hi everybody Jer breed here from review eon.com today we're going to be looking at unit five for microeconomics this one is all about Factor markets this video goes alongside the total review booklet from reviewe eon.com and if you're interested in picking up a copy head down to the links below also don't forget to like And subscribe let's get into the content going to be amazing now this unit is all about the buying and selling of factors of production by businesses there are three key factors of production and each of them has different names for the payments businesses make for those resources for land the payment is called rent for labor the payment is called wages for physical capital we call the payments interest these Concepts we're going to talk about moving forward can apply to both land and capital but the focus will be labor so just keep that in mind as we go forward back in unit 3 you learned about the production function that shows us the relationship between the quantity of Labor a business hires and the amount of output those workers can produce that gave us three phases of the law of diminishing marginal returns as you hire more workers you get increasing marginal product then decreasing marginal product we call that diminishing marginal returns and then finally negative marginal product we can take that concept and apply it to determine how many workers a business would like to hire in order to figure that out we have to calculate What's called the marginal revenue Revenue product marginal revenue product is the marginal revenue times the marginal product of those workers on most exams the marginal revenue is going to be equal to the price on this chart here the price is $10 we're going to calculate the marginal revenue for each of these workers hired by this firm that first worker has a marginal revenue product of $90 that's because the marginal product is 9 and the marginal revenue the price in this case is $10 that gives us $90 the marginal revenue that second worker has a marginal revenue product of $130 the next one $100 keep on going we go all the way down to the end where we have a negative marginal revenue product now a firm's demand for labor is equal to the marginal revenue product of those workers that's because the most a firm would be willing to pay for a worker is equal to the money that worker brings in by hiring them so if the price of workers was 50 worth of wage how many workers would this firm be willing to hire well that third worker brings in $100 worth of marginal revenue product if that worker is paid $50 hiring that worker increases profit by $50 so that firm should definitely hire that worker the next worker brings in $70 worth of marginal revenue product that still increases profit so they should be hired as far as that fifth worker goes marginal revenue product is only $40 that is less than the way wage and that worker would decrease profit if they were hired based on this chart The Profit maximizing number of workers is four that leads us to the market demand for labor the market demand for labor is downward sloping and shows an inverse relationship between the wage and the number of workers hired when the wage Falls the number of workers hired increases it's a downward sloping demand curve like most of the demand curves you've seen so far in this class that demand curve comes from the sum of each firm's marginal revenue product a little side note to keep in mind as we move forward in this unit businesses are the demanders so far they've been the suppliers now they're the ones that are demanding labor here let's move on to the market supply curve for labor here we have an upward sloping supply curve for labor just like most other Supply curves you've seen before in this class when the wage Rises the number of workers willing to work also increases there's a IR relationship between the wage and the quantity supplied in the past consumers within households were the ones demanding products now households are the suppliers of Labor keep that in mind it's a little bit different than other markets you've had in the past next we're going to talk about changes within the factor markets the labor demand curve is actually a derived demand it comes from the product price the product demand and the productivity of the workers that are making the product if any of those things change it will change the demand curve and shift it here we have an increase in the demand all of these changes actually move the demand curve because they all impact the marginal revenue product of these workers any of those things increasing the marginal revenue product of the workers will increase the demand likewise if any of those things decrease the marginal revenue product of the workers it will decrease the demand for those workers the supply of labor can also shift of course when anything that would impact the number of workers available at any given price the number of workers there are the availability of those workers the population the age the value of leisure time and countless other things can impact the supply of labor if we see an increase in the supply of labor just like you've seen in the past it's going to be a rightward shift indicating an increase as far as what determines the equilibrium wage I know I keep saying it but it's just like you've seen before with other markets the equilibrium comes from the interaction between supply and demand that's what gives us our equilibrium wage it's where the two curves intersect and that also gives us our equilibrium quantity of workers hired this is just like the product markets we've seen before in the past except that the suppliers are actually from households and the demanders are actually businesses if we see an increase in the demand for labor within the market we should expect an increase in the wage and an increase in the equal ibrium quantity just like you would have seen in product Market changes next we're going to talk about firms Within These markets first we're going to talk about firms within perfectly competitive Factor markets here there are many many buyers of Labor within this Market each individual firm must compete to buy the workers they need to produce the products they are trying to sell here's our Market here we have our downward sloping demand upward sloping Supply and it establishes our equilibrium wage and equilibrium quantity within the market these firms are wage takers which means that they have no influence on price there are so many businesses competing for labor within this Market the market sets the wage and that wage is going to be the cost of hiring one more worker we call that the marginal resource cost marginal resource cost is the amount of money a business has to pay to hire one more worker thanks to so many firms competing within the market and firms being wage takers as a result each firm's marginal resource cost will be equal to the market wage so we're going to take that market wage and take it all the way over to the firm graph that market wage becomes the firm's supply curve they can hire as many workers as they want at the market wage that is also equal to our marginal resource cost for this firm next we're going to add in the firm's demand curve it looks like a marginal product curve that you've already seen but remember we're taking the marginal product and multiplying it by the marginal revenue for those workers that gives us an upward sloping portion when we have increasing marginal returns and then thanks to diminishing marginal returns it eventually downward slopes now most of the time when I draw this I leave off that upward sloping portion because my assumption is that firms would always hire those workers if they're operating at all so where is the profit maximizing number of workers this firm should hire well at low quantities we see that the marginal revenue product that's the benefit of hiring workers is greater than the marginal resource cost or the marginal cost of hiring those workers so it pays to hire more workers at higher quantities we see that the marginal resource cost the marginal cost of hiring workers is greater than the marginal revenue product or the marginal benefit for hiring workers here it pays to hire less The Profit maximizing number of workers is found where the marginal revenue product equals the marginal resource cost it's right there at the intersection between those two curves if there are change within the market it's going to move the firm's marginal resource cost here we have an increase in demand that's going to increase that equilibrium wage and increase the equilibrium quantity within the market that increase in the wage is going to shift the marginal resource cost and supply of labor up for the firm that gives us a lower profit maximizing quantity number of workers this firm will hire you will notice that even though this firm is hiring fewer workers the marginal revenue product of the last worker hired is now larger than it was before because we are at a higher point on that marginal revenue product curve at the new profit maximizing quantity of Labor hired you can also have changes that impact just the firm and not the market as a whole here we have an increase in the marginal revenue product for just this firm that could come from an increase in technology or productivity of this firm's workers if that happens this firm will hire a greater number of workers but the marginal revenue product of the last worker hired didn't change there's only one other factor market that you need to know for this unit and that is called monopsony it's sort of like a monopoly but with a monopoly there's only one seller of a product with monopsony there's only one buyer in this case of a resource labor there's only one firm the firm is going to be the market and the market is going to be the firm that means the firm's supply curve is the labor supply curve it's upward sloping just like the market supply curve was before at low wages a small number of workers will be willing to work if the firm wants to hire more workers it's going to have to raise the wage in order to incentivize those workers to give up leisure time for a monopsony there's an interesting relationship between the wage and the marginal resource cost since this firm must increase wages to hire more workers it changes the connection between the supply of labor and the marginal resource cost for the firm here at one worker the wage is going to be $10 that gives us a marginal resource cost the change in Total Resource cost of $10 it's equal to the wage at the moment because it's the first worker that's been hired if this firm hires a second worker it must increase the wage to $11 but it doesn't just pay that second worker $11 it also pays the first worker $11 that means the marginal resource cost or the change in the Total Resource cost is $122 it is more than the wage if you look all the way down that chart the marginal resource cost is going to be greater than the wage all the way down if we graph this out those first two columns are the supply of labor for the market the marginal resource cost for this firm is those two columns and if we graph it out it tells us that the marginal resource cost is greater than the supply of labor here's what it looks like on the graph our supply of labor is upward sloping because that is the market market supply curve and the marginal resource cost is above the supply curve there let's go ahead and add in our firm's demand curve it is the marginal revenue product for that firm and just like a perfectly competitive factor market firm this firm will profit maximize if it highes the quantity of Labor where the marginal revenue product equals the marginal resource cost let's find that point and drop down that is the quantity of Labor this monopsony is going to hire the wage though comes from not that intersection but from the supply curve below because the supply curve indicates the wage required to hire that number of workers next we're going to compare this monopsony to a perfectly competitive market remember perfectly competitive markets will pay the equilibrium wage where the supply and demand intersect and it will hire the number of workers where the supply and demand intersect in order to turn this Market into a monopsony just put the marginal resource cost above the supply there Mark The Profit maximizing quantity of workers and the wage that this firm will hire that shows us that a monop pays lower wages and hires fewer workers than a perfectly competitive market would as a result monopsonies are not allocatively efficient and in fact we've got dead weight loss right there the last thing we're going to talk about is least cost combinations of resources that can be used in the production of different Goods this is just like utility maximizing combinations that you learned back in unit 1 let's say a firm has two primary resources that it uses in the production of its goods labor and capital in order to find the least cost combination of these resources first you need to take the marginal product of that resource and divide it by the price of the resource for labor the marginal product is 30 the price of Labor is $15 for Capital the marginal product is 100 units of of output while the price of capital is $25 when you divide you get two units of output per dollar spent on labor for Capital you have four units of output per dollar spent which one should we employ more of well the profit maximizing combination is found where the marginal product of labor divided by the price of Labor equals the marginal product of capital divided by the price of capital since they aren't equal you want more of the one with the higher marginal product per dollar capital and less of the one with the lower marginal product per dollar labor we got through it that was a lot of information there 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