ap-micro-unit-5-summary1

Unit 5: The Resource Market (aka: The Factor Market or Input Market)

Perfectly Competitive Labor Market Characteristics

• Many small firms hiring workers

• No single firm can manipulate the market

• Many workers possess identical skills

• Constant wage rate

• Workers are wage takers

• Firms can hire as many workers as desired at wage set by the industry

Perfect Competition vs Monopsony Resource Markets

• Perfect Competition: Many firms, none large enough to influence wages.

• Monopsony: One firm hiring workers, has some wage-setting power.

Resource Demand

Derived Demand

• Demand for resources is based on the demand for products they help produce.

Examples:

1. If demand for pizza increases:

   • Demand for cheese, cows, milking machines, and veterinarians increases.

2. If demand for cars increases:

   • Increases the demand for parts and related services.

Marginal Resource Cost (MRC)

• Additional cost incurred by hiring an additional resource (worker).

• In perfectly competitive labor markets, MRC = market wage.

• Formula: MRC = Change in Total Cost / Change in Inputs

• Example: If MRC of unskilled worker is $8.75, that is the wage.

Marginal Revenue Product (MRP)

• Additional revenue generated by an additional worker.

• In perfectly competitive product markets, MRP = Marginal Product of the resource × Price of the product.

• Formula: MRP = Change in Total Revenue / Change in Inputs

• Example: If Marginal Product of 3rd worker is 5 and price is $20:

  • MRP = 5 × $20 = $100

Resource Employment Decision

• Firms hire resources (workers) until:

  • MRP = MRC

Market Graph Dynamics

Equilibrium Analysis

• Various graphs illustrate the interplay between industry and firm level employing.

• Graphs include wage determination and quantity adjustments.

Demand for Labor

Definition and Law of Demand

• Demand for labor refers to quantities of workers businesses want to hire at different wage rates.

• Law of Demand for Labor: Inverse relationship between wage and quantity of labor demanded.

Supply for Labor

Definition and Law of Supply

• Supply of labor is the number of workers willing to work at various wages.

• Law of Supply for Labor: Direct relationship between wage and quantity of labor supplied.

Labor Market Equilibrium

• Equilibrium wage is determined by the intersection of labor supply and demand.

• Equilibrium adjusts as market conditions change.

Differences in Wage Rates

• Labor Market Imperfections:

  • Insufficient job information results in poorer employment choices.

  • Geographical immobility can lead to lower wages.

  • Unions can increase wages through collective bargaining.

  • Wage discrimination by race or gender may exist (illegal).

Government Interventions

Minimum Wage

• A government-imposed wage floor above the equilibrium wage can lead to unemployment (surplus of labor).

• Debate on whether increasing minimum wage is beneficial or detrimental to the economy.

Globalization and Outsourcing

• Firms seek to reduce costs and maximize profits, resulting in globalization.

• Outsourcing: Sending jobs overseas to leverage cheaper labor, impacting local employment.

• Advantages: Lower prices for goods, reduced poverty in developing countries.

• Disadvantages: Increased unemployment in the U.S., lower tax revenues, inadequate worker protections overseas.