micro CRAM unit 5

factor prices (factor payments)

payments made for use of factors of production:

• land is paid RENT

• labor is paid WAGE

• capital is paid INTEREST

• entrepreneurs are paid PROFIT

demand for labor

diff quantities of workers that businesses are willing and able to hire at different wages (inverse)

supply for labor

diff quantities of individuals that are willing and able to sell their labor at different wages (direct)

firms produce where …

MRP=MRC

minimum wage

minimum amount employers are allowed to pay their workers (wage floor)

marginal resource cost (MRC)

the additional cost of an additional resource (worker).

• in perfectly competitive labor markets, the MRC = wage set by market and it is constant.

formula for MRC

MRC = change in total cost//change in inputs

marginal resource product (MRP)

the additional revenue generated by an additional worker (resource).

• in perfectly competitive product markers the MRP = marginal product of resource X price of product.

MRP formula

MRP = change in total revenue// change in inputs

shifts for demand of labor

• price of output

  • if price of product goes up, the worker that produces the product becomes more valuable.

  • derived demand- the demand for resources is derived by the products they produce.

• productivity of the worker

  • a more productive worker is more valuable to a business

• change in price of other resources

  • substitute resources (ex: what happens to demand for assembly line workers if price of robots falls?)

  • complementary resources (ex: what happens to demand for laggers if price of lumber increases significantly?)

shifts for supply of labor

1. education + training

2. availability of alternative options

3. immigration + mobility of workers

4. cultural expectations

5. working conditions

6. preference of leisure

reasons for differences in wages:

• labor market imperfections

  • insufficient/misleading job information

• geographical immobility

  • many people are reluctant or too poor to move, they accept lower wage.

• unions

  • collective bargaining + threats to strike often lead to higher equilibrium wages

• wage discrimination

  • some people get paid differently for doing same job based on race/gender

perfect competition labor market characteristics

• many small firms hiring workers

  • no one firm is large enough to manipulate the market

• many workers w/ identical skills

• wage is constant

• workers are wage takers

  • firms can hire as many workers as they want at wage set by industry

hire workers if …

MRP > W

stop hiring when…

MRP = W

don’t hire if…

MRP < W

least cost rule

MPx/Px = MPy/Py

imperfect competition: monopsony charactersitics

• one firm hiring workers

  • firm is large enough to manipulate market

• workers are relatively immobile

• firm is a wage maker

  • to hire additional workers, firm must increase wage.

• Ex: Central American sweatshops, midwest small town w/ large car factory, NCAA

for monopsonies…

the MRC does NOT equal the supply

• *produce at MRP=MRC

factor markets

involve the buying + selling of the factors of production (land, labor, capital, and entrepreneurship)