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i:; "#FsrilEl[:lt ,it lffi.ll:itil'ijli How Many Workers Should Be Hired? & fig,rre ++.2 How Many Workers to Hire per Day for $2 Yo-Yos Number of Workers Level of Output (number of yo-yos produced per day) Hired (inputs) 0 (O) Marginal Price at Which Physical Yo-yos Can Product (MPP) Be Sold 0 Total Revenue (P x a) $2.00 Marginal Revenue Product (MPP x MR) $o - 2x2O 1 20 20 2.00 2 50 30 2.00 100 60 3 70 20 2.00 140 40 4 85 T5 2.O0 170 30 5 95 10 2.00 190 20 6 100 5 2.O0 200 10 40 $40 1. Why does the number of extra yo-yos produced decrease B ecause of iliminishing marginal retuffis 2. If the wage is $30 per da5 how many workers shouldAcme hire? Why? Acme shoulilhire four workers. Profit is maximizeil where MKP = wdg€, At four worlccrs, MRP is $30 anil the wage is $30. At five workers, MRP is $20 and the wage is $30. It iloes not pay to hire the fifthworken as more workers are hired? If the demand for yo-yos increases so that Acme can sell as many yo-yos as it wants for $3 each, what effect will this have on Acme's level of employment? It will now hire ftve workers. At $3, MRP for five workers is $i0 rather than $20 (P x MPP) so the higher price makes it profitable to hire the fifthworlccr, To make as much.profit as possible, in this case a firm should hire an additional worker as long as that worker's marsinal reyenue oroduct is ereater than his or wase her Advanced Placement Economics Teacher Resource Manual @ National Council on Economic Education, Nry York, N.Y. 249 The Derived Demand for a Resource The key to understanding resource prices in factor markets is to see the relationship between demand in the factor market and demand in the product market,You should review the definitions of marginal physical product (MPP), marginal revenue (MR) and marginal revenue product (MRp). The demand for a resource (land,labor, capital or entrepreneurship) is called derived demand because it is derivei (comes) from the demand for the goods and services that are produced by these resources. 1' Complete Figure 45.1. The yo-yo manufacturer operates in a perfectly competitive factor market and in a perfectly comPetitive product market. In a perfectly competitive faitor market, market supply and demand determine the price of the factors of production. In a perfectly competitive product market, supply and demand determine the price of the product g ffiS rigu.e45.t Data for aYo-Yo Manufacturer Units of Resource Total Product Marginal Physical Product (MPP) Price at Which Yo-Yos Can Be Sold Revenue $2.00 $0 Total (Pxa) Marginal Revenue Product (MPP x MR) 0 0 1 8 8 2.AO 16 16 2 14 6 2.OO 28 12 3 19 5 2.00 38 10 4 23 4 2.00 46 I 5 26 3 2.00 52 6 6 28 2 2.00 56 4 7r 29 1 2.00 58 2 The marginal revenue product (MRP) shows the additional revenue the firm will receive from the additional output produced by adding another unit of the factor / resource. This can be calculated as ATR/AResource or MPp x p. This is the firm's demand curve for the resource. 2' 250 inthe last column of Figure 45.1 to graph marginal revenue product on Figure 4''2'Labelthe MRP curve MRP = D. Plot each number on the iine, not at the midpoint. Use the answers Advanced Placement Economia Teacha Resource Manual @ National Council on Economic Education, Nw york, N.y ffiflffiil ffiu$=+u*$,8ffiffi'+l1#,ffiffiFffi ffi rispre +s.z Price and Quantityfor a Resource $to 15 1 \ ,q 14 13 s'& % 12 11 Uro \ Fe P8 f lrJ \ ol a H6 \ qN \ IP D 1 0 23456 UNITS OF RESOURCE DEMANDED 3. MRP depends on two variables. One is marginal physical product (MPP), sometimes referred to as marginalproduct.The second variable is the price of the good or service being produced. For each of the following situations, identifrwhether MPP of the factor or P of the product is affected and indicate whether the demand for a resource would increase or decrease. Marginal Situation (A) A new yo-yo machine increases productivity of labor Physical Demand for labor Product Price (inc. / dec.) x Increase x (B)The price of yo-yos increases (C)Better training increases the output of yo-yo labor x (E) New technology increases the output of yo:yo labor x (F) Consumers become sick of yo-yos Placement Economics Teacher Resource Manual @ Increase x (D)The demand for yo-yos increases National Council on Economic Education, NewYork, N.Y. Increase Inqease Increase x Decrease $ffi The Orcly (Yo-Yo) Game in Tbwn ffi ,,*, e46.2 How Many workers to Hire per Day for varying prices yo-yos of Number of Workers Hired (inputs) Level of Output (number of yo-yos produced per day) 0 (o) Marginal Physical Product (MPP) 0 Price at Which Yo-yos Can Be Sotd Revenue $0.00 $o Total (Pxa) Marginal Revenue Product (change in TR from previous levet) 1 20 20 5.00 $100-$5x20 2 $100 50 30 4.00 200 3 rco 70 20 3.50 245 45 4 85 15 3.00 255 10 5 95 10 2.00 190 b 100 -65 5 1.00 100 -90 1' How is Acme's demand schedule for labor different now from when it sold all its product fijr $2 for labor, which is its MRp schedule, now ileclin"sioth because of the law of iliminishing rcfitrns and because Acme must lower itsprice to sell more. The ilemanil for Inbor is less elastic because the ilemanil for Acme's product is less elastic. The demanil curve now is each? Acme's demand schedulc steepen Acme's decision-making rule is the same: If an additional worker adds more to revenue than cost, this worker should be hired. If Acme can still hireworkers at $io per day, how many workers should Acme hire? why?-Three workcrs, Beyonil this level, workers do not generate enough addi- tional revenue to cover the cost of hiring thirn. Flow does the number of workers hired by the monopolist differ from the number in Activity 45? Ithires fewer workers, 252 AdvancedPlacementEconomisTeacherResourceManual @NationalcouncilonEconomicEducation,Newyork,N.y r Market Pricing *1:::1t.::al.1t5 it, (ABC) is a price taker in both the Tn* riinf,ose that the Acme Belt company in a perfectlv competitive perfectly iompetitive *"ri.o and purchases labor .|ll,T, ;ffi:;;;;;; " market. PartA l. Fill in the blank sPaces in Figure 47.1. Note that marginal of data are placed between levels emploYment. / 47.I n! .__ Firm ilJUtt Demand for the Perfectly Competitive Figure EmploYment Number of Workers (L) TotalOutPut Per DaY 0-* 0 ln- 1 30 2 MarginalPhYsical Product (MPP) (^o/^L) \10 as 80.00 100.00 70.00 87.50 60.00 75.00 50.00 62.50 20 40.00 50.00 S- ts 30.00 37.50 S- ro 20.00 25.00 0 0 -20.00 -25.00 195 I 205 10 205 11 195 6 - 2s.00 50.00 8 5 $ $20.00 40.00 7 4 $2.00 >-20 70--- \\is 105 =135 =-S0 160 -25 >180 3 Marginal Revenue Product (MPP x P) Ps = $2.50 Po = >-0 --10 AnindividualfirmsfactordemandcurveisrestrictedtoarangeoftheMRP'cuwethatisdownward sloping, beginning at L = 3 for ABC' 2. If the marginal and the price of belts is $2 per resource cost, or wage, faced by ABC is $20 then the quantity of labor demandedbyABC is belt' 9 is 3. If the marginal resource cost, or wage, faced by ABc $20 is 9 then the q"""tity of labor demanded byABC and the price of belts is $2'50 per belt' 253 AdvancedPlacernentEconomicsTeaclrerResourceManual@NationalCouncilonEconomicEducation'NewYork,N.Y. Part B ,t Now suppose that ABC i, ot. of 1,000 identical firms that purchase labor in this perfectly competitive labor market. To get the market demand curve for labor, we need to sum over each individual firmt MRP, curve at each given wage. Given our assumption that the firms are identical, we can simply multiply the quantity of labor demanded by a single firm by the number of firms in the market. In Figure 47.2, dataare for P = $2.00 and P = $2.50. HH ,,*, e 47.2 The LaborMarket P = 92.00 Number P = $2.50 of Number of Workers Workers Demanded Demanded By ln Firm ABC Wage (Po = $2) 9 $20 30 I 40 7 50 6 60 5 70 4 80 3 the Market Numberof Number of Workers $2) Supplied Wage (Po = 92.50) 9,000 3,000 $25.00 g 9,000 4,000 37.50 g 7,000 5,000 50.00 7 6,000 6,000 55.00 6.5 5,000 7,000 62.50 6 4,000 9,000 75.00 5 3,000 9,000 87.50 4 100.00 3 (Po = If the wage is $20 and the price of belts market is 1,000 254 x 9 ,= 9.000 Numberof Workers Workers Demanded Demanded By Firm ln the ABC Market Number of Workers (ph = $2.S0) Supplied 9,000 3,500 9,000 4,750 7,000 6,000 6,500 6,500 6,000 7,250 5,000 8,500 4,000 9,750 3,000 11,000 is $2 per belt, then the quantity of labor demanded in the units of labor. Advanced Placement Economics Teacher Resource Manual @ National Council on Economic Education, NewYork, N.Y. Figure 47.3 shows the market labor supply curve as well as the firm and market demand curves when pu = $2. The supply curve shows that, ceteris paribus,as the wage increases, more workers are willing to supply their labor to this market, and existing workers in this market are willing to supply more labor. ffi$ rigure az.a Market and Firm Demand for Labor Market IU FirmABC $80 tIl l- L krfJC $80 #ss ilso ilso o g o MRPL(PB = $2.50) = MRPl(Ps = $!) 1234567891011 1234567891011 THOUSANDS OFWORKERS NUMBER OFWORKERS .3 andthe table in Figure 47.2,the equilibrium wage in the market is 6,00A workers. .The equilibrium quantity of labor in this market 5. On the graphs in Figure $50 47 is 6. Given that this is a competitive labor market, ABC faces a marginal resource cost, or wage, $s0 7. Because ABC can purchase as much or as of little labor as it wants without affecting the market, it is said to face a perfectly elastic labor supply curve. Draw the labor supply faced by the firm in the Firm ABC graph above. 8. Using a different color pen or pencil, graph ABC's and the market's labor demand curves in Figure 47.3,given that the price of a belt has increased to $2.50. 9. Designate the new market equilibrium is now $55 . based on Figure 47.2.The equilibrium wage in the market The equilibrium quantity of labor in this market is nowi;!00- workers. 10. What has happened to the labor supply curve faced by the firm? It shifteil up to ahigher wage rate. Admnced placement Economics Teacher Resource Manual @ National Council on Economic Education, NewYorlq N'Y' 255 How wagu Are Determined in competitive Labor Markets ffi rigure +a.t Wages and Labor $5.50 5.00 4.50 S 4.00 a t! t- 3.50 tr t! 3.00 o g 2.50 2.00 1.50 1.00 D .50 0 100 200 300 400 500 600 zoo eoo 900 1,000 QUANTITY OF LABOR Use Figure 48'1, which shows the supply and demand curves in a for a perfectly competitive labor market perfectly competitive product market, to answer these questions: 1' what two the factors affect the demand for labor? The price of the product produceilby thatlabor and productivity of the hbor z' rt* does marginal revenue product affect the demand for labor? A firm will hire labor until the wage = MKP The perfectly competitive cannot control the wage; so where wege = MKp, the firm amount of labor ilemanded is determined. The MW is the demand curve for lnbon A ftrm wiII hire worlecrs as long as the workers contribute more to TR than to TC. To calculate how much a worker contributes to TR, yultioly the MPP of the factor by the price of the good in the outptut market, which is MHp MRp and demand are necessarily the same. 3' why is the demand curve ro, tuuo, downward sloping? Because under perfe* competition the product price is constant, iliminishing marginal retuis is the reason the demanil curve is downward shping. 258 Advanced Placement Economics Teacher Resource Manual @ National comcil on Economic Education, New york, N,y, What determines the market supply of labor? The number of people willing anil ahle to work at yarrous wages 5. \fhy is the market supply curve for labor upward sloping? More people are willing to work if they are paiil more, The cost of not working, or leisure, increases. 6. What is the equilibrium wage in this labor market? $3.00 7. How many workers 8. If a be 9. will be hired in this labor marke t? 500 minimum-wage law raises the minimum wage to $4.00 an hour, what quantity of labor will supplied? 800 At a minimum wage of $4.00 an hour, what quantity of labor will be demanded?-100_ 10. How many workers would be laid off or would lose their jobs because of this minimum wage? 200 11. How many workers entered the labor force seeking a job because of this minimum wage? 300 12. If the demand for labor were more inelastic, would more or fewer workers lose their jobs because of this minimum wage? Fewer 13. Would skilled or unskilled workers be more likely to lose their jobs because of law? Unskilleil a minimum-wage 14. Who benefits from the minimum wage? Skilleil workers anil unskilleil worleers who lccep their jobs 15. Who is hurt by the minimum wage? Unskilleil workers who lose their 16. Do you favor a higher jobs minimum wage? Why or why not? Answers will vary. Although the minimum wage iloes leail to higher wages for unskilleil worleers who keep their jobs, it hurts unskilleil wo*ers who lose their jobs. The least skilleil anil youngest worlccrs are hurt most, Victims of iliscrimination are also hurt by the minimutn-wage la,ws because a hrge pool of unskilteil worleers allows employers to pick and choose amongrte nailable job hunters, 1, Plairment Economics Teadrer Resource Manual @ National Council on Ecoaomic Educatiou, NewYork, N,Y. "' "The Eff€cts of unions on wages and Employment in competitive and Monopsonistic Labor Markets Assume tn'o labor markets: Market I is competitive, and Market 2 is monopsonistic. Assume each market is in an initial equilibrium illustrated by the graphs. Assume further that a union exists in each of the markets, For each scenario below,l'ou have been given the market supply and demand curyes for a labor market before a union is formed. For each scenario and each market, identifr how the actions of the union affect the supply and demand curyes. Then indicate whether, as a result of these actions, the wage rate and level of employment will be highea lower or indeterminate. SCENARIo 1: The union is successful in requiring that new teachers pass a state competencF test to be employed. HE rigure ar.t Competency Test Required Competitive Monopsonistic uJ tU &, (E k lrJ IU o g o g WageRate Higher EmploymenlLawer 26A Advanced Placeoent Economics Teacher Resource Manual Wage Rate Higher Employment @ W__ National Council ou Economic Education, Nmyork N.y ffiffi SCENARIO 2: The labor union conducts ' a successful national advertising campaign urging peo- ple to buy union-made goods. ffi r*ure ar.z National Advertising Campaign Competitive Monopsonistic UJ IIJ ktr kE uJ LU o g CI = Wage Rate Higher Employment SCENARIO Wage Rate Higher Mgfu_ Employment llisher 3: The labor union educates workers in new methods of production, which leads to increased productivity. ffi ffiff rigure +r.a Increased Productivity Competitive Monopsonistic u LrJ kE t- lrJ uJ E o g o E WageRale Higher WageRale Higher Employment Higher Employmenl Higher " Placement Economics Teacher Resource Manual @ National Council on Economic Education, NewYork, N.Y. 261 foreign competitors. ffi rigure +r.+ Quotas/Tbriffs on Foreign Competition Competitive Monopsonistic tU lrJ k ktr IE ul uJ o o 5 = LABOR WageRate Higher WageRate Higher Employmenl Hisher Employment Higher SCENARIO 5: The labor union bargains for andwins an increase in thewage rate above the equi librium wage rate. ffi rigure +r.s Wage Increase Above Equilibrium Rate Competitive Monopsonistic lrJ uJ F*' E t- lU IU o 3< CI 5*' wc wc LABOR 262 Wage Rate Higher Wage Rate Higher Employment Lower Employment Indeterminate Mvanced Placement Economics Tbacher Resource Manual @ National Council on Economic Educatioo NsYork N.Y Fffi SCENARIO ' * 6: The labor union signs an agreement with employers that forces employers to hire only union members who have gone through the union's apprenticeship program. rigure +r.a Only Union Members Hired Competitive Monopsonistic UJ til t- kG c [rJ l.U o (t g =< LABOR Wage Rate Higher Wage Rate Higher EmploymentLower Employment Lower Placement Bconomics Teacher Resource Manual @ National Council.on Economic Education, Newyork, N,y, 263