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Chapter 18

Chapter 18. Resource Demand and Labor Economics. Resource Markets. Marginal Revenue Product (MRP): Demand curve for a resource MRP = MP X MR = Chg in TR/Change resource quantity MP = Marginal Product = Chg in Total Product/Change in Resource

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Chapter 18

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  1. Chapter 18 Resource Demand and Labor Economics

  2. Resource Markets • Marginal Revenue Product (MRP): Demand curve for a resource • MRP = MP X MR = Chg in TR/Change resource quantity • MP = Marginal Product = Chg in Total Product/Change in Resource • MR = Marginal Revenue = Change in Total Revenue/Change in Resource = Product Price • Supply • Marginal Resource Costs (MRC)= Marginal Factor Costs (MFC) = Chg in Resource costs/Chg resource quantity = Price of the Resource (Pr) • Rule for Employing a Resource • Hire when MRP > MRC • Hire until MRP = MRC

  3. Marginal Productivity Theory • All resources are paid to their marginal contribution to output • Deciding on a resource • MRPa/MRCa > MRCb/MRCb, hire a • MRPa/MRCa = MRCb/MRCb, stop • Profit Maximizing Rule • MRP = MRC • MRPa/MRCa = 1 , Therefore • For labor: MRPl/MRCl = 1 • For capital: MRPk/MRCk = 1 • For Land: MRPld/MRCld = 1 • Least-Cost Rule • Therefore • MRPl/MRCl = MRPk/MRCk = 1

  4. Labor • Labor – Services of people • Blue and white collar workers • Professionals • Small business owners

  5. Wages • All compensation to Labor • Components • Salaries • Bonuses • Royalties • Benefits • Repair costs • Commissions • Types • Nominal wage – is the amount you make • Real Wage is the amount you can buy • Adjusted for inflation

  6. Wage Differentials • Ability • Education and training • Specific human capital – unique to a job (surgeon) • General human capital – good everywhere (math) • Compensating differences • Risk • Work conditions • Market imperfections • Minimum wage • Unions • Geographic immobility • Discrimination • Quasi-income

  7. Terms • Uses of Time – Tradeoff between Work and Leisure • Work • Market work • Non-market work • Leisure • Psychic income – Non monetary benefits of work (friendships, power, prestige etc.)

  8. Perfect Labor Market - Demand • Demand for Labor • Determinants • Product Demand • Derived Demand - taken from the demand of the product • Productivity • Prices of other resources • Number of sellers

  9. Perfect Labor Market - Supply • Individual Supply - backward bending • Income preference • Income effect: wages rise, incomes rise so workers work less and have more leisure • At $5, work 8 hours, $40 income • At $6, work 7 hours, $42 income • Market supply • Monetary considerations • Wage rates in other labor markets • Other sources of income • Benefits • Work environment considerations • Job difficulty • Risk • Work conditions • Type of work • Mental • Physical • Qualification considerations • Unions • Preferences • Education • Job experience • Population • Equilibrium

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