Unit 5
Resource Market
(aka: The Factor/Input/Labor Market)
2
Producers Demand
Households Supply
The Circular Flow Model
Businesses
Individual
Producers Supply
Households Demand
Resource Markets
Perfect
Competition
Monopsony
1. Number of firms:
 Many small firms are hiring workers
 No firm is large enough to manipulate the market.
2. Wage maker? Wage taker?
 Workers are wage takers
 Firms can hire as many workers as they want at a wage
set by the industry
3. Wages rate:
 Wage is constant
4. Workers’ skills:
 Many workers with identical skills
4
Resource Demand
Example 1:
If there was a significant increase in the
demand for pizza, how would this affect the
demand for Cheese? Cows? Milking Machines?
Veterinarians? Vet Schools teachers? Etc.
Example 2:
An increase in the demand for cars increases
the demand for…
Derived Demand:
The DEMAND for resources (workers) is
determined (derived) by the products they
help to produce.
5
Industry Demand for Labor
 What is Demand for Labor (DL)?
Demand is the different quantities of workers that
businesses are willing and able to hire at different wages.
 Market Demand for Labor is the sum of every firm’s
MRP.
 What is the Law of Demand for Labor?
There is an INVERSE relationship between wage and
quantity of labor demanded.
Wage
 As wage
, Qd
.
 As wage
, Qd
.
Demand (D )
for Labor L FIRMS demand labor.
Quantity (Q )
of Workers L
6
Industry Supply for Labor
 What is Supply for Labor (SL)?
Supply is the different quantities of individuals that are
willing and able to sell their labor at different wages.
 What is the Law of Supply for Labor?
There is a DIRECT or POSITIVE relationship between
wage and quantity of labor supplied.
Wage
Supply
for Labor
(SL)INDIVIDUALS supply labor.
 As wage
, Qs
.
 As wage
, Qs
.
Quantity (Q )
of Workers L
7
• The additional cost of an additional
resource (worker).
• MRC is the WAGE.
 Another way to calculate MRC is:
Marginal
Resource Cost =
Δ Total Cost
Δ Inputs
8
• The additional revenue generated by
an additional worker (resource).
marginal
price of
• MRP = product X the product.
 Another way to calculate MRC is:
Marginal
Revenue
Product
=
Δ Total Revenue
Δ Inputs
9
How do you know how many
resources (workers) to employ?
Continue to hire until…
MRP = MRC
(≥)
10
Where to get the Market Demand ?
Industry
Market
Wage
QLDem
Wage
QLDem
Wage
QLDem
Wage
QLDem
$12
1
$12
0
$12
9
$12
10
$10
2
$10
1
$10
17
$10
20
$9
3
$9
2
$9
25
$9
30
$6
5
$6
3
$6
42
$6
50
$4
7
$4
5
$4
68
$4
80
Wage
Wage
$9
$9
DL
3
QL
DL
2
QL
Wage
Wage
$9
$9
DL
25
QL
DL
30
QL
Perfectly Competitive
Labor Market and Firm
Firm
Industry
SL
Wage
Wage
$12
2800
DL
QL
?
28
SL=MRC
DL=MRP
QL
Example:
 You hire workers to mow lawns. The wage for each
worker is set at $100 a day.
 Each lawn mowed earns your firm $50.
 If you hire 1 worker, he can mow 4 lawns per day.
 If you hire 2 workers, they can mow 5 lawns per
day together.
1.
2.
3.
4.
5.
6.
7.
What is the MRC for each worker?
What is the first worker’s MRP?
What is the second worker’s MRP?
How many workers will you hire?
How much are you willing to pay the first worker?
How much will you actually pay the first worker?
What must happen to the wage in the market for
you to hire the second worker?
13
You’re the Boss
• You own a business.
• Assume the you are selling the goods in a
perfectly competitive PRODUCT market
so the price is constant at $10.
• Assume that you are hiring workers in a
perfectly competitive RESOURCE market
so the wage is constant at $20.
• Also assume the wage is the ONLY cost.
To maximize profit
How many workers should you hire?
14
Wage = $20 / Price = $10
Units of
Labor
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
*Hint*
How much is each
worker worth?
15
Wage = $20 / Price = $10
Units of
Labor
Total
Product
(Output)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
1.What is happening to
Total Product?
2.Why does this occur?
3.Where are the three
stages?
16
Wage = $20 / Price = $10
Units of
Labor
Total
Product
(Output)
Marginal
Product
(MP)
Product
Price
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
7
10
7
3
2
1
-3
0
10
10
10
10
10
10
10
Price
constant
because we
are in a
perfectly
competitive
market.
How many workers should you hire?
17
Wage = $20 / Price = $10
Units of
Labor
Total
Product
(Output)
Marginal
Product
(MP)
Product
Price
Marginal
Revenue
Product
(MRP)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
7
10
7
3
2
1
-3
0
10
10
10
10
10
10
10
0
70
100
70
30
20
10
-30
This
shows
how
much
each
worker
is
worth
How many workers should you hire?
18
Wage = $20 / Price = $10
Units of
Labor
Total
Product
(Output)
Marginal
Product
(MP)
Product
Price
Marginal
Revenue
Product
(MRP)
0
1
2
3
4
5
6
7
0
7
17
24
27
29
30
27
7
10
7
3
2
1
-3
0
10
10
10
10
10
10
10
0
70
100
70
30
20
10
-30
Marginal
Resource
Cost
(MRC)
0
20
20
20
20
20
20
20
How many workers should you hire?
19