AP Micro Mod 4: Supplemental Notes

Transcription

1 AP Micro Mod 4: Supplemental Notes 1 Make sure you know Function of Financial Markets: Bring buyers and sellers together Reduce transaction costs Increase the liquidity of financial assets Reduce the risk of owning financial assets Circular Flow Diagram Connections: Entrepreneurship/Household = profits from investments Labor = wages Capital/Land = rent (these resources come from Households) Investors = interest Firms = revenue from factor/receipts from product Perfect Competition Perfectly Competitive Labor Market Characteristics: Monopsony Many small firms are hiring workers No one firm is large enough to manipulate the market. Many workers with identical skills Wage is constant Workers are wage takers Firms can hire as many workers as they want at a wage set by the industry 3 1

2 This is where firms go to hire works, rent land, borrow money, and so on. Resource demand is DERIVED DEMAND. Demand for any input is derived from the demand for the output that those inputs produce. Main points about resource demand: o Firms will hire workers (or other inputs) until the Marginal Resource Cost (MRC) = Marginal Revenue (MRP) MRC: The additional cost to a firm of hiring one more worker. MPP: Marginal physical product. This is the number of additional units contributed by the last worker hired. MRP: The amount of additional revenue contributed by the last worker hired. MRP = MPP x P 4 o In a resource market, the Supply curve represents households (who provide the productive resources) and the Demand curve represents firms (which require resources to produce anything). o A firm s Demand for labor curve is the same as the MRP curve. o In a purely competitive labor market, firms are wage takers; in other words no matter how many workers a firm hires, it cannot affect the market wage rate. 5 Make sure you know Determinants of labor/resource demand (causes shift) demand ivity of resource Prices of other resources Substitute resources use cheaper resources and those providing higher output Complementary resources price of complement resource impacts demand for labor Factors that impact elasticity of labor supply: Social norms views on types of workers Training time i.e. doctor vs. garbage collector Availability of labor unemployment factors Time available to fill the position 2

3 Industry graph for PC Labor Market Supply curve belongs to workers and demand curve belongs to firms. Marginal : additional output by employing additional unit of labor. Marginal Revenue of Labor: dollar value of additional worker. So, the relationship between MP and MRPL is MRPL = Price times MP in competitive market since the price is constant. All workers make the same wage in perfectly competitive labor market. Wage S L Wage W E S L =MRC Q E Industry D L Q Q e Firm D L =MRP Q Example: Stone Inc., owns a clothing factory and hires workers in a competitive labor market to stitch cut denim fabric into jeans. The fabric required to make each pair of jeans costs $5. The company s weekly output of finished jeans varies with the number of workers hired, as shown in the following table: Number of workers Jeans (pairs/wks) If the jeans sell for $35 a pair, and the competitive market wage is $250 per week, how many workers should Stone hire? How many pairs of jeans will the company produce each week? 3

4 Example Continued: Wage = $250/wk Cost of Jean = $5 Price of Jean = $35 Number of workers Jeans (pairs/wks) Marginal MRP (MP x P) x 35= = x 30= = x 35= = x 35= = 8 8 x 35= = 5 5 x35= 175 Optimal number of workers is determined where MRPL=Wage in perfectly competitive market. So you look for the number where MRPL=Wage. In comparison, if you hire 6th person, then MRPL < Wage. Therefore, you should hire 5 workers (as 280 > 250). Profit Maximizing Rule for Combining Resources MRPL MRPK = = 1 MRCL MRCK This means that the firm is hiring where MRP = MRC for labor and capital The price of labor is $2.00 and the price of capital is $1. The marginal product of labor is 200 and the marginal product of capital is 50. What should the firm do? MRPL MRCL = = 1 MRPK MRCK 200 = 50 = 100 (labor) to 50 (capital) 2 1 Decrease capital and increase labor (since labor is more productive) so that the marginal product of capital rises and the marginal product of labor falls. 4

5 Least Cost Combination of Resources for a set production amount... Step 1: Find out which resource is more productive MRP L = MRP K 5 = 10.5 MRC L MRC K = 3.5 So we find that machines are more productive. Step 2: Find cost ratio for resources. Price of Labor = 2 Price of Machine = 3 So machine is 1.5 more expensive than labor Least Cost Combination of Resources for a set production amount... Step 3: Find Least Cost Combination of resources for set production amount. So we will hire 5 machines to go with 3 workers to produce 99 units. Wage Minimum Wage Surplus of workers (Unemployment) S $15 $8 $6 What s the result? Q demanded falls. Q supplied increases. So higher wage but less workers hired D Q Labor 5

6 Perfect Competition Imperfect Competition: Monopsony Characteristics: Monopsony One firms hiring workers The firm is large enough to manipulate the market Workers are relatively immobile and have specialized skills Firm is wage maker To hire additional workers the firm must increase wages Examples: Hospitals Midwest small town with a large Car Plant NFL Monopsony Graph MRC > wage Remember: To hire additional workers the firm must increase wages to attract specialized workers 6

7 Monopsony Observations The monopsonist will employ workers up to the point where the MRP = the MRC. The monopsonist will only pay the wage necessary to attract Qm workers At Qm (quantity of labor demanded by the firm), the firm has to pay a wage rate of Wm. If this were a purely competitive labor market, the Supply curve and the MRC curve would be the same, and firms would employ Qpc and pay a wage rate of Wpc. Conclusion: Monopsony employers hire fewer workers and pay lower wages than firms in a purely competitive labor market. IMPORTANT NOTE: When government raises minimum wage, BOTH the wage AND number of workers hired in a monopsony will increase. The firm will increase production in the product market to generate greater revenue to off-set the higher labor cost. # of workers Monopsony Observations From the previous module, we learned that a monopoly chooses to produce less output and can charge a higher than necessary price. This, means that MR<P in a monopoly market. Therefore, it makes sense when we look at the labor market that the Marginal Revenue in a monopsony is less than the Marginal Revenue in a perfectly competitive labor market (MRP m < MRP c ). So to find the MRP of a worker, you would subtract the Total Revenue of the previous number of workers from the Total Revenue of the next worker in a monopsony labor market. Jeans (pairs/ wks) Marginal Price Total Revenue (P x Q) Marginal Revenue ( TR) = = = = = = = = = = =