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    AP Micro 5-3 Perfectly Competative Labor

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    kjs1031
    This document discusses the market for resources (inputs) and how firms determine the optimal quantity of each resource to hire. It introduces the concept of derived demand, where the demand for a resource depends on the demand for the final good it helps produce. Firms will hire resources up to the point where the marginal revenue product (MRP) of each resource equals its price. The least cost rule states that firms should allocate their budget in a way that maximizes total output. Specifically, firms should hire resources in proportion to their marginal products divided by their prices until the budget is fully used.

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    AP Micro 5-3 Perfectly Competative Labor

    Uploaded by

    kjs1031
    75 views20 pages
    This document discusses the market for resources (inputs) and how firms determine the optimal quantity of each resource to hire. It introduces the concept of derived demand, where the demand for a resource depends on the demand for the final good it helps produce. Firms will hire resources up to the point where the marginal revenue product (MRP) of each resource equals its price. The least cost rule states that firms should allocate their budget in a way that maximizes total output. Specifically, firms should hire resources in proportion to their marginal products divided by their prices until the budget is fully used.

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    Ap micro lectur

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    This document discusses the market for resources (inputs) and how firms determine the optimal quantity of each resource to hire. It introduces the concept of derived demand, where the demand for a resource depends on the demand for the final good it helps produce. Firms will hire resources up to the point where the marginal revenue product (MRP) of each resource equals its price. The least cost rule states that firms should allocate their budget in a way that maximizes total output. Specifically, firms should hire resources in proportion to their marginal products divided by their prices until the budget is fully used.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    75 views20 pages

    AP Micro 5-3 Perfectly Competative Labor

    Uploaded by

    kjs1031
    This document discusses the market for resources (inputs) and how firms determine the optimal quantity of each resource to hire. It introduces the concept of derived demand, where the demand for a resource depends on the demand for the final good it helps produce. Firms will hire resources up to the point where the marginal revenue product (MRP) of each resource equals its price. The least cost rule states that firms should allocate their budget in a way that maximizes total output. Specifically, firms should hire resources in proportion to their marginal products divided by their prices until the budget is fully used.

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    You are on page 1of 20

    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.
    12

    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

    19

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