VIII. Resource markets
A. resource supply
2. responding to wage changes

    When you buy a good, +P lowers attainable utility
    Here you sell a good, leisure: +P raises attainable utility

    So income effect of a higher PL causes more l to be consumed if leisure is a normal good.

    If leisure is a normal good, S & I effects of a wage change move in opposite directions.

In diagram:
    1: la --> la' = Sub.Effect
    2: la' -> lb = Inc.Effect

Labor market:     If Sub.Effect dominates: +PL –> -l and +L-supplied     If Inc.Effect dominates: +PL –> +l and -L-supplied:     So it is quite plausible to have a downward-sloping overall supply of labor     Same is true for consumption and savings.

    Empirically: for individuals in the work force, possibly backward-bending

  Evidence:
           Real    Real    Avg.work
    Year   Wage    wage   week
           (1982$) (Cur$)
    1959   6.69    ____    39.0
    ____   ____    ____    ____

    For those out of the work force, appears to be upward sloping

    Overall: it appears to be very steep, possibly vertical

    ?shape of SL per supply-siders?

    Still, for any given industry, SL is upward sloping because it can draw workers from other industries.

Application: education and work hours    Education is an investment--someone pays it.    Option 1: HS: keep some wealth --> interest income     Option 2: College: use your wealth to pay expenses     Equilibrium => same U with either choice                 Other           Wage  income  Utility Option 1  PLhs     Io    Uo Option 2  PLc      0     Uo

B. Resource demand in competitive markets

Learning objectives: Use the resource hiring rule to determine the profit-maximizing quantity of an input to use. Explain and illustrate why input demand curves always slope down.

    Note: input (factor) demand is a derived demand:
    --derived from demand for output resources are demanded by firms not for their own sakes, but to produce output in response to product demand

    1. Basic analysis

    Ex: labor (L)
    You own a hairdresser shop, a PC industry that hires homogeneous labor in a PC labor market
    ? Should you hire me?
    I am just as efficient and talented as any other you can hire
    Can ask up to 3 questions about me or your market
    PL = $30/hr. 2 haircuts per hour. P=$20/haircut

    Cost of hiring more of a resource
    Example: labor

    Cost is given to a firm by the market--diagram it
    --For now we assume that firms are perfect competitors in factor markets
    Each firm is such a small part of total demand for a factor that it can't affect the price

    Extra cost of another worker = MFCL
        = DTFCL/DL = D(PL^.L)/DL
        = PL with PC

    Benefit from hiring more of a resource

    Now consider the revenue side for a firm:
    ? What does an extra worker do that allows you to earn more revenue?

    Extra revenue from another worker = MRPL = DTR/DL

    A resource hiring rule in competitive input markets

    General rule: Hire more of an input as long as its MRP exceeds its MFC.

    With PC:
    (1) MR = P => MRPL = P^.MPL = the value of the marginal product of labor (VMPL)
    (2) MFCL = PL
    (3) Hire until P^.MPL = PL

Note: MRP must eventually decline since:     (1) MPL eventually falls by law of diminishig returns     (2) MR is constant for PC firms and falls for firms with market power     Ex: haircust     MPL = 2 haircuts     P = MR = $20     MRPL = $20 x 2 = $40 PC equilibrium: VMPL = PL => Workers can afford to buy back what they produce => workers are paid the value of their mp => workers are not exploited.