Micro Unit 4

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Unit 4 Lesson 1 

Ex. What happens if the economy is going so well that wages are driven up.   ( Supply curve in the product market shifts left.)

If a good is not in great demand the resources used in production of that good will not be in great demand.

You have to look at the resources used in production to look at the costs or production. The cost curves we have been looking at are derived from the factors of production.

When you look at the factor market you have to realize that it is a derived demand.

This means that the demand for the factors of production are derived from the demand for the goods you are producing.

            It is important to look at

1. how productive something is at producing the good and

2. the price of product. If it is priced high it must mean that people want the good.    

Assumptions:

1) In a perfectly competitive factor market each firm is acquiring a very small amount of resources compared to the entire market. This means they are not affecting the price of the resources.

2) A resource will be in greater demand if it can produce a product that is in great demand.

monopsony: a market in which there is only one buyer of the good, service, or resource.

Unit 4, Lesson 2

Marginal Product: the change in total product / change in quantity of the resource

As units of variable resource is added to production a point is reached where diminishing marginal returns is reached. 

Law of Diminishing Returns: As more and more of a variable resource is added to a  fixed resource a point is reached where the additional production added by the next variable resource will be less than the previous and eventually total production will decrease.

It is a demand curve because it shows the amount of labor that will be demanded at each price level.

Determinants of Resource Demand:

1) Changes in Product demand will cause the change in resource demand to go in the same direction. (Common Sense)

2) Changes in the productivity of the resource will shift the demand curve in the same direction. (If the resource can make more (MRP) at the same cost (MRC) then the resource would be in greater demand.

3) Changes in price of other resources:

If the  price of a substitute resource (Capital) declines the demand for the other resource (Labor) will decline because you will substitute Captial for Labor.  (Substitution Effect)

However, at the same time since the cost of the other resource (Captial) declines they can now get more output from that resource . This will lead to an increase demand for all resources. (including the original.) (Output Effect)

When you graph this information you can see the demand curve for a imperfectly competitive firm is more inelastic than that of a perfectly competitive firm.

This is because they will cut back production when the price of a good drops. When they cut back production they hire less workers.

If the price of a complementary good increases the demand for the original good will decrease because the MRC of the good has increased.

                    Elasticity of Resource Demand:

1) Rate of MP Decline:

If the marginal product of labor declines slowly as it is added to a fixed amount of capital, the MRP, or demand for labor will decline slowly and tend to be highly elastic. This means that a small decline in price of such a resource will yield a relatively large increase in the amount demanded.

The larger the number of good substitute resources available, the greater will be the elasticity of demand for a particular resource.

3) Elasticity of Product Demand:

The greater the elasticity of product demand (the good being produced), the greater the elasticity of resource demand. (If the price of the good being produced goes up and it is elastic that means the quantity demanded will drop greatly. If this is the case their will be a big drop in the demand for the resources that make it.

4) The more that the production costs play in the price of the good the more elastic the demand for the product. Ex. If production costs go up then the demand for the good will decrease. This in turn causes the demand for the production resources to decline.

Imperfect competitor in the product market

How do we know this is an imperfect competitor?

Why does the MRP of the imperfectly competitive firm fall more rapidly than the MRP of the perfect competitor?

What happens if new technology increases efficiency? Output Increases, MPP increases TR increases, and MRP increases. 
This means you will hire more workers at the same wage rate.

Unit 4 Lesson 2 (Chapter 28)
The perfect competitive factor market

Wages: the price paid for the use of labor.

Nominal Wages: amount paid to the worker

Real Wages: the quantity of Goods and Services one can obtain with nominal wages. (purchasing power)

The demand for labor (any variable resource) depends on its productivity. (If it can produce a lot it will be in great demand.)

Labor may be more productive (ex: U.S. vs. China) because of

     1. Capital: machinery, buildings....

     2. Natural Resources: many high quality resources

    3. Technology:

    4. Labor Quality: health, vigor, education, training, attitudes...

Wages in Particular Labor Markets

COMPETITIVE MODEL:

1. Many firms hiring

2. Many qualified workers with identical skills acting independently

3. Wage taker (too small to set the wage rate) Notice that different types of companies demanding the same type of labor (ex. business managers) will make up a market.

The supply curve for the market the supply curve is up sloping because the firms must pay more to the workers to get them away from other occupations. (Pay for opportunity costs)

In a perfectly competiitve industry (in the factor market) the firm has no influence on the wage rate paid to the workers.  (They do not hire enough workers to affect the wage rate.)  Since this is the case, they have to accept the rate set by the market.

In order to Maximize profits will hire resources up to the point where MRP = MRC. This makes sense. If the last person hired adds more to cost than it adds to product than the company is losing money.

This means that when a new worker is hired the total resource cost will increase by the amount of the wage. The bottom line is that the wage rate and the marginal resource cost are the same.

This means that you can see how many workers will be hired based on the wage rate which is equal to the MRC.

MONOPSONY MODEL: (Regarding labor usage not necessarily sellers)

This type of firm is not very common. Usually towns have many employers and workers are free to change occupations. (Ex. Steel mills, sugar producers) Other examples are when the workers are not totally free to move (Ex. hospitals, major league sports, school teachers...)

1) Firm is large portion of the total employment

2) Labor is immobile

3) Firm is Wage Maker

When it pays these higher wages to the new hires it must also increase wages for all other workers.

This means that when it raises wages its Marginal Resource Cost will increase at a higher rate than its supply curve.

Compared to a perfect competitor (in the factor market) a monopsony will hire less workers.   It is not efficient.

What would be the wage level and employment level if this firm were buying labor in a perfectly competitive market?

What quantity of labor would be purchased in a monopsonistic labor market? Why?

What is the wage level in a monopsonistic labor market? Why?

What determines the wage in a competitive labor market?

Why is the supply curve for an individual firm in a competitive labor market horizontal or perfectly elastic?

Why is the supply curve for labor up sloping?

Why are the demand curve for labor and the MRP for labor the same thing?

Why is the market demand for labor down sloping?

What are you in the product market? 

 What are you in the factor market? 

Micro Unit 4 Lesson 4

Optimal Combination of Resources:

Given all the resources you must choose the combination that produces the most for the dollar.

Firms can vary the amount of their inputs. In so doing they will try to produce using the combination of resources that maximizes profits and minimizes losses.

The Least-Cost Rule:

Assume two resources: labor and capital

The cost of any output is minimized when the marginal product per dollar's worth of each resource used is the same.

          MP of labor         MP of capital
        price of labor   =    price of capital

Example:
If MPl/pl = 20/1 and MPk/pk = 10/1 what must you do?

Spend money on labor not capital. By doing so you lose the 10 in capital but you gain the 20 in labor. The overall gain is $10 for the same amount of money. You keep adjusting until the least cost rule is satisfied.

What if MPl is 50 and MPk is 25 with the price of both being 1.

You would be better hiring more labor because you are getting more for your dollar.

What if the MPl/pl = 50/2 and MPk/pk = 50/1

In this example the firm will take a dollar away from labor and give it to capital. This moves capital down its MP curve for capital and up the MP curve for labor.

The net result of this is that we gain 50 units from capital and lose 25 units from labor. The net result is an increase in MP of 25 units/dollar.

You have now increase output without increasing costs.

(This is the same thing as producing the same amount of a good at a lower cost.)

The Profit-Maximizing Rule:

Now that we have figured out how to produce at the least cost we must look at how to maximize our profit in terms of output. In order to maximize profit from a cost standpoint you should hire resources so that the price of the resource (Pl) is equal to the MRP of the resource (MRPl). 

MRC = MRP     Since MRC is just the price of hiring the factor of production(Pl) that means  Pl = MRPl

Given that Pl = MRPl take this and divide both sides by the Pl and you get MRPl/Pl = 1

This works for all resources so ultimately you get 

MRPl/Pl = MRPk/Pk = MRP.../P... = 1

If all of these are equal and equal to one then you are in the profit maximization point.

***If any one of these is more than the others then you need to use more of that product.***

What type of industry is this?  

How do you know?

Based on the table above, calculate the least costly manner in which to produce.  What is it?

There is no one least cost way to produce.  There are multiple combinations to solve for this.  What if I give you a total number to produce?  Does this narrow it down?

Based on the table above, calculate the least costly manner in which to produce50 units.  What is it?

You will find that  a firm could satisfy the least-cost rule but do so in such a manner that it is producing the wrong quantity. In order to fix this it must look at the profit maximization rule.

Calculate the Profit Maximization rule?  What is this combination?

One you have calculated the profit maximization point look at the least cost rule for this point.  

If you meet the MRPl/Pl = MRPc/Pc (profit maximization rule) you are meeting the least cost rule!!!

More on MRP 

Keep in mind that the MRP comes from the change in Total Revenue. 

This means that if this is a perfectly competitive factor market and the wage rate is $8 we will hire 4 units of resource. 

Minimum Wage

  How does minimum wage affect Ql in a monopsonistic labor market?  If the government imposes a minimum wage what happens to Ql? We have to know where the minimum wage will be set in order to know that answer.
 

If minimum wage is set below the wage rate that the monopsonist is charging then it is ineffective because the monopsonist will just ignore it and pay the people what they were paying them.

If minimum wage is set above old wage rate above S and MRP intersection but below the MRP/MRC intersection then minimum wage is the MRC curve so we hire where MRP = minimum wage (MRC). This means we hire more workers at this higher wage.

If minimum wage is set above the MRP/MRC intersection the minimum wage is the MRC so we still hire where MRP = minimum wage (MRC) but the quantity of labor hired is less than before.

LABOR UNIONS

Labor Unions: workers organizations that seek to secure economic improvements for their members.

1) Increasing product demand: advertising, politics... (derived demand increases demand for labor)

2) Increasing productivity: making companies buy better machinery (if it does not replace workers)

3) Increase in price of substitutes and reduce price of complements.

When this happens they will change the demand curve for the product and this in turn will affect the MRP for the resource.

Unions try to decrease the supply of labor

1) Restrict immigration

2) reduce child labor

3) encourage compulsory retirement

4) shorter workweeks

5) Restriction on hiring to union members only. (They will then make it hard to get into the union or make it a lengthy process. The net effect is less workers and higher wages.)

6) Requirement of licenses: AMA, barbers, teachers...

All of the above will cause supply to be decreased

By entering the market and setting a specific minimum wage the union will alter the supply curve. This means less union members are working.

Unit 4 Lesson 4 (Rent, Interest, and profits)

Economic Rent: the payment for the use of any resource over and above its opportunity cost.

We have economic rent on Labor: Tom Glavin makes a lot more as a basketball player than he would doing his next best alternative (no high school diploma: flipping burgers???). This excess pay is economic rent.

Economic rent serves to allocate resources (land, labor...) to the highest valued use. This goes back to allocative efficiency.

Land will be around even if we did nothing with it. For this reason economist consider any payment for land to be a surplus payment. It is unnecessary to pay for it.

In the 1800's it was proposed to tax away almost all income on land. Since earnings from land are just because someone hold property that is in great demand. The feeling is that everyone should profit from this (government).

A tax on land would not affect the allocation of it. The amount of land is not affected by the tax. This is not true for any other resource. A tax increases the cost of business on every other resource and that means a reduction in production.

INTEREST:

Interest Rate: the price paid for the use of money. It is the amount of money that a person must pay for the use of others money.

: the market return earned by capital as a factor of production

1) Interest Rates stated in %.

2) Money itself is not a resource. Instead, it can buy resources.

In regards to interest rates we will determine how these are calculated in Macro Economics.

Nominal Interest Rates: the rate expressed in terms of current values

Real Interest Rates: the rate expressed in terms of constant or inflation adjusted value. As inflation increases the same amount of money paid this year is not worth as much next year as it is now. This means that if you are paying 15% a year for 30 year that in 30 years the 15% will not buy near as much as it is now.

Interest rates vary because of:

1) Risk

2) Maturity: the longer money is held the higher the interest rates.

3) Size of Loan: the smaller the loan the higher the interest rate because of administrative costs.

4) taxability: tax free type of loans will demand a lower interest rate (pay a higher interest rate if you consider taxes.)

All this is taken into account in determining the Supply and Demand for these loanable funds

  ECONOMIC PROFITS:

Economic Profits: those profits earned after all cost are paid out. This includes both implicit (opportunity costs...) and explicit costs.