Begin2 Market4 Shifts5 M & M3 Adjustment6 LaborEnd 1 Session 10 Resource Markets Chapter 10 and 11...

Begin 2 Market 4 Shifts 5 M & M3 Adjustment 6 Labor End1

Session 10 Resource Markets

Chapter 10 and 11 in the text

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Lecture Outline Session 10

1.0 Begin2.0 The Market for Resources 3.0 Adjustment and Surplus4.0 Shifts in Resource Demand 5.0 Monopsony & Monopoly 6.0 Labor Supply

7.0 End


Example: Bilateral Monopoly in Labor Market

Seattle -- At the heart of the union machinists' strike against Boeing Co. is a high-stakes showdown over something the aerospace giant once touted as a manufacturing innovation: Its effort to outsource key roles in producing its new 787 Dreamliner jet. Nearly 27,000 machinists walked off the job at 12:01 a.m. Saturday after last-ditch talks for a new three-year contract failed. While wages and health-care costs are big issues, job security has emerged as perhaps the most crucial one, with both sides signaling that the new contract represents a major crossroads.

The machinists' strike is a classic illustration of the bi-lateral monopoly model. ﾊﾊ The Boeing labor union represents a monopoly seller of aircraft worker services, in the diagram its wage demand demand is represented by the Monopoly Wage of $15. ﾊ The Boeing management represents a monopsony buyer of aircraft worker services, in the diagram its wage offer is represented by the Monopsony Wage of $8.


A Hollywood Story Without an EndingNovember 12, 2007 7:51 a.m. WSJ

Example

© 2006 Thomson/South-Western

— In Hollywood, the West Coast capital of conventional wisdom, several theories about the Writers Guild strike are widely held: The longer writers and their production patrons stay away from the negotiating table, the harder it'll be to come back; no side is likely to emerge unscathed; As the second week of the strike begins, layoffs have already spread across parts of the TV sector and hostility is growing,. An example of a bilateral monopoly


U.S. Cracks Down on Hiring of Illegal Immigrants By ERIC LIPTON

Published: April 20, 2006 NY Times

Example of Supply Decrease

© 2006 Thomson/South-Western

— The apprehension on Wednesday of more than 1,100 illegal immigrants employed by a Houston-based pallet supply company, as well as the arrest of seven of its managers, represents the kickoff of a more aggressive federal immigration enforcement campaign intended to hold employers accountable for breaking the law, Homeland Security Secretary Michael Chertoff said today. An example of a decrease in labor supply


2.0 Resource Demand and Supply

2.1 Resource Demand2.1a Marginal Revenue Product: Competition2.1b Price Maker: Monopoly

2.2 Resource SupplyMarginal Resource Cost

2.3 Equilibrium Wage and Employment


2.1 Demand Curve: Marginal Revenue Product

The demand curve for a resource is derived from the marginal product of the input and the marginal revenue from selling that output . This demand curve is the marginal revenue product curve for that factor

Marginal product is the change in total product from employing one more worker and reflects the law of diminishing returns

Marginal revenue is the change in total revenue associated with the sale of the output produced by the factor.

The slope of the demand curve depends on the structure of the output market. If sold in a perfectly competitive market the slope is flatter, in a monopoly market, the slope is steeper.


2.1a Output sold in Perfectly Competitive Market Here, marginal revenue product is the marginal product of the resource

multiplied by the product price of $20, the marginal benefit from hiring one more worker

Note that because of diminishing returns, the marginal revenue product falls steadily as the firm employs additional units of the resource.

MarginalWorkers Total Marginal Product Total Revenue per day Product Product Price Revenue Product (1) (2) (3) (4) (5) (6)

0 0 - $20 $0 - 1 10 10 20 200 $200 2 19 9 20 380 180 3 27 8 20 540 160 4 34 7 20 680 140 5 40 6 20 800 120 6 45 5 20 900 100 7 49 4 20 980 80 8 52 3 20 1040 60 9 54 2 20 1080 40 10 55 1 20 1100 20 11 55 0 20 1100 0 12 53 -2 20 1060 -40


2.1b Output sold in Monopoly Market If the firm has some market power over the price that it charges, the demand curve

slopes downward and price must be lowered to sell more The profit-maximizing firm should be willing and able to pay as much as the

marginal revenue product for an additional unit of the resource The marginal revenue product for the price maker declines because of the law of

diminishing returns and because additional output can be sold only if the price is lower

MarginalWorkers Total Product Total Revenue per day Product Price Revenue Product (1) (2) (3) (4) = (2) (3) (5)

1 10 $40.00 400.00 $400.00 2 19 35.20 668.80 268.80 3 27 31.40 847.80 179.00 4 34 27.80 945.20 97.40 5 40 25.00 1000.00 54.80 6 45 22.50 1012.50 12.50 7 49 20.50 1004.50 -8.00 8 52 19.00 988.00 -16.50 9 54 18.00 972.00 -16.00 10 55 17.50 962.50 -9.50 11 55 17.50 962.50 0.00


2.2 Supply Curve: Marginal Resource Cost

The additional cost to the firm of employing one more unit of labor

Since the typical firm hires such a tiny fraction of the available resources, its employment decision has no effect on the market price of that resource

Each firm usually faces a given market price for the resource and decides only on how much to hire at that price


$200

2.2a SUPPLY CURVE: Market v Firm

$200

Workersper day

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100

Resourcedemand

Resourcesupply

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Marginal revenue product =resource demand

Marginal resource cost =resource supply

100

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a) Market demand for factory workers b) Firm

In panel (a) the intersection of market demand and supply determines the market wage of $100 per day becomes the marginal resource cost of labor to the firm regardless of how many workers the firm employees.

In panel (b) the marginal resource cost curve is shown by the $100 market wage. The marginal revenue product, or resource demand curve, is based on the firm being a price taker. In this case the firm will hire 6 workers per day.


2.3 Equilibrium Wage and Employment

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SHere we illustrate with “labor” as the specific resourceThe demand curve slopes downward and the supply curve slopes upwardThe demand for and supply of resources depends on the willingness and ability of buyers and sellers in resource markets


3.0 Adjustment and Surplus

3.1 Price Differentials: A. Temporary/Permanent

3.2 Opportunity Costs A. Pure Economic RentB. Pure Opportunity Costs


3.1 Differences in Resource Prices

Resource prices sometimes differ temporarily across markets because adjustment takes time

The differences can be between industries, or geographic regions When resource markets are free to adjust, price differences

trigger the reallocation of resources, which equalizes payments for similar resources

Not all resource price differences cause a reallocation of resources For example, land may lead to permanent differences in prices Certain wage differentials stem from the different costs of acquiring

the education and training required to perform particular tasks Other earning differentials reflect differences in the nonmonetary

aspects of similar jobs


3.1a Example: Differences in Demand Market for Carpenters •Differences in the demand for carpenters in alternative uses•If carpenters earn $25 an hour to build homes (panel a), $5 more than carpenters making furniture (panel b), some will move from furniture making to home building: the wage in home building decreases and the wage in furniture building increases. Eventually, this shift will continue until the wage is equal at $24 in both markets.


$10

5

0 5,000 10,000 Hours of labor per week

Opportunity costs

Economic rent

S

D

If the supply curve slopes upward, the resource supplier earns some economic rent and some opportunity cost

At a market clearing wage of $10, the pink shaded area identifies the opportunity cost and the blue shaded area the economic rent

Both demand and supply determine the equilibrium price and quantity

(c) Resource returns are divided between economic rent and opportunity cost

3.2 Opportunity Cost (50%), Economic Rent (50%)

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3.2a Opportunity Cost (0%), Economic Rent (100%)

$1

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Economicrent

Millions of acresper month

The supply of grazing land is shown by the perfectly inelastic vertical supply curve, indicating 10 million acres have no alternative useSince the supply of land is fixed, the amount paid to rent the land has no effect on the quantity supplied: the land’s opportunity cost is zero and all earnings are economic rentThe fixed supply determines the equilibrium quantity of the resource, while demand determines the equilibrium price

(a) All Resource Returns are Economic Rent

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Opportunitycosts

Hours of labor per week

At the other extreme is the case in which a resource can earn as much in its best alternative use as in its present use

the supply curve is perfectly elastic horizontal all resource returns are opportunity costs as shown by the shaded area

Here, the horizontal, perfectly elastic, supply determines the equilibrium wage while demand determines the equilibrium quantityThe more elastic the resource supply, the lower the economic rent as a portion of total earnings

(b) All Resource Returns are Opportunity Costs

3.2b Opportunity Cost (100%), Economic Rent (0%)D

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4.0 Factors Shifting Resource Demand

4.1 Shift Factors4.2 Substitutes

Chocolate: Corn and Coca butter

4.3 Complements Travel: Gasoline and SUVs

4.4 Technology4.5 Final Product

Iraq War and Big Tires

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4.1 Demand for Resources: Shift Factors

The resource demand curve is the resource’s marginal revenue product. Shift factors include: The price of related inputs.

A change in the price of a substitute resource A change in the price of a complement resource

A change in technology

The market price for the output. A change in the market demand for the output produced


4.2 Price of a Substitute Resource

Substitutes --Positive Elasticity An increase in the price of one

increases the demand for the other

A decrease in the price of one decreases the demand for the other

Examples Coca Butter Corn

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Corn and Coca butter are substitutes in the production of choclate. $4 is the initial price in both markets (point A). Assume an increase in cost of corn oil to $7, then demand for Coca butter will rise, say for example to point B in the right panel


4.2a Example: Demand for Coca Butter

Corn oil and coca butter are substitute resources in the production of chocolate Recently rising Corn Prices have increased cost of corn oil leading firms to substitute coca butter in the production of chocolate

Source


4.3 Price of a Complement Resource

Complements --Negative Elasticity An increase in the price of one decreases

the demand for the other Because they are used together.

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Gasoline and Autos are complements in the production of travel. If gasoline sharply rises in price (left hand panel) then demand for autos will fall (right hand panel). B in the right panel


4.3a Complements: Gasoline & SUVs: I

Americans have cut back gasoline use in apparent response to increasing prices, separate surveys by the government and a petroleum trade organization showed Wednesday. Gasoline prices — which average $2.801 nationwide, are up 57.7 cents from last year, according to motorist organization AAA. Gas use last month was 0.6% less than a year ago, the American Petroleum Institute reported.

High fuel prices have led to decreased quantity demand for gasoline and other refined oil products.

OutlineMarket USA Today

Analysis of impact for other final markets:

Oil Hits $100, Jolting Markets, Squeeze's Effect Is Amplified


4.3b Complements: Gasoline & SUVs: II

Slumping SUV Sales Drive Losses at GM

January 26, 2006 Lagging SUV sales continued to hurt General Motors Corp. as the auto giant posted a fourth-quarter net loss of $4.8 billion. The losses exceeded Wall Street expectations and GM blamed the red ink on high costs, shrinking market share and sluggish sales of SUVs. Slumping SUV Sales Drive Losses at GM

OutlineMarket

Source

Source II


4.4 Changes in Technology

Technological improvements can boost the productivity of some resources but can make others obsolete Development of computer-controlled

machines increased the demand for computer-trained machinists, but decreased the demand for machinists without computer skills

The development of synthetic fibers – rayon and orlon – increased the demand for acrylics and polyesters, but reduced the demand for natural fibers

OutlineMarket


4.5 Demand for the Final Product

Because the demand is derived from the demand for the final output, any change in the demand for output will affect resource demand

For example, a decrease in the demand for automobiles will decrease their market price and decrease the marginal revenue product of autoworkers and other resources employed by the automobile industry

OutlineMarket


4.5a Example: Iraq War & Big Tires

Mining companies are complaining about a shortfall in the supply of the giant tires that go on large dump trucks and other heavy equipment. These outsize tires stand as tall as 12 feet tall and can spread 4 feet wide. prices have quadrupled for some of them in the last year to more than $40,000 a tire.

By SIMON ROMERO Published: April 20, 2006

There are several reasons for the tire shortage. Demand is soaring, with greater needs by the military for the wars in Iraq and Afghanistan and by construction firms rebuilding the hurricane-ravaged Gulf Coast.

In many ways, the tire shortage contributes to the soaring commodities prices. The price of copper, which is used in electrical wiring and pipes, has climbed 45 percent this year, closing at $2.9595 a pound on Wednesday. Nickel, used to make stainless steel, is up 37 percent during the same period, while gold is up 23 percent and zinc is up 65 percent.

Some companies have been forced to idle their heavy equipment

In the meantime, salvage firms are doing a thriving business in discarded tires and companies that retread tires are struggling to keep pace with demand, with used tires in some cases fetching higher prices than new tires.


5.0 Monopsony & Monopoly5.1 Monopsony on Buyer Side,

A,B CharacteristicsC. Graph D. ExampleE. Market Structure Matrix

5.2 Minimum WageA. Pro ViewB. Con ViewC. Videos of Pro and Con View

5.3 Bilateral MonopolyGraph


5.1 Monopsony Characteristics

Single Buyer: First and foremost, a monopsony is a monopsony because it is the only buyer in the market. The word monopsony actually translates as "one buyer." As the only buyer, a monopsony controls the demand-side of the market completely. If anyone wants to sell the good, they must sell to the monopsony.

No Alternatives: A monopsony achieves single-buyer status because sellers have no alternative buyers for their goods. This is the key characteristics that usually prevents monopsony from existing in the real world in its pure, ideal form. Sellers almost always have alternatives.

Barriers to Entry: A monopsony often acquires and generally maintains single buyer status due to restrictions on the entry of other buyers into the market. The key barriers to entry are much the same as those that exist for monopoly: (1) government license or franchise, (2) resource ownership, (3) patents and copyrights, (4) high start-up cost, and (5) decreasing average total cost.

Source of the material in the Monopsony slides


5.1a Modern Monopsony

Like other extreme market structures (perfect competition and monopoly) monopsony is only approximated in the real world. Achieving the status of THE ONLY BUYER is not easy. Few if any buyers actually achieve this status. However, several have come close. In modern times a few examples of markets that come very close to monopsony come from the world of sports.Should a talented quarterback wish to obtain a job as a professional football player, then THE employer is the National Football League (NFL). Of course, the NFL is not absolutely the ONLY employer. Employment as a professional football player can also be found with the Canadian Football League (CFL). However, sufficient difference exists between these two employers to give the NFL significant monopsony control.


5.1b Monopsony Supply and CostSingle-buyer status means that monopsony faces a positively-sloped supply curve, such as the one displayed in the exhibit to the right. In fact, the supply curve facing the monopsony is the market supply curve for the product.The far right curve in the exhibit is the red supply curve (S) facing the monopsony. The far left curve is the brown marginal factor cost curve (MFC). The marginal factor cost curve indicates the change in total factor cost incurred due to buying one additional unit of the good.Because a monopsony is a price maker with extensive market control, it faces a positively-sloped supply curve. To buy a larger quantity of output, it must pay a higher price. For example, the monopsony can hire 10,000 workers for a wage of $5. However, if it wants to hire 20,000 workers, then it must raise the wage to $6.10.

For this reason, the marginal factor cost incurred from hiring extra workers is greater than the wage, or factor price. Suppose for example that the factor price needed to hire ten workers is $5 and the factor price needed to hire eleven workers is $5.10. The marginal factor cost incurred due to hiring the eleventh unit is $6.10. While the $6 factor price means the monopsony incurs a $5.10 factor cost from hiring this worker, this cost is compounded by an extra cost of $1 due to the higher wage paid to the first ten workers. The overall increase in cost, that is marginal factor cost, is thus $6.10 (= $5.10 + $1).


5.1c Profit-maximizing employment of a monopsony

This firm faces a positively-sloped supply curve, represented by the red supply curve (S). Because higher wages are needed to attract more labor, the positively-slope brown curve is the marginal factor cost curve (MFC). The third curve displayed in the exhibit is the green negatively-sloped marginal revenue product curve (MRP), which indicates the value of the extra production generated by each worker.As a profit-maximizing firm, monopsony hires the quantity that equates marginal factor cost and marginal revenue product found at the intersection of the MFC and MRP curves. This quantity is 37,000 workers. The monopsony then pays each worker $8.40.

•This price and quantity maximizes profit because the revenue generated from hiring the last worker (marginal revenue product) is exactly equal to the cost incurred from hiring the last worker (marginal factor cost).


5.1d Example:One Company Town

Murray Energy, is the largest employer of Huntington Utah, business patterns linkIt is the Crandall Canyon mine operator

Arguably the high risk “retreat mining” project was a direct function of the monopsony power of Murray EnergyCrandall Canyon cave-in 8/6/2007 reflects the dangers of retreat mining NYTimes

Retreat mining was found to be the cause of the cave-inWSJ article, Retreat Mining described

Begin 2 Market 4 Shifts 5 M & M3 Adjustment 6 Labor EndEnd35

5.1e Summary of the Key Market Structure Characteristics

# of suppliers

Product Standardized

Entry/Exit Control over Price

Perfect Competition

Many Yes Very easy None

Monopoly One Unique, no close substitutes

Blocked Considerable

Monopsony One buyer No alternatives

Barriers Considerable

Monopolistic Competition

Many Not much as much differences as they want you to think

Relatively easy

Some, but within narrow limits

Oligopoly Few Not much Significant obstacles

Limited by interdependence, but considerable with collusion


5.2a MONOPSONY & MINIMUM WAGE: Con

The standard analysis of a minimum wage price floor assumes a perfectly competitive market with a large number of sellers and buyerswhen a minimum wage is imposed on this efficient, competitive market the minimum wage disrupts this competitive equilibrium and creates a surplus of unemployed workers.

Sourceof the material in the slides on Monopsony and Minimum Wage

A $12 minimum wage in the diagram creates 13,500 unemployed workers, workers who are willing and able to work at the $12

minimum wage, but who cannot find employment.


5.2b MONOPSONY & MINIMUM WAGE: Pro

Now consider how a $10 minimum wage affects a monopsony market. By imposing a minimum wage, the portion of the supply curve that carries a factor price less than $10 is no longer relevant. The factor supply curve now consists of two segments. The first segment is horizontal at the $10 wage. The second segment is the original factor supply curve above the $10 wage.The change in factor supply also cause changes in the marginal factor cost. The marginal factor cost curve coincides with the horizontal segment of the factor supply curve up to 50,000 workers. At 50,000 workers the marginal factor cost curve then turns vertical until it joins the original marginal factor cost curve.The profit-maximizing outcome is where marginal factor cost and marginal revenue product intersect. This occurs at the $10 minimum wage and 50,000 workers. This is, by no coincidence, the intersection of the marginal revenue product curve and the factor supply curve. This is, by no coincidence, the perfectly competitive, efficient, outcome. And none of this is coincidence because $10 minimum wage is designed to generate that particular outcome.

How does this minimum wage outcome compare with the monopsony outcome? The wage rate is obviously greater ($10 compared to $8.40). However, employment is ALSO greater (50,000 workers compared to 37,000 workers). And there is NO unemployment? The minimum wage did not created unemployment. In fact, MORE workers are employed and

they ALL receive a higher wage. It is a win-win situation for ALL workers in the market.

Begin 2 Market 4 Shifts 5 M & M3 Adjustment 6 Labor End

5.2c Videos: Pro & Con

Click the black area for the Con View

Click the graph for the Pro View


5.3 Bilateral Monopoly

A market containing a single buyer and a single seller, or the combination of a monopoly market and a monopsony market. A market dominated by a profit-maximizing monopoly tends to charge a higher price. A market dominated by a profit-maximizing monopsony tends to pay a lower price. When combined into a bilateral monopoly, the buyer and seller both cannot maximize profit simultaneously and are forced to negotiate a price and quantity. Then resulting price could be anywhere between the higher monopoly price and the lower monopsony price. Where the price ends ups depends on the relative negotiating power of each side.


5.3a Bilateral Monopoly: Example

Industrial Labor: a number of modern labor markets contain a dominate employer on the buying side and a dominate labor union on the selling side. Negotiations between large corporations and labor unions over wages and working conditions, such as those between General Motors and the United Autoworkers Union, approximate the bilateral monopoly model. While these markets are not, strictly speaking, comprised of pure monopoly sellers and pure monopsony buyers, the do have a definite bilateral monopoly flavor.


5.3b Bilateral monopoly labor market: TV Screen Writers

Consider the current (Nov 2007) Screen writers srtike On the buying side are the Hollywood producers represented by the Alliance of Motion Picture and Television Producers.. Assuming that everyone who writes TV scripts either works for the Alliance or they do not work at all, then this makes the Alliance a monopsony buyer.On the selling side are the screen writers represented by the Writers Guild of America Assuming The Guild speaks for ALL of the screen writers, then it essentially is controlling the supply-side of this particular labor market. This makes the Guild a monopoly seller.YouTube Video, Supporter

Outline Ch 12


5.3c Bilateral monopoly labor market: TV Screen Writers

What results from this bilateral monopoly is the need for negotiation between the monopoly (Writers Guild) and the monopsony (TV Producers). Without the Writers Guild monopoly on the selling side, the Alliance of TV Producers monopsony maximizes profit by paying 37,000 workers a wage of $8.40 per hour. Without the Alliance of TV Producers monopsony on the buying side, the Writers Guild monopoly maximizes profit (that is, member income) by charging a wage of $15 per hour to employ 30,000 workers. The two sides need to negotiate a price. But what price? Unlike other output analyses, there is no way of knowing the price. It could be $8.40, it could be $15, or (more likely) it could be anywhere between. Where the price ends up depends on the relative negotiation power of each side. If the TV Producers are extremely powerful, with oodles of profit, with tons of inventory available, or with an extremely talented team of negotiators, then the price might end up close to $8.40. However, if the Writers Guild has charismatic negotiators, has unwavering support from every employee, and has a large bank account, then the price might end up close to $15.There is no way of knowing in advance.

Outline Ch 12


6.0 Labor Supply

6.1 The work/leisure trade off 6.2 Labor Supply

A. Substitution EffectsB. Income Effect

6.3 Back ward bending Labor Supply 6.4 Market Supply 6.5 Wage Differentials

Occupation Education AE Profiles


6.1a Three Uses of Time

Individuals can use their time in three waysUndertake market work selling time in

the labor market in return for incomeUndertake nonmarket work using time to

produce their own goods and servicesSpend time as leisure all nonwork uses of

their time


6.1b Work and Utility

Work is not a pure source of utility, rather it is a source of disutility the opposite of utility

Net utility of work -- the utility of consumption made possible through work minus the disutility of the work itself; usually makes some amount of work an attractive use of part of an individual’s time

In the case of market work, the individual’s income buys goods and services


6.1c Utility Maximization

Within the limits of a 24-hour day, seven days a week, individuals can balance their time among market work, nonmarket work, and leisure in order to maximize utility

The rational consumer will attempt to maximize utility by allocating time so the expected utility of the last unit of time spent in each activity is identical


6.1d Implications

The higher your market wage, other things constant, the higher your opportunity cost of leisure and nonmarket work

The higher the expected earnings right out of high school, other things constant, the higher the opportunity cost of attending college


6.2 Labor Supply

An increase in the wage affects an individual’s choice between market work and other uses of time in two ways:Substitution EffectIncome Effect


6.2a Substitution Effect

As wage increases, market work is substituted for other activities

The substitution effect of a wage increase

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6.2b Income Effect

A higher wage means a higher income for the same number of hours, so demand for all normal goods increases

Leisure is a normal good, so higher income increases the demand for leisure and the allocation of time to market work declines

The income effect of a wage increase tends to reduce the quantity of labor supplied to market work


6.3 Backward Bending Labor Supply Curve

The individual supply curve slopes upward until a wage of $12 is reached: at $12, the substitution effect dominates – the quantity of labor supplied increasesAfter a wage of $12, the labor supply curve bends backward and the income effect dominates – the quantity of labor supplied decreases


6.4 Market Labor Supply CurveThe labor supply curves of different individuals do not bend backwards at the same time – here we have three individual supply curves that sum to a market supply curve that slopes upward over the realistic range of wages


6.5 Causes of Wage Differentials

Wage differences across markets trace to differences in a number of factorsDifferences in training, education, age, and

experienceDifferences in abilityDifferences in riskGeographic differencesJob discriminationUnion membership


6.5a Wage Differentials By Occupation


6.5b Wages Differentials by Education

Training, Education, Age, and ExperienceSome jobs pay more because they require a

long and costly training periodFewer individuals are willing to incur the time

and expense requiredResults in a smaller market supply

However, extensive training increases the productivity of labor There is increased demand for these skills


6.5c Data: Age, Education, and Pay

Age Earning Profiles By Level of Education

A College Degree leads to a dramatically higher earnings level than a high school graduate


6.5d Application of AE Profiles

In wrongful death lawsuits, the plaintiff economist uses data on salary by occupation to estimate the total earnings of the decedent over the remainder of their work-life expectancy. (An estimate of the number of years an individual would have participated in the labor force.)


6.5e Application

Total earnings can be estimated in two waysFirst Method: Obtain recent earnings.: Recent

Year Earnings2000 $ 34,0002001 $ 34,5002002 $ 35,7002003 $ 38,1002004 $ 42,000

Then project forward based on the average increase in those wages :. The Geometric Mean is one easy formula for average annual increase:

($42,000/$34,000)^(1/4) = 1.0542 5.42%General Formula for Geometric Mean: (Et/E1)(1/t-1)


6.5f Potential Problem with First Method

Some individuals may be on that portion of age-earnings profile where earnings are either increasing rapidly or starting to decreaseThus for young decedents with a long remaining work-life the appropriate method is to consult age-earnings profile to obtain earnings growth for each educational attainment, and for each stage of the age intervalProf. Jacob Mincer (Columbia University) was the first to quantify the age earning profile for return to education Copyright © 2003 by Pearson Education, Inc. 6-36

Figure 9.3Money Earnings (Mean), for Full-Time, Year-Round Male Workers, 1999


Some Age Earnings Factors

An example of Age Earnings Adjustment factors

is in the exhibit

Source: “An Empirical Evaluation of Different Methods for Estimating Earnings Losses,” with J. Lambrinos, The Journal of Risk and Insurance, Vol. 56, No. 4, December 1989, 733-739.

The exhibit illustrates that for each educational attainment level picking the factor of the lowest age group will give an upward bias to the estimate of the total earnings.

Using the factor for each age interval will be more accurate.


End of PresentationClick a pic to review

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Example: Demand for Corn

Factor shifting the demand curve for cornOil and Corn are substitute resources in the production of gasoline

In summer 2008 oil was $145 a barrel and the demand for corn was high, but in 2009 oil prices fell and the demand for corn fell

Source

.


Example: Carbon Based Fuel TaxAn energy policy that taxes carbon based fuel

Congress is considering several measures that would impose a so-called cap-and-trade system, which would limit the amount of carbon dioxide companies are allowed to emit.

Changes the relative price of nuclear powera cap-and-trade system would probably push up wholesale electricity prices in deregulated markets, as coal- and natural-gas-burning utilities jack up prices to recover the additional cost of allowance purchases. Nuclear operators stand to gain from greenhouse-gas legislation in two ways. For starters, their plants don't spew carbon dioxide, so they would not have to buy emissions allowances, giving them a competitive advantage over competitors that burn fossil fuels.

Use the Etch-a-graph tool to analyze the effect in the market for nuclear power and the market for carbon based fuels.Source


Etch-A-GraphCarbon Fuels: ---------------- Nuclear Power:

Directions: Represent the effect of the cap-and-trade proposal in the correspond-ing graph, Then press “Print Screen” on the keyboard, then click here to paste the screen capture.

Click here and Tell us which proposal you favor and why


Bilateral Monopoly

Diagram how the coop is alleged to force prices down for raw milk and to force prices up for processed milk products

Source


Example: Monopoly Pricing At a time when food prices are soaring world-wide, so is the price of fertilizer, producing huge profits for leading fertilizer makers and stirring anger among farmers in the U.S. and India.Fertilizer prices are rising faster than those of almost any other raw material used by farmers. In April, farmers paid 65% more for fertilizer than they did a year earlier, according to the U.S. Department of Agriculture. That compares with price increases of 43% for fuel, 30% for seeds and 3.8% for chemicals such as weedkillers and insecticides over the same period, according to Agriculture Department indexes.Those skyrocketing costs are making it harder for farmers to expand their harvests in response to the global food crisis that has sparked rioting, rationing and export controls in many countries. Food prices have soared in recent months as the world's growing demand for grain, which has exceeded production for much of this decade, has reduced stockpiles to extremely low levels. Farmers say too much market power is concentrated in the hands of a small group of companies in the U.S., Canada and Russia that dominate global production of potash and phosphate. In an interview Monday, Mr. Doyle called recent complaints about prices an emotional reaction. Fertilizer prices began rising in earnest about a year ago after a nearly decadelong period of stability. "People don't like higher prices," Mr. Doyle said. But "you never hear from anyone complaining when prices are low.“

He added during the call that continued price rises will "be a shock" to some consumers.

In the U.S., Potash Corp. and Mosaic are the sole surviving members of a phosphate export cartel called the Phosphate Chemicals Association. Under a 90-year-old law designed to promote American exports, the companies are allowed to legally market and sell their product overseas as a single entity at a price set in consultation with one another. Similarly, Canada has Canpotex, and Russia has Belarus Potash Co., another export cartel.

While the individual cartels can't legally collaborate among themselves on pricing, they regularly -- and legally -- follow each others' price increases. After the Russian cartel recently said potash prices would rise to $1,000 a ton, Potash Corp.'s Mr. Doyle said Canpotex would soon match that price.Denis Evstratenko, a UBS metals and mining analyst, said the cartels have little incentive to undercut one another in the current environment.

To protect American consumers, members of the U.S. cartel are required by law to compete against each other in selling their wares at home. But in today's global markets, the global price sets a benchmark so American farmers pay essentially what the cartels dictate.Source


Example: Monopoly Pricing

LHS Graph:

Represent Market Prices if

Fertilizer Producers

act as a Monopoly

RHS Graph:Represent

Market Prices if

Fertilizer Producers

act as a Perfect

Competitors


Example Boeing and Recession

Mr. Stewart is one of 27,000 Boeing machinists who voted to walk out on Sept. 6, when both Boeing and the world were in a much different place. Boeing had a bulging order book and was straining to meet production goals. The economy was sagging under the housing crisis, but had not yet buckled.Since then, instability in the financial sector has pushed the U.S. into what many believe could be a recession. The labor standoff in the midst of the financial turmoil may seem like lunacy to outsiders, but not to Mr. Stewart. Many striking workers say the broader economic gloom is only fueling their determination to lock in job security now. The machinists, who earned an average of $65,000 a year with overtime, are supplementing their $150-a-week strike pay with part-time jobs. The union complains that its members have already lost too much work because of Boeing's outsourcing. The company says it won't make guarantees about job security that could wind up hurting its competitiveness down the road. American labor can point to few victories recently. Sectors like textiles and auto manufacturing have watched jobs move overseas or into nonunion plants. Last year, the United Auto Workers made key concessions on pension issues, in part because of concerns about the financial health of big U.S. auto makers.But machinists at Boeing have clout that few other American workers can match. The plane maker, which has its headquarters in Chicago, has only one chief competitor, European Aeronautic Defence & Space Co.'s Airbus, and its products are so sophisticated that they have yet to come under pressure from low-cost countries in Asia.Source: Boeing Strikers Dig In Heels Even as Economy Turns Sour By J. LYNN LUNSFORD WSJ 10/23/08


Example: Rent ControlLHS

Graph:

Represent Market Rent of

$2,767

RHS Graph:

Represent Market Rent of

$2,767, and the rent of $1,241 for

rent-stabilized

unitsBack


Example: Output & Factor MarketsREAD:

Beijing Hotels…..WSJ 7/18/2008

LHS Graph:

Represent the change

in the Beijing

Market for Hotel

Rooms

RHS Graph:

Represent the Effect on Hotel

Staff Wages

Back


Example: Demand for Bulls

Factor shifting the demand curve for large size bullsCorn feed and large size bulls are complement resources in the production of beef.

In summer 2008 corn prices soared and cattle farmers reduced their demand for large sized bulls.

Source

. Prime Cut Backs, Farmers Seek a Little Less Bull (WSJ 8/12/08)


Lecture Outline Ch 111.0 Begin2.0 Resource Demand & Supply 16-21

Marginal Revenue Product: Price Taker 17, Price Maker 18Marginal Resource Cost 19Equilibrium Wage and Employment 21

3.0 The Resource Market 5-7Price Differentials: Temporary/Permanent 8-11Opportunity Cost & Economic Rent 12-15

4.0 Shifts in Resource Demand Substitutes 23 , Complements 24Technology 25, Final Product 26Examples: Big Tires 27 , Gasoline 28

5.0 Monopsony on Buyer Side, Monopoly on Seller SideCharacteristics 48-49, Wage & Employment Determination 50-51Minimum Wage 53-54, Bilateral Monopoly 55-58

6.0 Labor Supply and Utility Maximization 31-39Labor Supply 35 Income 36, and Substitution Effects 37Back ward bending 38, Market Supply 39Wage Differentials 40-47

Occupation 41, Education 43, AE Profiles 44-47

End

Begin2 Market4 Shifts5 M & M3 Adjustment6 LaborEnd 1 Session 10 Resource Markets Chapter 10 and 11...

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Transcript of Begin2 Market4 Shifts5 M & M3 Adjustment6 LaborEnd 1 Session 10 Resource Markets Chapter 10 and 11...