Unit 5 Micro

Significance Of Resource Pricing

* Determines money income for the household
* Cost minimization
* Resource allocation

Cost minimization

* Business are looking to minimize costs
* Best combination of resources

Resource Allocation

* The resources we desire more, we pay more for so we get more of them
* playing football vs playing soccer
* Soccer in the US vs soccer in Europe

Assume perfect competition in both

* Product markets
* Resource markets

Derived demand

the demand for a particular good or service that arises as a result of the demand for another good or service.

Derived demand depends on

* Marginal product of resource
* price of product it produces

Marginal Product

the additional output that is generated by using one additional unit of that resource while keeping all other inputs constant.

Marginal product example

Every hour, a pizza shop adds 2 pizzas. Add another worker, they are adding 3 pizzas. This is their marginal product

Marginal revenue product (MRP)

The additional revenue produced 

Marginal revenue product formula

Change in total revenue / change in resource quantity

Difference between MP and MRP

MRP measures the change in revenue, whilst MP measures the change in production

Marginal resource cost

the additional cost that a firm incurs when it hires one additional unit of a particular resource

MRC formula

change in total cost / change in resource quantity

MRP = MRC rule

To maximize profit, hire additional resources as long as the additional product produced adds more to revenues than to costs

MRC exactly equal to

wage rate

Determinants of resource demand

* Changes in product demand
* Changes in productivity
* Changes in price of substitute resources
* Changes in the price of complementary resources 

Changes in product demand

* Huge increase in demand, price will go up
* Workers are worth more when this happens
* Increase in demand = increase in labor

Change in productivity

* Workers become more productive 
* Quantities of other resources
* Technological advance
* Quality of the variable resource

Changes in price of substitute resources

* Substitution effect
* Output effect
* Ex. Self checkout lanes

Changes in the price of complementary resources 

Need ipads to do your job, ipads become cheaper, can higher more people with cheaper software 

Substitution effect

a firm will purchase more of an input whose relative price has declined and, conversely, use less of an input whose relative price has increased.

Output effect

the firm will purchase more of one particular input when the price of the other input falls and less of that particular input when the price of the other input rises.

Least - cost combination of resources

Trying to have the least cost combination of resources

Least cost rule

* Minimize cost of producing a given output
* __Marginal Product of labor__ = __Marginal product of capital__

Price of labor                              price of capital

Profit maximization combination of resources

Are you trying to maximize profit? 

Profit maximizing rule

MRP L = MRP c = 1
P L P C

income distribution

Paid according to value of service

* Workers
* Resource owners


* Cashier vs neurosurgeon

Inequality

* Productive resources unequally distributed

Wages

* The price paid for labor
* Direct pay + benefits (such as healthcare)

Wage Rate

How much you're paid (across different jobs, countries, etc)

Nominal Wage

How much money your actually bringing in (per hour, day, year) ($ value)

Real wage

Amount you can obtain with nominal wages. “Purchasing power” of nominal wages.

Labor demands depend on productivity

More productive you are, the more you make

You should be building skills to make more money

More productive = More money

US labor is highly productive because of its

* Plentiful capital
* Access to abundance of natural resources
* Labor quality (education system)
* Advanced technology
* and other factors

Market demand for labor is

The sum of firm demand. The demand for labor is all the firms in the market.

Market supply for labor is

Up sloping

Market supply is up sloping because

Higher wage, more people are willing to work

Market supply for labor has

Inter-industry competition

Labor market equilibrium is where

MRP = MRC

In a monopsony

The employer has the buying power

ex: one league, firm, team, etc

Monopsony characteristics

* Single buyer
* Labor immobile
* Firm is “wage maker”
* Up sloping labor supply to firm
* MRC higher than wage rate

Labor immobile

Cannot move around like you can in soccer leagues. The NBA is only in america.

The firm is a wage maker, examples

steel mills and coal mines. One mine, one wage maker

Monopsonys can maximize profit by

Hiring smaller number of workers at a lower wage than a competitive worker

Labor unions are

Organizations of all workers in a certain field

Labor unions can be

local or national

Labor union’s goal is to

Wage raises through collective bargaining

Labor unions are often used to

offset power imbalance

Labor union examples

Nurses, teachers, professional athletes.

Consequences of unions

* Higher unemployment
* Restricted ability to demand higher wages

Unions are good when

Faced with a monopsony, but are bad when faced with a competitive market.

Minimum wage acts as

a wage floor

Minimum wage creates

a surplus of workers (unemployment)

Case against minimum wage

Hurting the people your supposed to be helping

Case for minimum wage

Is it ethical / livable to have no wage floor

Biggest differential in wages comes from

education

Wage differential factors include

* Education
* Prevention from moving to higher paying jobs (non-compete agreements)
* Market imperfections (Lack of job info, unions, immobility, etc)

Economic Rent

Price paid for the use of land and other natural resources

Economic rent examples

* Land in a prime location
* Natural resources such as oil or gas (unique resources in high demand)

Interest

Price paid for the use of money

Interest rates reflect

the risk that the money will not be repaid

Interest rates are affected by four factors

* Risk
* Maturity
* Loan size
* Taxability (is it tax-exempt?)

Time - Value of money

Money is more valuable the sooner it is obtained

Compound interest

the total interest that accumulates over time on money that is placed into an interest-bearing account