Changes

Instructor, Andy Schlafly

Instructor, Andy Schlafly

I. Introduction and Review

==Introduction and Review==

The midterm exams were fine.  If you are disappointed in any way, then the key is to turn the negative into a positive.  A saying in business is that when you get a lemon, figure out how to turn it into lemonade and sell it.  Learn from your errors, and be stronger next time.

The midterm exams were fine.  If you are disappointed in any way, then the key is to turn the negative into a positive.  A saying in business is that when you get a lemon, figure out how to turn it into lemonade and sell it.  Learn from your errors, and be stronger next time.

II. Inputs

==Inputs==

Until now, when we discussed what a company does, we have usually talked about its output.  How many goods will it sell at what price?  The price elasticity of its demand, for example, looks at how demand for its output changes based on a change in its price.

Until now, when we discussed what a company does, we have usually talked about its output.  How many goods will it sell at what price?  The price elasticity of its demand, for example, looks at how demand for its output changes based on a change in its price.

In general, the demand for inputs by firms is called the “derived demand for inputs,” because it is derived from the consumer demand for the products the company sells.  You want to buy gas from a gas station, and your demand in turns creates a demand by the station for its inputs: the gas and labor.

In general, the demand for inputs by firms is called the “derived demand for inputs,” because it is derived from the consumer demand for the products the company sells.  You want to buy gas from a gas station, and your demand in turns creates a demand by the station for its inputs: the gas and labor.

III. Monopsony

==Monopsony==

A monopsony means only one buyer.  A buyer holds a monopoly on purchases.

A monopsony means only one buyer.  A buyer holds a monopoly on purchases.

For a competitive firm, in contrast, MFC=W because it can hire all the workers it needs at the market wage, without causing the market wage to rise for all its workers.

For a competitive firm, in contrast, MFC=W because it can hire all the workers it needs at the market wage, without causing the market wage to rise for all its workers.

IV. (For Intermediate and Honors Only) Elasticity of Derived Demand for Inputs

==(For Intermediate and Honors Only) Elasticity of Derived Demand for Inputs==

Just as we had price elasticity of demand for buying goods, we can also look at the elasticity of demand for inputs such as labor.  The definition is what you might expect:

Just as we had price elasticity of demand for buying goods, we can also look at the elasticity of demand for inputs such as labor.  The definition is what you might expect:

Assembly line workers at car manufacturing plants typically have inelastic labor demand.  As labor unions were successful in increasing the wages of assembly line workers in the early 1970s, car manufacturers’ overall labor costs increased dramatically.  Only competition by foreign manufacturers was successful in stopping the upward climb in car prices due to increasing labor costs.

Assembly line workers at car manufacturing plants typically have inelastic labor demand.  As labor unions were successful in increasing the wages of assembly line workers in the early 1970s, car manufacturers’ overall labor costs increased dramatically.  Only competition by foreign manufacturers was successful in stopping the upward climb in car prices due to increasing labor costs.

V. (Honors Only) Example

==(Honors Only) Example==

Let’s start with this simple equation: Profits = Total revenue - Total cost

Let’s start with this simple equation: Profits = Total revenue - Total cost

Let’s apply this to an example.  Suppose a firm has a declining marginal product for each additional laborer hired, such that:

Let’s apply this to an example.  Suppose a firm has a declining marginal product for each additional laborer hired, such that:

Labor Units (L) Marginal Product (MP)

Labor Units (L) Marginal Product (MP)

<br>1 20

1 20

<br>2 18

2 18

<br>3 16

3 16

<br>4 14

4 14

<br>5 12

5 12

<br>6 10

6 10

<br>7 8

7 8

Suppose the wage W for each employee is $70 and the price the output is sold for is $5.  How many workers should you hire?

Suppose the wage W for each employee is $70 and the price the output is sold for is $5.  How many workers should you hire?

Your firm hires four workers and no more.  Anyone beyond your fourth employee is a money-loser for you.  This is because of declining marginal product of labor.

Your firm hires four workers and no more.  Anyone beyond your fourth employee is a money-loser for you.  This is because of declining marginal product of labor.

VI. Review

==Review==

Monopoly is a single seller.

Monopoly is a single seller.

For Honors only: what is the effect of consumer demand for output on the labor demand by the company?  When consumer demand (demand for output) is more elastic, then labor demand by a company tends to be more elastic.  When it is easy to substitute other inputs for labor (such as machines replacing humans), then labor demand also tends to be more elastic.  Finally, when other inputs are in more elastic supply, then labor demand tends to be more elastic.  And don’t worry if you don’t understand all that.

For Honors only: what is the effect of consumer demand for output on the labor demand by the company?  When consumer demand (demand for output) is more elastic, then labor demand by a company tends to be more elastic.  When it is easy to substitute other inputs for labor (such as machines replacing humans), then labor demand also tends to be more elastic.  Finally, when other inputs are in more elastic supply, then labor demand tends to be more elastic.  And don’t worry if you don’t understand all that.

VII. Assignment

==Assignment==

Review the topics that gave you difficulty on the exam.  Then read, and reread, the above lecture.  Then answer the problems below, which use many concepts from the entire course.

Review the topics that gave you difficulty on the exam.  Then read, and reread, the above lecture.  Then answer the problems below, which use many concepts from the entire course.

Introductory:

===Introductory===

1.  A ________________ is one and only one buyer in a market.  

1.  A ________________ is one and only one buyer in a market.  

2.  Why do you think an economics course spends so much studying monopolies and monopsonies?

2.  Why do you think an economics course spends so much studying monopolies and monopsonies?

Intermediate:

===Intermediate===

<br>3.  What is the marginal factor cost of a monopsony when it increases is wage for 10 employees from $11 to $12 in hiring an 11th employee?  Show your work.

 

3.  What is the marginal factor cost of a monopsony when it increases is wage for 10 employees from $11 to $12 in hiring an 11th employee?  Show your work.

4.  In terms of P, MP, and W, state when a company in a competitive market hires an additional worker at wage W.

4.  In terms of P, MP, and W, state when a company in a competitive market hires an additional worker at wage W.

7.  Sharon has to pay $10.50 to hire nine workers, and must increase the wage to $11 to hire a tenth worker.  But the tenth worker will bring in $13 extra to the firm’s revenue.  Does Sharon hire the tenth worker?

7.  Sharon has to pay $10.50 to hire nine workers, and must increase the wage to $11 to hire a tenth worker.  But the tenth worker will bring in $13 extra to the firm’s revenue.  Does Sharon hire the tenth worker?

Honors:

===Honors===

<br>8.  “Marginal revenue product” is the change in total revenue resulting from a unit change in the quantity of a variable unit employed.  Now redo and explain this question from the exam:  “Factor of production” is any input (e.g., land, labor and capital) used to produce output.  A monopolist will continue to purchase a particular factor of production until:

 

8.  “Marginal revenue product” is the change in total revenue resulting from a unit change in the quantity of a variable unit employed.  Now redo and explain this question from the exam:  “Factor of production” is any input (e.g., land, labor and capital) used to produce output.  A monopolist will continue to purchase a particular factor of production until:

(a) average factor cost equals average revenue product

(a) average factor cost equals average revenue product

(b) marginal factor cost equals marginal revenue

(b) marginal factor cost equals marginal revenue