Introduction to Resource Markets and Marginal Revenue Product
Summary
TLDRThis lesson delves into the dynamics of resource markets, focusing on labor markets where wages are determined by the demand and supply of labor. It explains how firms, as demanders, assess the value of labor through marginal revenue product (MRP), which is the product of the marginal product of labor and the price of the good produced. The script illustrates this concept using a perfectly competitive bakery example, showing how MRP decreases due to diminishing marginal returns as more workers are hired. The demand for labor graph demonstrates the inverse relationship between wage rates and the quantity of labor demanded, highlighting the economic principle that as employment increases, the additional revenue generated by each worker diminishes.
Takeaways
- 📚 The lesson introduces the concept of resource markets and their role in determining the demand for resources by firms.
- 🔄 Resource markets are where firms hire resources like labor, capital, and land from households in exchange for money incomes such as wages, rent, and interest.
- 🛍️ The distinction between resource and product markets is that in resource markets, households are suppliers and firms are demanders, opposite to product markets.
- 👷 The demand for labor is a focus in the lesson, with wages being determined by the demand for labor and the supply of labor by firms.
- 📈 The demand for a resource by firms is influenced by the price of the good being produced and the productivity of the resource employed.
- 🥯 An example of a perfectly competitive bakery is used to illustrate how the marginal product of labor is calculated and its relation to the bakery's output.
- 📊 The marginal product of labor is the change in total output divided by the change in the number of workers, demonstrating diminishing marginal returns as more workers are hired.
- 📉 The concept of diminishing marginal returns is explained, showing that productivity decreases as more workers are added due to limited resources like space and equipment.
- 💰 The marginal revenue product (MRP) is calculated by multiplying the marginal product of labor by the price of the good, indicating how much additional revenue each worker generates.
- 📉 The MRP curve is downward sloping, showing that as more workers are hired, the revenue generated by each additional worker decreases.
- 📊 The demand for labor graph illustrates the relationship between the quantity of labor and the marginal revenue product, indicating the wage rate a firm is willing to pay for each worker.
Q & A
What are the two types of markets where buyers and sellers interact in a market economy?
-The two types of markets are product markets and resource markets. Product markets are where households demand goods and services from firms in exchange for money, while resource markets are where firms hire resources like workers, capital, and land from households in exchange for money incomes.
What is the primary focus of the next few lessons in the script?
-The primary focus of the next few lessons is on labor markets, where wages are determined by the demand for labor and the supply of labor by firms.
What determines a firm's demand for a resource in a resource market?
-A firm's demand for a resource is determined by two main factors: the price of the good being produced and the productivity of the resource being employed.
What is the role of a perfectly competitive bakery in the market?
-A perfectly competitive bakery is a price taker, meaning it can sell each loaf of bread it produces for a market price set by the market, in this case, five dollars per loaf.
How is the marginal product of labor calculated?
-The marginal product of labor is calculated by determining the change in total output or product divided by the change in the number of workers or the quantity of labor. It represents how much total output changes for each additional worker hired.
What is the concept of diminishing marginal returns and how does it relate to the marginal product of labor?
-Diminishing marginal returns is the idea that as a firm employs more of a variable resource (like labor) in the short run, with fixed resources, the output attributable to additional workers diminishes. This relates to the marginal product of labor because as more workers are hired, they become less productive due to limited capital or space, leading to a decrease in marginal product.
What is the marginal revenue product and how is it calculated?
-The marginal revenue product is the additional revenue generated by hiring one more unit of labor. It is calculated by multiplying the marginal product of labor by the price of the good being produced.
Why does the revenue generated by each additional worker decrease as more workers are hired?
-The revenue generated by each additional worker decreases due to the law of diminishing marginal returns. As more workers are hired, their productivity decreases, and thus the amount of revenue each additional worker can earn for the firm falls.
How does the demand for labor graph illustrate the relationship between the quantity of labor and the marginal revenue product?
-The demand for labor graph plots the quantity of labor on the horizontal axis and the marginal revenue product (or wage rate) on the vertical axis. It shows that as the quantity of labor increases, the marginal revenue product (and thus the wage rate the firm is willing to pay) decreases, illustrating the inverse relationship between the price of labor and the quantity demanded.
What does the downward-sloping demand for labor curve represent?
-The downward-sloping demand for labor curve represents the fact that as the wage rate decreases, the quantity of labor demanded by the firm increases. This is due to the decreasing marginal revenue product as more workers are hired, reflecting the law of diminishing marginal returns.
How does the law of demand from microeconomics apply to resource markets in this context?
-The law of demand states that there is an inverse relationship between the price of a good and the quantity demanded. In the context of resource markets, this means there is an inverse relationship between the wage rate (price of labor) and the quantity of labor that firms are willing to demand, due to the decreasing productivity and marginal revenue product of additional workers.
Outlines
📚 Introduction to Resource Markets
This paragraph introduces the concept of resource markets, explaining their function as places where firms hire resources like workers, capital, and land from households in exchange for money. It contrasts resource markets with product markets, where households demand goods and services from firms. The focus is on labor markets, where wages are determined by the demand for labor and the supply of labor by firms. The paragraph also discusses the factors affecting a firm's demand for resources, such as the price of the good being produced and the productivity of the resource. An example of a perfectly competitive bakery is used to illustrate the concept of marginal revenue product, which is the product of the marginal product of labor and the price of the good.
📈 The Determination of Labor Demand and Marginal Revenue Product
This paragraph delves into the calculation of the marginal revenue product (MRP) for labor in a perfectly competitive bakery. It explains how the MRP is derived by multiplying the marginal product of labor (the additional output produced by each worker) by the price at which the bakery can sell its bread. The paragraph illustrates the concept of diminishing marginal returns, showing how the marginal product of each additional worker decreases as more workers are hired due to limited resources like the size of the bakery and the number of ovens. The summary also includes a discussion on how the bakery determines the wage it is willing to pay each worker based on the MRP, and how this forms the demand for labor curve, which is downward sloping as the quantity of labor demanded increases with a decrease in wage rates.
📉 The Relationship Between Wage Rates and Labor Demand
The final paragraph discusses the relationship between wage rates and the quantity of labor demanded by firms, drawing parallels with the law of demand in microeconomics. It explains that there is an inverse relationship between the price of a resource (wages in this case) and the quantity of that resource firms are willing to demand. This is due to the law of diminishing marginal returns, which states that as more of a variable resource is employed, the revenue attributable to each additional unit of that resource decreases. The paragraph concludes with a summary of how the marginal revenue product informs the firm's willingness to hire more workers, contingent on wage rates falling as employment increases.
Mindmap
Keywords
💡Resource Markets
💡Product Markets
💡Firms
💡Households
💡Wages
💡Rent
💡Interest
💡Marginal Product of Labor
💡Diminishing Marginal Returns
💡Marginal Revenue Product
💡Demand for Labor
Highlights
Introduction to the concept of resource markets and their role in a market economy.
Differentiation between product markets and resource markets with their respective roles of suppliers and demanders.
Explanation of money incomes for different resources: wages for labor, rent for land, and interest for capital.
Focus on labor markets and the determination of wages by the demand for and supply of labor.
The impact of the price of goods and the productivity of resources on a firm's demand for resources.
Illustration of a perfectly competitive bakery's productivity table and its role as a price taker.
Calculation of the marginal product of labor and the concept of diminishing marginal returns.
The relationship between marginal revenue product and the price of the good being produced.
Graphical representation of the marginal revenue product curve and its downward slope.
The bakery's willingness to pay workers based on their marginal revenue product.
The law of diminishing marginal returns and its effect on the productivity of additional workers.
The demand for labor graph illustrating the relationship between wage rate and quantity of labor demanded.
The bakery's decision-making process on hiring workers based on marginal revenue product and wage rates.
The inverse relationship between wage rates and the quantity of labor demanded due to diminishing returns.
Practical application of the law of demand in resource markets, specifically labor markets.
Conclusion on how firms determine their demand for labor based on marginal revenue product and productivity.
The importance of understanding resource markets for economic decision-making in firms.
Transcripts
in this lesson we're going to introduce
the concept of resource markets and talk
about how firms demand for resources is
determined in a resource market by the
marginal revenue product of the resource
being employed so we need to do some
review from earlier on in your course we
need to review what the concept of
resource markets is you learned earlier
on that there are two places where
buyers and sellers interact with one
another in a market economy there are
product markets which you've probably
already studied this is where households
demand goods and services from firms in
exchange for money there are also
resource markets resource markets are
where firms hire workers capital and
land from households in exchange for
money incomes you probably learned what
those money incomes are called for labor
households received wages for land
households receive rent and for their
capital the money we put in the bank
which is late which is then passed on to
firms in the form of loans we earn
interest we're going to be focusing
mostly on labor markets in the next few
lessons in which wages are determined by
the demand for labor and the supply of
labor by firms so what's different
between resource markets and product
markets is the roles are reversed
households are now the suppliers and
firms are now the demanders firms demand
resources in order to produce the goods
and services that they then sell to
households in the product market so what
determines a firm's demand for a
resource there are basically two things
that can affect the demand for a
resource by firms one is the price of
the good being produced and the other is
the productivity of the resource being
employed to illustrate this we're going
to look at the productivity table for an
individual perfectly competitive bakery
you learned earlier on that a perfect
competitor is what we call a price taker
therefore a perfectly competitive bakery
can sell each loaf of bread that it
produces for a market price of five
dollars as we can see in the table what
we're going to do is determine this
individual Baker's do and for labor by
comparing the marginal product of labor
in other words how much bread each
additional worker that the bakery hires
produces and multiplying that by the
price the bakery can sell each loaf of
bread for first let's calculate the
marginal product of labor notice it in
the left here we have the number of
workers employed from one to seven and
the output produced in total by all the
workers from six for the first worker up
to twenty one when seven workers are
employed but we want to know is what's
the marginal product you probably
learned earlier on in the course that
marginal product is the change in total
product or output divided by the change
in the number of workers or the quantity
of labour very simple calculation here
all we need to do is see how much total
output changes for each additional
worker hired the first worker
contributes six loaves of bread as we
see as employment goes up to two the
output increases to eleven for a
marginal product of five because eleven
minus six equals five output then goes
up to fifteen giving the firm a marginal
product of four for the third worker and
so on the fourth worker contributes
three additional loaves of bread the
fifth worker contributes to additional
loaves of bread the six worker only one
loaf of bread and the seventh worker no
additional loaves of bread so one thing
you may be wondering is why does
marginal product decrease well you may
also remember the concept of diminishing
marginal returns
this is the idea that as a firm employs
more of a variable resource in this case
labor in the short-run when there are
fixed resources which in the case of my
bakery is the size of my bakery in the
number of ovens that I have the output
attributable to additional workers
diminishes this is because there's not
enough capital there's not enough space
for these workers to become more
productive as we hire more of them they
just get in each other's way you've
probably heard the term too many cooks
spoil the broth this is the quantitative
illustration of that concept so the
question now is how much should the firm
be willing to pay the first worker the
second worker the third worker and so on
and that's where the term marginal
revenue product comes in our marginal
revenue product is very simply the
marginal product of labor times the
price of the good being produced so
what we're looking at is how much output
did each worker that we hired produce
and how much were we able to sell that
output for so what we're going to do is
multiply the marginal product times the
price of bread the first worker produced
six loaves of bread which the bakery
could sell for five dollars per loaf
earning the bakery a total of thirty
dollars in revenues for the first worker
hired the second worker contributed five
loaves of bread we multiply that by the
price of five for a marginal revenue
product of twenty-five dollars and so on
I'm going to go ahead and calculate the
marginal revenue products for each of
these workers down to the seventh worker
so what do we see here we see that as
the firm employs more workers the
revenue generated by each additional
worker decreases it's pretty easy to
understand why well the price of bread
stays the same the productivity of
additional workers decreases therefore
the amount of revenue each additional
worker can earn the firm Falls just take
some notes here so as employment as
employment
increases
the revenues
generated
by additional workers
decreases you should start to be seen
how this explains the demand for labor
workers are less productive as we hire
more of them therefore firms are willing
to pay less for each additional worker
let's look down at our demand for labor
graph for the individual bakeries demand
for labor I need to put some labels on
this on the horizontal axis I'm going to
be looking at the quantity of labor in
other words the number of workers on the
vertical axis I'll be looking at the
marginal revenue product in other words
the amount of revenue each worker that
the firm hired contributed to the firm's
total revenues we're going to also look
at that as the wage rate because this is
also going to tell us how much
the firm would be willing to pay each of
these workers we're gonna go from one
worker to seven so let's put the labels
here
and we can see that the marginal revenue
product peaked at thirty dollars and it
fell down to zero dollars so I'm going
to put some values here we'll go 3 9 12
15 18
21 24 27
and 30 and all I need to do is plot the
points from my table up here at one
worker the marginal revenue product the
revenue that that worker contributed to
the firm was $30 and at 7 workers the
revenue contributed was zero dollars and
since this is linear all I need to do is
plot those two points so at one the
revenue was $30 let's connect those
points
all right we've now got our
marginal revenue
product of labor for my individual
bakery what this line tells me is how
much the bakery would be willing to pay
each of the workers from the first
worker to the seventh worker notice that
when the marginal revenue product is
high the first worker who contributed
six loaves of bread which could be sold
for five dollars each earning the firm
$30 the firm would be willing to pay
that worker up to thirty dollars but the
second worker only contributed five
loaves of bread
which were sold for five dollars a piece
earning the baker don't eat wente five
dollars in revenues therefore for the
second worker
the maximum wage the bakery would be
willing to pay is
twenty-five dollars and we can see that
that continues at lower wage rates the
bakery would be willing to hire more
workers
because
additional workers earned less
additional revenue this bakery would in
fact only be willing to hire a sixth
worker if he could pay that worker as
low as five dollars because as you can
see the marginal revenue product or the
revenue earned by the six worker is only
five dollars and so on there's no way
this bakery would want to hire seven
workers because the marginal revenue
products of the seventh worker is zero
so unless that work were willing to work
for free there's no reason to hire that
worker this is our demand for labor
curve it's a very simple graph guys the
marginal revenue product tells the firm
how much wage rate the firm would be
willing to pay each additional worker
and notice that it's downward sloping so
that means as wage rate Falls the
quantity demanded of labour increases
because
marginal revenue product Falls as
employment
increases
marginal revenue product is the
individual firms demand for labor going
back to our original notes here we can
see that the marginal revenue product
tells the firm how much each additional
worker will in that firm in revenue as
employment increases marginal revenue
product decreases due to the law of
diminishing marginal returns therefore
firms are only willing to hire more
workers if the wage rate they have to
pay those workers decreases this again
sounds a lot like the law of demand from
earlier on a microeconomics which says
there's an inverse relationship between
the price of a good and the quantity of
that good demanded the same is true in
resource markets there is an inverse
relationship between the price of a
resource in this case wages for workers
and the quantity of that resource that
firms will demand due to the law of
diminishing marginal returns and the
fact that the revenue attributable to
additional units of a variable resource
decreases as the employment of that
resource increases
[Music]
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