Copy of Unit 5.2- Labor Mkt in PC and Monopsony

Jan. 7 AP Micro Today

• Unit: 5.2: MRP = MRC Rule and Factors Markets in Perfect Competition

• MO: You Will Be Able To (YWBAT) explain the MRP = MRC rule and to resource maximize in a perfectly competitive market.

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• Unit: 5.2: Perfectly and Imperfectly Competitive Labor Markets

• Copyright: ACDC Leadership 2022

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• Concepts: Resource Market Marginal Analysis using the MRP = MRC Rule

  • MRP = Marginal Revenue Product

  • MRC = Marginal Resource Cost

  • Similar to the MR = MC rule!

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• Graphical Elements:

  • SL: Supply of Labor (SL)

  • DL: Demand for Labor (DL)

  • Each firm should hire quantity where MRP = MRC (i.e., DL = SL).

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• MRP Defined:

  • MRP = Additional revenue generated by an additional worker or unit of another resource.

  • Examples:

    1. Labor market: Revenue from an additional worker.

    2. Pizza context: Revenue from additional cheese.

  • Firm Policy: Firm will not pay more for workers than the marginal amount of revenue generated.

  • MRP is the firm’s resource demand curve.

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• Resource Demand Curve:

  • Data Points:

    • Example of calculating MRP using Total Product and Marginal Product.

  • Each firm will pay up to the point of MRP because it represents the additional revenue generated by hiring an additional worker.

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• MRP vs. MP:

  • Explanation of the relationship between Marginal Product (MP) and Marginal Revenue Product (MRP).

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• Calculating MRP:

  • Formulas:

    • MRP = Product Price x Marginal Product

    • MRP = Total Rev. 2 - Total Rev. 1

  • Example data calculations representing MRP.

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• MRC Defined:

  • MRC = Additional cost of an additional worker/unit of resource.

  • Example: Additional cost of more cheese in a pizza context.

  • MRC calculation formula:

    • MRC = Change in Resource Total Cost / Change in Resource Quantity;

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• MRP = MRC Rule:

  • To maximize profit, hire as long as each new worker adds more to total revenue than to total costs (MRP=MRC).

  • Analyze under-utilization (MRP > MRC) vs. over-utilization (MRP < MRC).

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• Perfectly Competitive Labor Markets:

  • Copyright: ACDC Leadership 2022

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• Characteristics of Perfectly Competitive Labor Market:

  • Large number of workers with identical skills;

  • Numerous small firms hiring workers;

  • Firms are wage takers, cannot influence the market wage;

  • Market wage rate = Firm’s MRC.

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• Graphical Analysis:

  • Market wages reflect each firm’s total resource costs and marginal resource costs.

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• Supply and Demand in Perfect Competition:

  • MRC = Labor Supply Curve for each firm due to wage-taking behavior.

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• Summary:

  • Reinforcement of hiring principles where MRP = MRC in a perfectly competitive market.

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• Impact of Increased Worker Supply:

1. Supply increase shifts right;

2. Market equilibrium wage decreases;

3. Each firm’s MRC curve decreases;

4. Firms hire more workers.

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• Graphical Demonstration of Labor Market Changes:

• Key changes in wages and quantities in market conditions.

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• Labor and Non-Labor Costs:

  • Distinction between labor costs and payments to suppliers of land/capital.

  • Firm in perfect competition earns only a normal profit.

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• Comparison of Product and Labor Markets:

  • Identical characteristics in both markets.

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• Finding Equilibrium in Markets:

  • Comparison of product market dynamics with resource market hiring processes.

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• Jan. 8 AP Micro Today:

  • Unit 5.2: Lecture on Factors Markets in Imperfect Competition.

  • Important dates for upcoming tests.

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• Imperfectly Competitive Labor Markets:

  • Overview of characteristics and dynamics.

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• Reinforcement of Characteristics in Perfectly Competitive Labor Market:

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• Market Imperfections:

  • Discussion on the middle ground of competitive market.

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• Labor Market Imperfections:

  1. Insufficient job info, geographical immobility, unions, and wage discrimination factors affecting wages.

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• Monopsony Characteristics:

  1. Pure and Virtual monopsony definitions;

  2. Limited worker mobility;

  3. Employer as wage maker.

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• Test Preparation:

  • Importance of monopsony graph for AP exam; able to draw and identify.

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• Key Features of Monopsony Graph:

  • Upward sloping supply curve;

  • Relationship between MRC, wage, DL, MRP.

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• Supply Curve Factors:

  • Limited supply of labor requiring higher wages; opportunity costs for workers; diminishing marginal returns to labor.

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• Labor Market Dynamics in Monopsony:

  • Explanation of wage increases alongside worker quantity.

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• Comparison Between Markets:

  • Distinctions between Labor Mkt and Monopsony vs Product Mkt in terms of MRP/MRC dynamics.

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• Resource Maximization in Monopsony:

  • Hiring based on MRC = MRP principles at equilibrium (QE).

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• Inefficiencies in Monopolistic Markets:

  • Comparison to Perfect Competition; underpayment and under-hiring scenarios.

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• Cost Dynamics:

  • Analyses of profits and costs within monopsonies and perfectly competitive firms.

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• Profit Maximization Strategies:

  • Methods to achieve MRP = MRC; implications of firm behaviors.

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• Identifying Key Financial Figures:

  • Working through examples of wage, quantity, labor cost calculations.

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• AP Micro Agenda:

  • Summary of upcoming testing dates and homework tasks.