Introduction to Resource Markets and Marginal Revenue Product

Summary

This 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

00:00

📚 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.

05:00

📈 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.

10:01

📉 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.

Keywords

💡Resource Markets

Resource markets are where firms hire resources such as labor, capital, and land from households in exchange for money. In the context of the video, resource markets are crucial for understanding how firms determine their demand for resources. The script explains that unlike product markets, where households demand goods and services, in resource markets, firms are the demanders and households are the suppliers.

💡Product Markets

Product markets are the economic venues where households demand goods and services from firms in exchange for money. The video script contrasts product markets with resource markets, emphasizing the different roles of households and firms in each type of market. In product markets, the focus is on the exchange of finished goods and services.

💡Firms

Firms are businesses that demand resources in order to produce goods and services. The video script discusses how firms' demand for resources is influenced by the marginal revenue product of the resource. Firms are portrayed as price takers in perfectly competitive markets, which is a key assumption in determining their behavior in resource markets.

💡Households

Households are economic units that supply resources such as labor, capital, and land to firms in exchange for money incomes. The script mentions that households receive wages for labor, rent for land, and interest for capital. They play the role of suppliers in resource markets, contrasting with their role as demanders in product markets.

💡Wages

Wages are the money incomes that households receive for supplying labor to firms. The video script explains that wages are determined by the demand for labor and the supply of labor by firms. Wages are a key component of the resource markets and are central to understanding the labor market dynamics.

💡Rent

Rent is the money income that households receive for supplying land to firms. The script briefly mentions rent as one of the money incomes that households can earn from supplying resources to firms in the resource markets.

💡Interest

Interest is the money income earned by households for supplying capital, typically in the form of loans to firms. The video script describes interest as a form of income that households receive when they put money in the bank, which is then passed on to firms as loans.

💡Marginal Product of Labor

The marginal product of labor refers to the change in total output resulting from employing one additional unit of labor. The video script uses the example of a bakery to illustrate how the marginal product of labor decreases as more workers are hired, due to the concept of diminishing marginal returns.

💡Diminishing Marginal Returns

Diminishing marginal returns is the concept that as more of a variable resource is employed, the additional output it generates decreases. The script explains this concept using the bakery example, where adding more workers leads to less additional bread produced per worker due to limited space and resources like ovens.

💡Marginal Revenue Product

Marginal revenue product is the additional revenue that a firm earns from employing one more unit of a resource. The video script calculates the marginal revenue product by multiplying the marginal product of labor by the price of the good produced. It shows how this concept helps determine the wage rate a firm is willing to pay for each worker.

💡Demand for Labor

The demand for labor refers to the quantity of labor that firms are willing to hire at various wage rates. The video script demonstrates how the demand for labor is determined by the marginal revenue product of labor, which decreases as more workers are hired, leading to a downward-sloping demand curve 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]