tests ???? 2006 test on units 4 & 5 – after the ap test, monday may 15. your last textbook...

Tests ???? 2006

Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test!

10 point Bonus Homework for unit 4 due Friday May 5. All Homework for unit 4 after the AP Test, Monday May 15.

A week break of Wal-Mart and Daddy Day Care.Final two weeks the state of our current U.S. and

global economy and Freakonomics. Your Choice last essay to be scored as a test on

one of the last topics.

The Demand for Resources

CHAPTER TWENTY-SEVEN

Product MarketBurgers

P

Q

D

S

S

S

S

S

D

D

D

D

P

P

P

PD2

D2

D2

D2

D2

Factor MarketsCELL

Q Land

Q Entrepreneurship

Q Capital

Q LaborMarkets Move in Unison!

Determinants of Resource Determinants of Resource Demand or Factor Demand(CELL)Demand or Factor Demand(CELL)

Changes in Product DemandChanges in Product Demand

Changes in ProductivityChanges in Productivity 1 - Quantities of Other Resources1 - Quantities of Other Resources 2 - Technological Progress2 - Technological Progress 3 - Quality of the Resource3 - Quality of the Resource

Prices of Other ResourcesPrices of Other Resources

Quantity Quantity

Product MarketProduct Market Factor MarketFactor MarketCELLCELL

P

S

D

Supply & DemandSupply & DemandProduct and Factor MarketsProduct and Factor Markets

P

D

S

Quantity Quantity

Product MarketProduct Market Factor MarketFactor Market

P

S

D

What if Product Demand FallsWhat if Product Demand FallsProduct and Factor MarketsProduct and Factor Markets

P

D

S

CELLCELL

Quantity Quantity

Product MarketProduct Market Factor MarketFactor Market

P

S

D

What if Product Demand FallsWhat if Product Demand FallsProduct and Factor MarketsProduct and Factor Markets

P

D

S

CELLCELL

Quantity Quantity

Product MarketProduct Market Factor MarketFactor Market

P

S

D

What if Demand FallsWhat if Demand FallsProduct and Factor MarketsProduct and Factor Markets

P

D

S

CELLCELL

Quantity Quantity

Product MarketProduct Market Factor MarketFactor Market

P

S

D

Supply & DemandSupply & DemandProduct and Factor MarketsProduct and Factor Markets

P

D

S

CELLCELL

Quantity Quantity

Product MarketProduct Market Factor MarketFactor Market

P

S

D

What if Factor Demand Increased?What if Factor Demand Increased?Product and Factor MarketsProduct and Factor Markets

P

D

S

CELLCELL

Quantity Quantity

Product MarketProduct Market Factor MarketFactor Market

P

S

D

What if Factor Demand Increased?What if Factor Demand Increased?Product and Factor MarketsProduct and Factor Markets

P

D

S

CELLCELL

Quantity Quantity

Product MarketProduct Market Factor MarketFactor Market

P

S

D

P

D

S

Failure to Know Difference BetweenFailure to Know Difference BetweenProduct and Factor Markets Major Miss for the AP ExamProduct and Factor Markets Major Miss for the AP Exam

CELLCELL

Marginal ProductivityMarginal ProductivityTheory of Resource DemandTheory of Resource DemandResource Demand as a Derived DemandResource Demand as a Derived DemandMarginal Product Marginal Product (MPP=^TP/^Q)(MPP=^TP/^Q)Marginal Revenue ProductMarginal Revenue Product (MRP) (MRP)

Productivity Productivity (MRP=MPP*P(MRP=MPP*Poo))Product Price Product Price (MRP=^TR/^Q)(MRP=^TR/^Q)

Marginal Resource Cost Marginal Resource Cost (MRC) – in a purely (MRC) – in a purely competitive resource market MRC=Pricecompetitive resource market MRC=Price

Rule for Employing a Rule for Employing a Single Single Resource:Resource:

MRP = MRCMRP = MRC

Optimum Combination of ResourcesOptimum Combination of ResourcesRules for multiple inputs!Rules for multiple inputs!

Least-Cost Combo Rule Least-Cost Combo Rule

Profit-Maximizing CombinationProfit-Maximizing Combination

MPP of LaborMPP of Labor MPP of CapitalMPP of Capital

MRC of LaborMRC of Labor MRC of CapitalMRC of Capital

MRPMRPLL

MRCMRCLL

MRPMRPCC

MRCMRCCC11

For nonmath people: if MRP = MRC then MRP/MRC = 1

Ha Ha Ha – Factor Markets are Fun!

1

TheProduct Market

HouseholdsIndividual FirmsSignals

D

S

Product Market HouseholdIndividual Firm

D

S

s

d

d = MR

s = MC

Q*

P*

q* q*

P* P*

The Product Market signals both Households and Individual Firmthe price of products. The signals indicate P* to both.Based on its cost of producing one more firms determine how much.Based on their demand consumer determine how many.

Factor MarketLabor

Individual FirmsWorkers

D

S

MRC

MRP

d = MSB

s = MSC

Q*

P*

q* q*

P* P*

The Factor Market signals both Workers and Individual Firmsthe price of labor & the wage of labor. The signals indicate P* to both.Based on its revenue/worker(mrp) vs. its costs(mrc) firms determine how many workers to hire (mrp=mrc). Based on their Marginal Benefit vs. Marginal Cost workers determine whether or not they will work for this wage (msc=msb).

Wag

e R

ate

(do

llar

s)

Quantity of Labor Quantity of LaborIndividual FirmIndividual Firm MarketMarket

S = MRC

d = mrp

Wc

D

S

D = MRP

( mrp’s)

Wc

(1000)(1000)

($6.85)($6.85)

Supply & Demand: Supply & Demand: Labor in a Competitive Firm and Market

TargetWorkers

Wag

e R

ate

(do

llar

s)

Quantity of Labor Quantity of LaborIndividual FirmIndividual Firm MarketMarket

S = MRC

d = mrp

Wc

D

S

D = MRP

( mrp’s)

Wc

(1000)(1000)

($6)($6)

Supply & Demand: Supply & Demand: Labor in a Competitive Firm and Market

Marginal ResourceCost (MRC) will be

constant and equal toresource price(the wage rate)

Marginal ResourceCost (MRC) will be

constant and equal toresource price(the wage rate)

Labor Market TheoryThe Real World Will Get You!

• Human Capital– Education = Income

• Sorting Mechanism– Hoops

• Radical View– Rich Dad Poor Dad

• Dual Labor Market– Good Job v Bad Job Market

3,500,000• Fast food workers lead

the nation in minimum wage jobs

• McDonalds Corp #1 at hiring minimum wage workers in the world

• How many minimum wage workers does McDonalds own?

1 - Ability Differences1 - Ability Differences2 - Education and Training: 2 - Education and Training: Human Capital & Sorting Mechanism TheoriesHuman Capital & Sorting Mechanism Theories

3 - Discrimination3 - Discrimination4 - Tastes and Risks4 - Tastes and Risks5 - Unequal Distribution of Wealth5 - Unequal Distribution of Wealth

Radical TheoryRadical Theory 6 - Market Power6 - Market Power7 - Luck, Connections, and Misfortune7 - Luck, Connections, and Misfortune

Good Job, Bad Job Market Good Job, Bad Job Market

EQUALITY-EFFICIENCY TRADEOFFEQUALITY-EFFICIENCY TRADEOFF

CAUSES OF INCOME INEQUALITY-Unit VCAUSES OF INCOME INEQUALITY-Unit V

Wag

e R

ate

(do

llar

s)

MRPDD

S=MRC

Wm

Quantity of Labor

MRPDD

MRC

Wc

Qm Qc

The MRC of aThe MRC of aMonopsonist isMonopsonist is

Pulled Above thePulled Above theSupplySupply

Monopsonistic Labor MarketMonopsonistic Labor Market

Wag

e R

ate

(do

llar

s)

MRP

S

Quantity of Labor

MRPMRC

MRPMRP = MRC = MRC Profit MaxProfit Max

S(MRC)=S(MRC)=DD(MRP)DD(MRP)

Wm

Qm

QQm m units ofunits of

labor hiredlabor hiredless than in aless than in a

Competitive MarketCompetitive Market

Monopsonistic Labor MarketMonopsonistic Labor Market

Price paid for resources less

than in a Competitive

Market

Wc

Qc

Wg

Qm

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Monopsonist & Minimum wage…

Wc

Qc

S

Wm

Qg

MRC

Wu

Qu

Wag

e R

ate

(do

llar

s)

D1

S

Quantity of Labor

Wc

Qc

D2

...by increasing...by increasingproduct demandproduct demand...by increasing...by increasingproductivityproductivity...by increasing...by increasingthe price ofthe price ofsubstitutessubstitutes

...by increasing...by increasingproduct demandproduct demand...by increasing...by increasingproductivityproductivity...by increasing...by increasingthe price ofthe price ofsubstitutessubstitutes

Goodwill, Buy AmericanGoodwill, Buy AmericanDemand-Enhancement Model

Wu

Qu

Wag

e R

ate

(do

llar

s)

D

S1

Quantity of Labor

Wc

Qc

...restrictive...restrictive membershipmembership policiespolicies...occupational...occupational licensinglicensingDoctors, LawyersDoctors, LawyersTeachers….Teachers….

...restrictive...restrictive membershipmembership policiespolicies...occupational...occupational licensinglicensingDoctors, LawyersDoctors, LawyersTeachers….Teachers….

S2

Occupational Licensing Occupational LicensingExclusive or Craft Union Model

Wu

Qu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

...by organizing virtually all workers and thereby control of the supply curve for labor

...by organizing virtually all workers and thereby control of the supply curve for labor

S

Close Shop ModelClose Shop ModelInclusive Unionism

ECONOMIC RENTECONOMIC RENTNote: Note: Fixed Total SupplyFixed Total Supply

Perfectly Inelastic SupplyPerfectly Inelastic Supply

means...means...

Demand Determines Price!Demand Determines Price!

therefore...therefore...

Lan

d R

ent

(do

llar

s)

Acres of Land

Changes in the demand for land...Determination of Land RentDetermination of Land Rent

0Q

Inelastic Supply...Inelastic Supply...

Copyright McGraw-Hill, Inc., 1999

Lan

d R

ent

(do

llar

s)

Acres of Land

S

S0

Q

Inelastic Supply...Inelastic Supply...combines withcombines withdemand...demand...

Determination of Land RentDetermination of Land RentChanges in the demand for land...

Lan

d R

ent

(do

llar

s)

Acres of Land

R1

S

S

D1

0Q

Inelastic Supply...Inelastic Supply...combines withcombines withdemand... demand... totodetermine determine RENTRENT

Determination of Land RentDetermination of Land RentChanges in the demand for land...

Lan

d R

ent

(do

llar

s)

Acres of Land

R1

S

S

D1

0Q

If demand decreases...If demand decreases...

Determination of Land RentDetermination of Land RentChanges in the demand for land...

Lan

d R

ent

(do

llar

s)

Acres of Land

R1

S

S

D2

D1R2

0Q

If demand decreases...If demand decreases...Rent decreases. Rent decreases.

Determination of Land RentDetermination of Land RentChanges in the demand for land...

Lan

d R

ent

(do

llar

s)

D3

Acres of Land

R1

S

S

D2

D1R2

R3

0Q

If demand decreases...If demand decreases...Rent decreases. Rent decreases. ...and decreases...and decreases

Determination of Land RentDetermination of Land RentChanges in the demand for land...

Lan

d R

ent

(do

llar

s)

D3

Acres of Land

R1

S

SD4

D2

D1R2

R3

0Q

If demand decreases...If demand decreases...Rent decreases. Rent decreases. ...and decreases...and decreases ...and decreases...and decreases

Determination of Land RentDetermination of Land RentChanges in the demand for land...

Bre

tt F

avre

’s S

alar

y

All Pro Quarter Backs with100+ Games Started without a miss

$100,000,000

S

1

D

0Q

PerfectlyPerfectlyInelastic Supply...Inelastic Supply...combines withcombines withdemand... demand... totodetermine determine Salary!Salary!

Economic Rent & Stardom?Economic Rent & Stardom?Changes in the demand for a fixed resource...

$200,000 Would play for $200,000for love of the game!

Pure Economic

Rent$99,800,000!

Factor Market Theory

• Land earns Rent, or Economic Rent

• Labor earns Wages or Salary

• Capital earns Interest

• Entrepreneurship earns Economic Profit

Interest Rate and theInterest Rate and theRole of the Interest Rate: Role of the Interest Rate:

Interest & Total Output: RGDPInterest & Total Output: RGDP Interest & Capital InvestmentInterest & Capital Investment Interest & R&D InvestmentInterest & R&D Investment Nominal Interest Rates vs.Nominal Interest Rates vs. Real Interest RatesReal Interest Rates

Inte

rest

Rat

e i,

(p

erce

nt)

Quantity of Loanable Funds

Loanable Funds Theory of InterestLoanable Funds Theory of Interest

8%

MD

M1

MS

Nominal i = Real i + Rate of Inflation

4% Inflation+4% Real Interest Rate 8% Nominal Interest Rate

The Money MarketThe Money Market

Ra

te o

f in

tere

st,

i (p

erce

nt)

Amount of money demanded(billions of dollars)

10

7.5

5

2.5

0

MS

MD

i

0 50 100 150 200 250 300

Ra

te o

f in

tere

st,

i (p

erce

nt)

Amount of money demanded(billions of dollars)

0 50 100 150 200 250 300

10

7.5

5

2.5

0

Dm

ie

SmSm1

Any MicroOr any Macro AP

Question concerningInterest Rate uses this

Graph!!!!

Any MicroOr any Macro AP

Question concerningInterest Rate uses this

Graph!!!!

The Money MarketThe Money Market

The Money MarketThe Money Market

Ra

te o

f in

tere

st,

i (p

erce

nt)

Amount of money demanded(billions of dollars)

10

7.5

5

2.5

0

MS – Fed controls MSOMO, RRR, DR, FFR

MD – FiscalPolicy: G,T,Surplus, Deficit

i

0 50 100 150 200 250 300

Transmission Graphs

Pri

ce le

vel

Real domestic output, GDP

Dm

InvestmentDemand

Rea

l rat

e of

inte

rest

, i

10

8

6

0

10

8

6

0Quantity of money demanded and supplied Amount of planned

investment, I

Monetary Policy and Equilibrium GDPMonetary Policy and Equilibrium GDPSm1

AS

AD1

P1

RiR

MEI – Marginal Efficiency of InvestmentAs interest falls more Investment becomesPossible and Profitable!

MEI

Real domestic output, GDP

Quantity of money demanded and supplied Amount of planned investment, I

Dm

InvestmentDemand

10

8

6

0

10

8

6

0

Monetary Policy and Equilibrium GDPMonetary Policy and Equilibrium GDPSm1

AS

AD1

If the money supplyincreases tostimulate theeconomy....P

rice

leve

lR

eal r

ate

of in

tere

st, i

P1

RiR

MEI

Dm

InvestmentDemand

10

8

6

0

10

8

6

0

Monetary Policy and Equilibrium GDPMonetary Policy and Equilibrium GDPSm1

AS

Sm2

AD1 AD2

Pri

ce le

vel

Rea

l rat

e of

inte

rest

, i

Real domestic output, GDP

Quantity of money demanded and supplied Amount of planned investment, I

P1

P2

RiR

MEI

Real domestic output, GDP

Quantity of money demanded and supplied Amount of planned investment, I

Dm

InvestmentDemand

10

8

6

0

10

8

6

0

Monetary Policy and Equilibrium GDPMonetary Policy and Equilibrium GDPSm1

AS

Sm2

AD1 AD2

If the moneysupply increases

again.... Pri

ce le

vel

Rea

l rat

e of

inte

rest

, i

P1

P2

RiR

MEI

Dm

InvestmentDemand

10

8

6

0

10

8

6

0

Monetary Policy and Equilibrium GDPMonetary Policy and Equilibrium GDP

AD1 AD2 AD3

Sm1

AS

P1

Sm2

P2

Sm3

P3

Pri

ce le

vel

Rea

l rat

e of

inte

rest

, i

Real domestic output, GDP

Quantity of money demanded and supplied Amount of planned investment, I

RiR

MEI

Long Run Effects:1. Increased planned investment will lead to increased AS2. Canceling effect: AD up, MD up, i up, and I down, = AD down3. i down = international $ down, PL up = X down

Pri

ce le

vel

Real domestic output, GDP

AD1 AD2

Fiscal Policy and Equilibrium GDPFiscal Policy and Equilibrium GDP

Rea

l rat

e of

inte

rest

, i

10

8

6

0

Sm1

Quantity of money demanded and supplied

Dm1

Dm2

Amount of planned investment, I

RiR

10

8

6

0

MEIPI1PI2

Long Run Effects:1. Decreased planned investment will lead to decreased AS2. Canceling effect: I down, AD down, MD down, and i down, = AD up3. i up = international $ up, PL down = X up

SCARCE RESOURCESSCARCE RESOURCES

PROPERTY RESOURCESPROPERTY RESOURCES

LANDLAND

CAPITALCAPITAL

HUMAN RESOURCESHUMAN RESOURCES

LABORLABOR

What’s missing????

PROPERTY RESOURCESPROPERTY RESOURCES

LANDLAND

CAPITALCAPITAL

HUMAN RESOURCESHUMAN RESOURCES

LABORLABOR

ENTREPRENEURIAL ABILITYENTREPRENEURIAL ABILITY

SCARCE RESOURCESSCARCE RESOURCES

ENTREPRENEURIAL ABILITYENTREPRENEURIAL ABILITY

TAKES THE INITIATIVETAKES THE INITIATIVE

ENTREPRENEURIAL ABILITYENTREPRENEURIAL ABILITY

TAKES THE INITIATIVETAKES THE INITIATIVE

MAKES POLICY DECISIONS MAKES POLICY DECISIONS

ENTREPRENEURIAL ABILITYENTREPRENEURIAL ABILITY

TAKES THE INITIATIVETAKES THE INITIATIVE

MAKES POLICY DECISIONS MAKES POLICY DECISIONS

SOURCE OF INNOVATIONSOURCE OF INNOVATION

ENTREPRENEURIAL ABILITYENTREPRENEURIAL ABILITY

TAKES THE INITIATIVETAKES THE INITIATIVE

MAKES POLICY DECISIONS MAKES POLICY DECISIONS

SOURCE OF INNOVATIONSOURCE OF INNOVATION

THE RISK BEARERTHE RISK BEARER

RESOURCE PAYMENTSRESOURCE PAYMENTS

PROPERTY RESOURCESPROPERTY RESOURCESLANDLAND

CAPITALCAPITAL

HUMAN RESOURCESHUMAN RESOURCESLABORLABOR

RENTRENT

INTERESTINTEREST

WAGESWAGES

ENTREPRENEURENTREPRENEUR PROFIT &PROFIT &LOSSLOSS