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

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

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?

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

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

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

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

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

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?

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?

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

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

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

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LESS

STAY PUT

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STAY PUT

STAY PUT

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2010 Practice FRQ

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