Bec doms ppt on pricing in resource markets

448 views

Published on

Bec doms ppt on pricing in resource markets

Published in: Economy & Finance, Technology
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
448
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
15
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

Bec doms ppt on pricing in resource markets

  1. 1. Pricing in Resource Markets <ul><li>Resource markets </li></ul><ul><li>Resource demand </li></ul><ul><li>The labor market </li></ul>
  2. 2. Factor/Resource markets <ul><li>Factors of production: </li></ul><ul><ul><li>land </li></ul></ul><ul><ul><li>labor </li></ul></ul><ul><ul><li>capital </li></ul></ul><ul><ul><li>entrepreneurship </li></ul></ul><ul><li>factor prices determined in resource markets </li></ul>
  3. 3. resources markets <ul><li>same concepts of demand and supply </li></ul><ul><ul><li>now applied to factors of production </li></ul></ul>
  4. 4. resource demand <ul><li>producer will demand an additional unit of resource if </li></ul>MR of resource > MC of resource
  5. 5. example: Wal Mart <ul><li>labor market </li></ul><ul><li>1 more clerk costs $400 per week </li></ul><ul><li>1 more clerk increases revenue by $500 week </li></ul><ul><li>hire 1 more clerk? </li></ul><ul><ul><li>Yes! $500 > $400 </li></ul></ul>
  6. 6. example: lawn service <ul><li>capital market </li></ul><ul><li>larger, faster mower costs extra $400/wk. </li></ul><ul><li>but mow more lawns, extra $600/wk. in revenue </li></ul><ul><li>buy the mower? </li></ul><ul><ul><li>Yes! $600 > $400 </li></ul></ul>
  7. 7. terms <ul><li>marginal revenue product (MRP) </li></ul><ul><ul><li>extra revenue from one more unit of resource </li></ul></ul><ul><li>marginal resource cost (MRC) </li></ul><ul><ul><li>extra cost for one more unit of resource </li></ul></ul>
  8. 8. rule for resource demand <ul><li>firm hires additional resources until </li></ul><ul><ul><li>MRC = MRP </li></ul></ul><ul><ul><li>cost of the extra resource = </li></ul></ul><ul><ul><li>extra revenue from the resource </li></ul></ul>
  9. 9. resource supply <ul><li>you will supply your resources to the “best” option </li></ul><ul><ul><li>highest paying (if all else equal) </li></ul></ul><ul><li>nonmonetary factors are important </li></ul><ul><ul><li>firms must compensate when jobs are </li></ul></ul><ul><ul><li>dirty, dangerous, illegal….. </li></ul></ul>
  10. 10. The Market for Resources <ul><li>resource demand </li></ul><ul><ul><li>downward sloping </li></ul></ul><ul><ul><li>producers less willing, able to buy resources at higher prices </li></ul></ul>
  11. 11. <ul><li>resource demand is a DERIVED demand </li></ul><ul><ul><li>it depends on the demand for the final product </li></ul></ul>
  12. 12. examples <ul><li>demand for nurses </li></ul><ul><ul><li>depends on demand for healthcare </li></ul></ul><ul><li>demand for steel </li></ul><ul><ul><li>depends on demand for cars </li></ul></ul><ul><li>demand for plywood </li></ul><ul><ul><li>depends on demand for houses </li></ul></ul>
  13. 13. Shifts in demand for a resource <ul><li>demand for final product </li></ul><ul><ul><li>if product demand rises, MRP rises </li></ul></ul><ul><ul><li>resource demand shifts right </li></ul></ul><ul><li>productivity of resource </li></ul><ul><ul><li>better resource, higher MP & MRP </li></ul></ul><ul><ul><li>resource demand shifts right </li></ul></ul>
  14. 14. examples <ul><li>increase demand for healthcare </li></ul><ul><ul><li>increase demand for nurses </li></ul></ul><ul><ul><li>increase demand for syringes </li></ul></ul><ul><li>higher-skilled labor </li></ul><ul><ul><li>increases demand for labor </li></ul></ul>
  15. 15. <ul><li>price of other resources </li></ul><ul><ul><li>if price of substitute resource falls </li></ul></ul><ul><ul><li>-- substitute cheaper resource </li></ul></ul><ul><ul><li> -- demand for original resource shifts left </li></ul></ul>
  16. 16. example <ul><li>bank </li></ul><ul><ul><li>ATMs vs bank tellers </li></ul></ul><ul><ul><li>ATM costs falls </li></ul></ul><ul><ul><li>-- demand for bank tellers falls </li></ul></ul>
  17. 17. example <ul><li>office buildings </li></ul><ul><ul><li>skyscrapers in Manhattan </li></ul></ul><ul><ul><li>3 stories in Oswego </li></ul></ul><ul><li>why? </li></ul><ul><ul><li>cost of land vs. cost of construction </li></ul></ul>
  18. 18. <ul><ul><li>if price of complement resource falls </li></ul></ul><ul><ul><li>-- use more of both resources </li></ul></ul><ul><ul><li>-- demand for original resource shifts right </li></ul></ul>
  19. 19. example <ul><li>price of trucks (18-wheeler) fall </li></ul><ul><ul><li>increase demand for truck drivers </li></ul></ul>
  20. 20. note <ul><li>sometimes resources are BOTH substitutes and complements: </li></ul><ul><ul><li>computers do some clerical functions AND </li></ul></ul><ul><ul><li>need clerical workers to operate them </li></ul></ul>
  21. 21. <ul><li>technology </li></ul><ul><ul><li>decrease demand for some types of labor </li></ul></ul><ul><ul><li>increase demand for other types of labor </li></ul></ul>
  22. 22. example <ul><li>better/cheaper computer technology </li></ul><ul><ul><li>increases demand for programmers </li></ul></ul><ul><ul><li>decrease demand for architects </li></ul></ul>
  23. 23. <ul><li>resource supply </li></ul><ul><ul><li>upward sloping </li></ul></ul><ul><ul><li>suppliers more willing, able to provide resources at higher prices </li></ul></ul>
  24. 24. Q res. P res. S D P* Q*
  25. 25. resource prices <ul><li>tend to equalize across alternative uses </li></ul><ul><ul><li>carpenters for houses </li></ul></ul><ul><ul><li>carpenters for furniture </li></ul></ul><ul><li>UNLESS other nonmonetary differences </li></ul><ul><ul><li>economics professors vs. business economists </li></ul></ul><ul><ul><li>land in Manhattan vs. land in Oswego </li></ul></ul>
  26. 26. The Labor Market <ul><li>Labor supply </li></ul><ul><li>Labor demand </li></ul><ul><li>Earnings differences </li></ul>
  27. 27. Labor Supply <ul><li>time is a scarce resource </li></ul><ul><ul><li>market work (for pay) </li></ul></ul><ul><ul><li>nonmarket work (not for pay) </li></ul></ul><ul><ul><li>(cleaning, studying) </li></ul></ul><ul><ul><li>leisure (for fun) </li></ul></ul>
  28. 28. work and utility <ul><li>work is a disutility </li></ul><ul><ul><li>but allows you to buy stuff </li></ul></ul><ul><ul><li>or to enjoy stuff </li></ul></ul><ul><ul><li>(clean house, dinner, good grades) </li></ul></ul>
  29. 29. <ul><li>tradeoff between consumption & leisure </li></ul><ul><ul><li>work to buy stuff or to make stuff </li></ul></ul><ul><ul><li>but working leaves less time for leisure </li></ul></ul>
  30. 30. implications <ul><li>higher wages </li></ul><ul><ul><li>= higher opp. cost of leisure, nonmarket work </li></ul></ul><ul><ul><li>most surgeons don’t mow their lawn </li></ul></ul><ul><ul><li>many college sports stars head to the draft early </li></ul></ul>
  31. 31. <ul><li>two effects: </li></ul><ul><ul><li>substitution effect </li></ul></ul><ul><ul><li>income effect </li></ul></ul>Effect of a wage increase
  32. 32. substitution effect <ul><li>as wage rises </li></ul><ul><ul><li>opp. cost of other time uses rises </li></ul></ul><ul><ul><li>spend more time on market work </li></ul></ul><ul><li>Qs of labor rises as wages rise </li></ul>
  33. 33. income effect <ul><li>as wages rise </li></ul><ul><ul><li>income rises </li></ul></ul><ul><ul><li>consumer more of what you like: </li></ul></ul><ul><ul><li>-- stuff, leisure </li></ul></ul><ul><li>Qs of labor falls as wages rise </li></ul>
  34. 34. <ul><li>if substitution effect > income effect </li></ul><ul><ul><li>labor supply is upward sloping </li></ul></ul><ul><li>if substitution effect < income effect </li></ul><ul><ul><li>labor supply is downward sloping </li></ul></ul><ul><li>which is it? </li></ul>
  35. 35. labor supply <ul><li>economists observe </li></ul><ul><ul><li>upward sloping for most wages </li></ul></ul><ul><ul><li>downward sloping at very high wages </li></ul></ul><ul><li>backward-bending supply curve </li></ul>
  36. 36. subst. > inc. effect subst. < inc. effect wage Q labor S
  37. 37. Changes in market labor supply <ul><li>adult population </li></ul><ul><ul><li>births rates, immigration </li></ul></ul><ul><ul><li>increase will shift labor supply right </li></ul></ul>
  38. 38. <ul><li>preferences </li></ul><ul><ul><li>willingness of groups to work </li></ul></ul><ul><ul><li>women have increasingly entered labor force </li></ul></ul><ul><ul><li>-- shift labor supply right </li></ul></ul>
  39. 39. <ul><li>skills, education, training </li></ul><ul><ul><li>education increases opp. cost of not working for pay </li></ul></ul><ul><ul><li>-- labor supply increases with education </li></ul></ul><ul><ul><li>increase HS, college graduation </li></ul></ul><ul><ul><li>-- increase supply high-skill labor </li></ul></ul><ul><ul><li>-- decrease supply low-skill labor </li></ul></ul>
  40. 40. <ul><li>other sources of income </li></ul><ul><ul><li>nonwage income lowers labor supply </li></ul></ul><ul><ul><li>less labor supply among those over 50 with the growth of pensions, disability </li></ul></ul><ul><ul><li>less labor supply among women with high-earning husbands </li></ul></ul>
  41. 41. Labor demand <ul><li>firm’s demand for labor </li></ul><ul><li>car wash </li></ul><ul><ul><li>perfectly competitive </li></ul></ul><ul><li>marginal revenue product (MRP) </li></ul><ul><ul><li>change in total revenue when one more unit of labor is hired </li></ul></ul>
  42. 42. example: car wash <ul><li>price of car wash = $3 </li></ul><ul><li>car washes per hour </li></ul>Q labor TP MP MRP 0 0 1 5 2 9 3 12 4 14 5 15 15 12 9 6 3 5 4 3 2 1
  43. 43. how much labor to hire <ul><li>MC of one more unit of labor </li></ul><ul><ul><li>marginal resource cost (MRC) </li></ul></ul><ul><ul><li>wage </li></ul></ul><ul><li>MR of one more unit of labor </li></ul><ul><ul><li>MRP </li></ul></ul><ul><li>hire until MRP = wage </li></ul>
  44. 44. <ul><li>if MRP > wage </li></ul><ul><ul><li>hire more labor and still add to profit </li></ul></ul><ul><li>if MRP < wage </li></ul><ul><ul><li>last units labor taking away from profit, hire less labor </li></ul></ul>
  45. 45. 15 12 9 6 3 1 2 3 4 5 if wage = $9 hire 3 units labor wage Q labor LD
  46. 46. 15 12 9 6 3 1 2 3 4 5 wage Q labor LD wage = $6, hire 4 wage = $12, hire 2
  47. 47. Earnings differences <ul><li>based on both demand-side and supply side factors </li></ul>
  48. 48. Human Capital <ul><li>Skill set </li></ul><ul><ul><li>Education, training, experience </li></ul></ul><ul><li>increases MP of labor & labor demand </li></ul><ul><li>cost of education means supply of skilled labor lower relative to unskilled labor </li></ul><ul><li>result is a higher market wage </li></ul>
  49. 50. ability/talent <ul><li>Human capital, but hard to measure </li></ul><ul><li>the best athletes, most popular movies stars, CEOs command HUGE salary premium over others </li></ul>
  50. 51. Efficiency wage theory <ul><li>Higher pay leads to better productivity </li></ul><ul><li>Why? </li></ul><ul><ul><li>Better morale, lower turnover </li></ul></ul><ul><ul><li>“ Cherry pick” the best workers </li></ul></ul><ul><ul><li>Workers do not want to risk losing job </li></ul></ul>
  51. 52. Non-wage job characteristics <ul><li>Risk/danger </li></ul><ul><li>Working conditions </li></ul><ul><li>Work is meaningful or glamorous </li></ul><ul><li>Holding all else constant, </li></ul><ul><li>dangerous jobs pay more </li></ul><ul><li>jobs with higher layoff probability pay more </li></ul>
  52. 53. geography <ul><li>wages higher in U.S. </li></ul><ul><ul><li>encourages immigration </li></ul></ul><ul><li>teacher’s salaries vary significantly by state </li></ul><ul><li>wages lower in South than Northeast </li></ul>
  53. 54. discrimination <ul><li>age, race, gender </li></ul><ul><li>wage differentials remain EVEN after controlling for other factors </li></ul><ul><ul><li>occupation </li></ul></ul><ul><ul><li>education/experience </li></ul></ul><ul><ul><li>risk </li></ul></ul>
  54. 55. unionization <ul><li>union workers earn more than nonunion workers doing the same jobs </li></ul><ul><ul><li>janitors </li></ul></ul><ul><ul><li>auto workers </li></ul></ul><ul><ul><li>teachers </li></ul></ul>

×