment..business expenses mount.*****

8. Taxes are also a leakage. • Government injects tax dollars back into the economy (flow) by spending the money that taxes take out. • What expenditures does government make into the flow? • ****Money spent on redistribution of income or transfer payments is not “productive into the flow.” Why?**This is where a lot of the controversy occurs about stimulus package.

9. Who Determines the value of a product? The value of the product is the worth that society puts on it…. What worth does society put on sports? What worth does society put on music industry? What worth does society put on sport cars, SUVs, large houses, motorcycles, eating out, designer clothes, entertainment. Etc, etc. etc. Education?

10. The Demand for Labor • Product demand: • A firm’s demand for workers is derived from the demand for the firm’s products • Worker productivity: • Highly productive workers are in greater demand than those with low productivity • Worker productivity is constrained by the amount of capital goods available

11. The Benefit of Hiring a Worker • A firm’s ultimate benefit from hiring added workers is the sales revenue received from selling the added products produced. • Marginal Revenue Product (MRP) =$in/worker • Marginal Revenue (MR)= $in/product • Marginal Product (MP)= Product/worker • MRP = MR x MP = $in/worker

12. The Cost of Hiring a Worker • We use the term “wage” to account for all the costs of hiring a worker: • take-home pay • taxes • benefits • administrative costs • Wage = $out/worker

13. Benefit-Cost Analysis • If MRP > Wage, hire one more worker • If MRP < Wage, lay off one more worker • Keep doing this until MRP = Wage • This is the ideal number of workers • It is here where profit maximization will occur

14. Figure 7-2. MRP-Wage Benefit- Cost Analysis $ MRP>wage Hire more workers wage MRP<wage Lay off workers MRP Number of workers N Hire this number

15. Responding to Product Demand • If product demand increases, MRP shifts right and MRP > Wage. • hire more workers