Published by Audra Whitehead Modified over 6 years ago. Inelastic Supply D1D1 to determine rent. Chapter 15 - Resource markets. Economic Resources Resource Resource Payment land rent labor wages capital interest entrepreneurial ability profit. Markets for Factor Inputs. Slide 2 Markets for factor inputs In some examination questions, one is asked to comment on factor market questions, such as.
Begin Unit 4: Factor Markets 3. The DMRP directly affects bargaining power between workers and employers, except the rare theoretical case of monopsony. Whenever a proposed wage is below DMRP, a worker may gain bargaining power by shopping his labor to different employers. If the wage exceeds DMRP, the employer may reduce wages or replace an employee. This is the process by which the supply and demand for labor inch closer to equilibrium. Financial Analysis. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.
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We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Economy Economics. Marginal Product of Labor : This table shows hypothetical returns and marginal product of labor.
Note that in reality this firm would never hire more than seven employees, since a negative marginal product is bad for the firm regardless of the wage rate. The law of diminishing marginal returns ensures that in most industries, the MPL will eventually be decreasing.
The key factor is that the variable input is being changed while all other factors of production are being held constant. Under such circumstances diminishing marginal returns are inevitable at some level of production. The marginal revenue product of labor is the change in revenue that results from employing an additional unit of labor. The marginal revenue product of labor MRPL is the change in revenue that results from employing an additional unit of labor, holding all other inputs constant.
This can be used to determine the optimal number of workers to employ at an exogenously determined market wage rate.
Theory states that a profit maximizing firm will hire workers up to the point where the marginal revenue product is equal to the wage rate, because it is not efficient for a firm to pay its workers more than it will earn in revenues from their labor. Note that the change in output is not limited to that directly attributable to the additional worker.
For example, changes in technology or the quantity of other inputs will change the marginal product of labor, and changes in the product demand or changes in the price of complements or substitutes will affect the price of output. These will all cause shifts in the MRPL.
Firms demand labor and an input to production. Compared to the competitive market, we see that the monopsonist will employ fewer workers and pay a lower wage rate. Recall from consumer behavior, consumers maximize their utility by purchasing those goods or services that give the highest marginal utility per dollar spent.
If a consumer could get more marginal utility per dollar from one good than another, they should purchase more of that good and less of the other, increasing their total utility.
Thus the decision rule for utility maximization is to purchase that combination of goods such that the ratio of marginal utilities per dollar are the same i. This same concept can be applied to the resource market to determine the cost minimizing combination of resources to produce a given level of output.
In construction, for example, a certain level of output may be attained by various combinations of labor and capital. A nail gun is able to do the work of several workers with hammers. Other examples: would be using different foods to meet given dietary guidelines, e. To reach a certain number of potential customers at the lowest cost, a firm has to decide what combination of media, i. To determine the cost minimizing combination of resources to produce a given output level, a firm should select that resource combination that gives that greatest marginal product per dollar.
When determining the cost minimizing combination of resources, we must first divide the marginal product of the resources by the resource price. For simplicity, we will assume that labor and capital are substitutes in production, meaning that there is not a certain amount of labor required to operate the capital.
If we were assigned to produce an output level of 66 units, what combination of labor and capital should we employ? The first unit of labor gives 1. Since this would give us only 12 units of output, we need to employ more resources. The second unit of labor and the first unit of capital have the same marginal product per dollar, so we are indifferent to which we employ first and since we need both, we will employ each.
Still needing more resources to reach our output level of 66 units, we compare the third unit of labor and the second unit of capital. Both have the same marginal product per dollar and we need both to reach our given output level. Thus we will employ three units of labor and two units of capital to produce 66 units of output. The cost minimizing combination would be to employ four units of labor and 2 units of capital. Finding the cost minimization combination of resources to produce a given output level is a necessary but not a sufficient condition for profit maximization.
The firm must also determine the output level that maximizes profits. As discussed earlier, a firm must compare the marginal revenue product to the marginal resource cost of using the resource. To determine the profit maximizing input level, we would first compute the marginal revenue product for each input then divide it by the resource price or marginal resource cost.
We then determine which inputs, if employed, would add more additional revenue than cost. In looking at labor, we would employ four units. If we employed the fifth unit, we would only generate 80 cents of revenue per dollar cost. In looking at capital, we would employ three units of capital. If labor and capital were the only costs, we could determine the resulting profit.
There is another interesting feature about resource markets that is specific to labor. This feature arises because, unlike other inputs, workers are utility maximizers and they experience a trade-off between work and leisure. This interesting trade-off may result in an unusual supply curve for labor which exhibits a backward bending segment at higher wage rates. The backward bending nature arises because it is possible when wages get high enough that the quantity supplied of labor declines with further wage increases.
In general, this can be explained quite easily using substitution and income effects much like they were used for consumer choice and demand. The worker faces a trade-off between labor and leisure. As the price of labor increases, the substitution effec t leads the individual to supply more labor and have less leisure since the opportunity cost of leisure has increased.
However, as the wage rate rises, individuals are able to have the same income level with fewer hours of work, allowing for more leisure time. The income effect is often negative and if the income effect is greater than the substitution effect, the individual will reduce the quantity of labor supplied as the wage rate rises. It is important to keep in mind that the wage rate is typically only a portion of the compensation to employees and that workers should consider the entire package when evaluating employment alternatives.
According to the Bureau of Labor Statistics, total benefits make up Think of what you would like to have in a career. While monetary reward is important, there are many other factors that individuals seek for in their employment, particularly when they consider the portion of their life that will be spent working.
Many of these factors are non-pecuniary or non-monetary but still are important factors of a career. Since individual preferences vary, the factors that individuals seek for in a career will also vary.
These factors may include: a sense of accomplishment, flexibility, opportunities for personal growth or advancement, a career that is challenging, the location where one lives, the people that one would work with, or the lifestyle that can be lead, such as time to be with family or serve in the Church or community. As Mark Millburn pointed out in the Business Summit, there are some things money can and cannot buy.
In some labor markets, workers have joined together and formed a labor union. By bargaining collectively with the employers, unions seek to exercise their market power and demand higher wages, better working conditions, or other benefits.
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