Unit 5: The Resource Market

(aka: The Factor Market or Input Market)

Review
1. Who demands in the Resource Market? 2. Who supplies in the Resource Market? 3. Define Derived Demand The demand for resources is determined (derived) by the products they help produce. 4. Identify the Shifters of Resource Demand 1. Derived Demand 2. Productivity of the Resources 3. Price of related resources

Use side-by-side graphs to draw a perfectly competitive labor market and firm hiring workers

Wage is set by the market Demand/MRP falls

Wage SL Wage

WE DL Q

SL=MRC

DL=MRP
Qe Q

QE

Industry

Firm

What happens to the wage and quantity in the market and firm if new workers enter the industry?
Wage SL Wage

WE DL Q

SL=MRC

DL=MRP
Qe Q

QE

Industry

Firm

What happens to the wage and quantity in the market and firm if new workers enter the industry?
Wage SL Wage SL1

WE W1 DL Q

SL=MRC
SL1=MRC1

DL=MRP
Qe Q1 Q

QE Q1

Industry

Firm

Minimum Wage
Assume the government was interest in increasing the federal minimum wage to $15 an hour Do you support this new law? Why or why not
7

Wage

Fast Food Cooks

S

$15 $8 $6
The government wants to help workers because the equilibrium wage is too low

D 5 6 7 8 9 10 11 12

Q Labor

Wage

Fast Food Cooks

S

$15 $8 $6 Government sets up a WAGE FLOOR. Where?

D 5 6 7 8 9 10 11 12

Q Labor

Minimum Wage
Wage S $15 $8 $6

Above Equilibrium!

D 5 6 7 8 9 10 11 12

Q Labor

10

Minimum Wage
Wage
Surplus of workers (Unemployment)

$15 $8 $6

Whats the result? Q demanded falls. Q supplied increases.

D 5 6 7 8 9 10 11 12

Q Labor

11

Is increasing minimum wage good or bad?

GOOD IDEAWe dont want poor people living in the street, so we should make sure they have enough to live on. BAD IDEAIncreasing minimum wage too much leads to more unemployment and higher prices.
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Minimum Wage Worksheet

13

Combining Resources
Up to this point we have analyzed the use of only one resource.
What about when a firm wants to combine different resources?

Least Cost Rule

$10
# Times Going 1st
How much additional output does each resource generate per dollar spent?

$5
MP/PW
(PriceW =$5)

MP
(Robots)

MP/PR
(PriceR =$10)

MP
(Workers)

30

20

2nd
3rd 4th

20
10 5

2
1 .50

15
10 5

3
2 1

If you only have $35, what combination of robots and workers will maximize output?

Least Cost Rule

$10
Resource x

MPx = MPy Px Py
MP
(Robots)

$5
Resource y

# Times Going 1st

MP/PR
(PriceR =$10)

MP
(Workers)

MP/PW
(PriceW =$5)

30

20

2nd
3rd 4th

20
10 5

2
1 .50

15
10 5

3
2 1

If you only have $35, the best combination is 2 robots and 3 workers

Profit Maximizing Rule for a Combing Resources

MRPx = MRPy = MRCx MRCy

This means that the firm is hiring where MRP = MRC for each resource x and y

Practice: What should the firm do hire more, hire less, or stay put?
1. MRPL = $15; PL = $6; MRPC = $10; PC = $10
MORE LESS MORE STAY PUT LESS STAY PUT

2. MRPL = $5; PL = $10; MRPC = $10; PC = $15

3. MRPL = $25; PL = $20; MRPC = $15; PC = $15

4. MRPL = $12; PL = $12; MRPC = $50; PC = $40
STAY PUT MORE

5. MRPL = $20; PL = $15; MRPC = $100; PC =$40

MORE MORE

2010 Practice FRQ

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