Resource Demand

1. Resource Demand Jennifer Creagmile Liz Walz

2. In a perfectly competitive product/resource market, the firm is a wage taker • Derived Demand: the demand for factors of production is derived from the demand for the products they produce • Depends on productivity of resource • Market value of the good produced by the resource • MRP= MP X P • Rule for employing resources: MRP=MRC

3. Perfectly Competitive • S & D establish wage rate • TRC increases by wage rate • The MRP schedule = firm’s demand for labor, b/c each point on this schedule indicates the # of workers the firm would hire at each possible wage rate • MRP falls b/c MP diminishes • Imperfectly Competitive • Must lower price to sell more product • MRP falls b/c MP diminishes AND product prices falls as output increase • Ceteris paribus, IC produces less than PC, thus reqires fewer resources

4. Market demand, same as product market • Determinants: changes in product demand, changes in productivity (quantity, tech, quality), changes in prices of other resources • Substitution effect • Output effect

5. Elasticity • Sensitivity of producers to changes in resource prices Erd = % Δ resource quantity % Δ resource price • Ease of resource substitutability • Elasticity of product demand • Ratio of resource cost to total cost

6. Optimal combination of resources • Least-cost rule: use when the last $ spent on each resource yields the same MP • Minimize TC of specific output when MP of labor = MP of capital P of labor P of capital • Profit Maximizing Rule: MRP=P(resource) PL=MRPL and PC=MRPC If we divide by their respective prices we get: MRPL = MRPC = 1 PL PC They must be equal to 1

7. Wage Determination • Wage rate= price paid for labor per unit of time, earnings =wage rate x time • Nominal vs. Real • Role of productivity: plentiful capital, access to abundant natural resources, advanced tech, labor quality, intangibles • Real income= real output

8. Purely Competitive labor market: • Many firms compete in hiring • Numerous qualified workers w/identical skills • Both sides “wage takers”

9. Firm’s Labor Graph Non-labor costs Wage Rate S=MRC D=MRP Q Wage cost

10. Monopsony: Single buyer of resource (hiring) • Conditions: single buyer of particular kind of labor, type of labor relatively immoble, firm is “wage maker” • Pays higher wages to obtain more labor • Hires fewer workers at lower wages than PC • Wage discriminating: lower wages for those with more inelastic supply

11. Unions: increase wages (for members) &UE (growth, elasticity) • Demand-enhancement: increase wage rates and # of jobs • Increase product demand, increase productivity, change prices of other inputs • Generally seek to prevent declines in labor demand rather than increases • Exclusive/Craft Union: restrict supply of labor • Immigration, child labor, compulsory retirement, shorter workweek • Craft unions: “unions which comprise workers of a given skill” • Closed shops, occupational licensing

12. Inclusive/Industrial Unions: unionize all workers S Wu Wc Qu Qc

13. Bilateral Monopoly Model • Strong industrial union (monopoly) in monopsony labor market: indeterminate outcome • May be desirable MRC S Wu Wc Wm D=MRP Qc Qu=Qm

14. Minimum wage- price floor->surplus (cause some UE) • What cause wage differentials: workers not homogeneous, jobs vary in attractiveness, labor markets imperfect • Noncompeteing groups: differ physical capabilities and education and training(human capital investment • Compensating differences: nonmonetary aspects of job • Market imperfections: lack of job info, geographic immobility, unions and govt. restrait, discrimination

15. Pay for Performance • Principal-Agent Problem • Workers are “agents” hired to further interests (profit) of “principal” (firm) • Interests not identical incentive pay plan: piece rates (per unit), commission/royalties, bonuses/profit sharing • Efficiency wages: pay above equilibrium wages more efficient workers

16. Rent, Interest & Profit • Economic rent: “the price paid for the use of land and other natural resources that are completely fixed in total supply” • Perfectly inelastic supply, no production cost (capital payments to improve land) • Changes in Demand- price, and productivity of land • Upsloping S for labor, capital, entrepreneurial ability ->incentive function and thus rent is a surplus payment • Single tax on land b/c other taxes reduce efficiency

17. Interest: price paid for money( stated as a percentage & money used only to acquire resources, NOT a resource itself) • Nominal vs. Real Interest Rate • Loanable Funds Theory of Interest: S & D of funds available for lending • Supply(households): upsloping, a higher interest rate ->more funds • Demand (firms/govt): downsloping b/c fewer investments will have that level of return • Expected rate of return from investment in capital goods • Role of IR: • Total output(lower->higher); allocation of capital (price ration); level and consumption of R&D (higher-> less, flows toward high rates of return • Usury Laws

18. Economic Profit • Explicit vs. implicit costs • Return for entrepreneurial ability • Normal profit vs. economic profit • PC & static economy: Economic profits are zero in LR • Modern capitalism not static-> dynamic, insurable cs. Uninsurable risks, innovation, monopoly • Function of profit: induces innovation, allocate resources, attracts financing for expansion • Negative: not necessarily completely aligned with society’s wants and needs

19. FRQ 1. Assume that a firm produces and output, using labor with a market wage rate of $75 per day per worker. The market price of their product is sold at a market price of $15 each. • a) In what kind of market structure does this firm sell its output, how can you tell? • b) Using the information in the table, draw a correctly labeled graph of the firm’s current supply curve for labor • c) Show how to find how many employees the firm should hire to maximize their short-run profits • d) how many units of output will this firm produce? • e) how will an increase in technology for the firm affect the wage paid to workers?

20. Multiple Choice • To find the amount by which the production of an additional worker increases a purely competitive firm's total revenue: A) subtract the wage from marginal product B) divide marginal product by the wage rate C) subtract marginal cost from marginal revenue D) multiply marginal product by product price 2. A perfectly competitive firm is has hired the amount of workers to maximize their profit at a wage rate of $30 per worker. If the marginal product for the last worker they hired was 10, than how much does the product cost? A) $20 B) $5 C) $3 D) $15 3. If there is an increase in the product price, and an increase in the substitute input capital, there will be: A) decrease in the demand for labor B) increase in the demand for labor C) increase in the demand for labor if the substitution effect is stronger than the output effect D) increase in the demand for labor if the output effect is stronger than the substitution effect

21. Multiple Choice 4. Using the concept of “derived demand”, an increase in the demand for pizza will: A) increase the demand for pizza makers B) increase the price of pizza C) decrease the demand for salad D) increase the demand for pizza sauce 5. The following table shows the relationship between a firm’s number of workers and its total revenue. If the market wage for one worker is $75 , than how many workers should the firm hire? A) 3 B) 4 C) 5 D) 6

22. Multiple Choice 6. A firm may choose to pay its employees an above-market wage to: A) increase worker turnover B) shift their labor demand curve to the left C) reduce the opportunity cost of shirking D) overcome the principal-agent problem 7. A firm can hire 10 workers at a wage rate of $20 per hour but must pay $22 to all of its employees to attract an 11th worker. The marginal wage cost of the 11th worker is: A)$22 B)$42 C)$20 D)$121

23. Multiple Choice 8. According to the diagram, the competitive wage and monopsony wage, respectively, are: A)W2 and W1 B)W1 and W4 C)W1 and W5 D)W2 and W4 9. A nonunionized monopsonist pays a wage that is: A) equal to MRC but less than MRP B) equal to MRP but less than MRC C) less than MRP but greater than MRC D) less than both MRP and MRC

24. Multiple Choice 10. Suppose a large employer hires 80% of the labor force in a small Tennessee coal mining town. Virtually all of these workers belong to the United Mine Workers union. Economists would describe this market as: A) discriminating monopoly B) segregated oligopoly C) bilateral monopoly D) dual monopsony 11. For a monopsonist, marginal resource cost: A) is constant and equal to the market wage B) is less than marginal revenue product at the optimum employment level C) is the difference between marginal revenue product and the wage rate D) equals the wage rate paid to the last worker plus the wage increases paid to all other workers 12. A union could increase the wages and employment of its workers by successfully lobbying government to: A) increase the licensing requirements of those who wish to join the union B) raise taxes on inputs that are complementary to the union C) subsidize the production of goods and services complementary to those produced by the union D) raise tariffs on goods and services complementary to those produced by the union

25. Answers to FRQ • a) Perfectly competitive because the wage and price are set by the market b) Non-labor costs Wage Rate S=MRC=$75 D=MRP Q1 Q Wage cost

26. Answers to FRQ c) • d) Firm will produce 25 units of output • e) wage will stay the same b/c in perfect competition wage is constant

27. Answers to MC • D • C • C • A • B • D • B • A • D • C • D • C