Unit 4: The Factor Market

Transcription

1 Unit 4: The Factor Market (aka: The Resource Market or Input Market) - Factor Wages - Perfect Competition vs. Monopsonies - Optional Combination of Factors - Income Inequality - Taxation 7

2 Market in which the factors of production are traded 8

3 The Factors of Production Land + Labor + Capital = goods and services Land = gifts of nature /natural resources Soil, minerals, water, forest, wind, plants, animals, solar energy, etc. Labor = physical effort Human Capital = people with their skills, knowledge and experience. Physical Capital = tools, equipment, machinery, and factories used in the production of goods and services.

4 Supply of Labor Supply of labor is the number of workers that are willing to work at different wage rates. Higher wages give workers incentives to give up leisure activities or leave other industries. An upward-sloping labor supply curve means that an increase in the wages induces workers to increase the quantity of labor they supply.

5 Supply of Labor The decision about how much labor to supply involves making a decision about time allocation how many hours to spend on different activities. As wages increase, workers have an incentive to consume less leisure and work longer hours. Conversely, a higher wage rate makes workers richer and this lead him/her to consumer more leisure and supply less labor because leisure is a normal good.

6 Demand for Labor Demand for labor shows the quantities of workers that firms will hire at different wage rates. An downward-sloping labor demand curve means that firms will hire more workers at lower wages and fewer workers at high wages.

7 The demand for a factor of production is a derived demand. The demand for any resource is derived from the demand for the products that the resource can produce. Thus, resource demand depends on the price of the good/service that the resource produces and on the resource s productivity in producing the good or service. The demand for apple pickers is determined by the demand for apples. If the demand for apples falls so will the demand for apple pickers. If the demand for apples rises so will the demand for apple pickers.

8 Equilibrium in the Labor Market Labor supply and labor demand determine the equilibrium wage. The wage adjusts to balance the supply and demand for labor. If one firm pays $40,000/year while most other firms pay $50,000/year, how many applicants will that firm have? If one firm pays $60,000/year while most other firms pay $50,000/year, how many applicants will that firm have?

9 Above/Below-Equilibrium Wages

10 Minimum Wage -the gov t creates a minimum wage to protect workers. Wage S $15 $8 $ D Q Labor 16

11 Efficiency Wages Pays $10.50/hour Why would In-N-Out choose to do this? How does this higher wage affect their worker turnover rate? What about the opportunity cost of losing a job there? by paying workers more, it increases their productivity

12 What are other reasons for differences in wages? Unions Collective bargaining and threats to strike often lead to higher than equilibrium wages Insufficient Job Information- prevents workers from seeking better employment or pay. Geographical Immobility- Many people are reluctant or too poor to move so they accept a lower wage Wage Discrimination- Some people get paid differently for doing the same job based on race or gender.

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15 Why do women on average earn less then men? 1. Occupational Selection What majors do women typically occupy? Compensating Differentials -wages depend on how un/attractive the job is. Physical labor jobs tend to be unionized. 2. Experience Mommy Penalty studies show wages begin to fall with the birth of the first child and revive (but don t recover) when children pass the age of 20. Take time off Move to other jobs where the hours are more flexible If a woman has a baby at 24, she can expect to receive nearly $1 million less over her career. 3. Do women negotiate their salaries?

16 "When the Sony hack happened and I found out how much less I was being paid I didn t get mad at Sony. I got mad at myself," "I failed as a negotiator because I gave up early."

17 Gender Income Gap Market forces tend to work against discrimination If women are paid 20% less then men, why would employers hire anyone but women? Profit-seeking firms would demand women so what would happen to their wages?

18 Equilibrium in the Labor Market Shifts in the supply of or demand curve for labor cause the equilibrium wage to change.

19 3 Shifters of Demand for Labor 1.) Changes in the Demand for the Product (derived demand) Price increase of the product increases the demand for the resource. 2.) Changes in Productivity of the Factor Technological advances in resources make the resource more profitable 3.) Changes in Price of Other Factors Substitute Resources Ex: What happens to the demand for assembly line workers if price of robots falls? Complementary Resources Ex: What happens to the demand of surf instructors if there is a shortage of surfboards?

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21 3 Shifters of Supply of Labor 1. Changes in Tastes/Attitudes Towards Work The number of women employed in paid jobs or looking for work rose from 34 percent in 1950 to 60 percent in Changes in Alternative Opportunities The supply of labor in one market depends on the wage available in other markets. If the wage in alternative markets rises, workers will switch to the alternative markets, and supply of labor in the first market will shift to the left. 3. Immigration and Population Growth As the population grows or shrinks, the labor supply will tend to shift to the right or to the left.