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Unit 3: The Resource Market
Wage Determination
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Review1. 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 Demand1. Derived Demand2. Productivity of the Resources3. Price of related resources
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Use side-by-side graphs to draw a perfectly competitive labor
market and firm hiring workers
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SL
DL
Wage
Q
Wage
Q
Industry FirmQE
WE
Qe
DL=MRP
SL=MRC
Wage is set by the marketDemand/MRP falls
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SL
DL
Wage
Q
Wage
Q
Industry FirmQE
WE
Qe
DL=MRP
SL=MRC
What happens to the wage and quantity in the market and firm if new workers enter the
industry?
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SL
DL
Wage
Q
Wage
Q
Industry FirmQE
WE
Qe
DL=MRP
SL=MRC
What happens to the wage and quantity in the market and firm if new workers enter the
industry?
SL1
W1
Q1
SL1=MRC1
Q1
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Minimum Wage
Is raising the minimum wage a good idea or a bad idea? Why or why not
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State of the Union Speech 2014
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A different Perspective
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S
Wage
Q Labor
D
Fast Food Cooks
$15
$8.25
$6
The government wants to “help” workers because the equilibrium wage is too low
105 6 7 8 9 10 11 12
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S
Wage
Q Labor
D
Fast Food Cooks
Government sets up a “WAGE FLOOR.”
Where?
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$15
$8.25
$6
5 6 7 8 9 10 11 12
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S
Wage
Q Labor
D
Minimum Wage
Above Equilibrium!
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$15
$8.25
$6
5 6 7 8 9 10 11 12
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S
Wage
Q Labor
D
What’s the result?Q demanded falls.Q supplied increases.
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$15
$8.25
$6
5 6 7 8 9 10 11 12
Surplus of workers(Unemployment)
Minimum Wage
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Is increasing minimum wage good or bad?
GOOD IDEA-We don’t want poor people living in the street, so we should make sure they have enough to live on.
BAD IDEA-Increasing minimum wage too much leads to more unemployment and higher prices.
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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?
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If you only have $35, what combination of robots and workers will maximize output?
Least Cost Rule
# Times Going
MP(Robots)
MP/PR
(PriceR =$10)
MP (Workers)
MP/PW
(PriceW =$5)
1st 30 3 20 4
2nd 20 2 15 3
3rd 10 1 10 2
4th 5 .50 5 1
$10 $5How much additional output does each
resource generate per dollar spent?
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If you only have $35, the best combination is 2 robots and 3 workers
Least Cost Rule
# Times Going
MP(Robots)
MP/PR
(PriceR =$10)
MP (Workers)
MP/PW
(PriceW =$5)
1st 30 3 20 4
2nd 20 2 15 3
3rd 10 1 10 2
4th 5 .50 5 1
$10MPk = MPL
Pk PL$5
Resource k Resource L
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Profit Maximizing Rule for a Combining Resources
MRPk = MRPL =MRCk MRCL
1This means that the firm is hiring where MRP = MRC for each resource k and L
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Practice: What should the firm do – hire more, hire less, or stay put?
1. MRPL = $15; PL = $6; MRPC = $10; PC = $10
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
5. MRPL = $20; PL = $15; MRPC = $100; PC =$40
MORE
LESS
STAY PUT
MORE
MORE MORE
MORE
STAY PUT
STAY PUT
LESS
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2010 Practice FRQ
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