Transcript The Costs of Production
Special Delivery Simulation
*Note to teachers* This simulation is nearly identical to the push-up machine activity. Instead of doing push-ups, students run across the room placing balls into boxes.
• • • •
Special Delivery Inc.
I am the owner of a delivery service Your goal is to use economic reasoning to determine how many workers my firm should hire.
In the process we will learn how to draw the graph for a FIRM hiring in a PERFECTLY COMPATIVE LABOR MARKET. Get your neighbor excited!!!!
• • • • •
Supply for Labor
You are supplying labor and I am demanding it.
I am willing to hire as many workers as I need at a wage that is set by the market.
I am willing to pay between $5 and $25.
Write down how much you are willing to work for on your paper.
I will hire the workers that are willing to work for the lowest wage.
Supply of Labor
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The wage set by the market is $5!
Key Questions: 1. Why didn
’
t anyone try to supply their labor for $25? You wouldn
’
t get hired since there are so many other
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workers that would be willing to work for less 2. Why can
’
t the firm get you to supply your labor for $1?
Since there are so many firms hiring, it is impossible for one firm to force workers to work for below market wage
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3. If each workers must supply their labor at a wage set by the market, what does the supply curve for the firm look like?
The Supply curve is PERFECTLY ELASTIC Supply for labor equals the Marginal Resource Cost.
MARGINAL RESOURCE COST (MRC)
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The additional cost for each additional INPUT (worker).
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Sometimes called MFC-Marginal FACTOR Cost Why is MRC the same as Supply?
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If a worker wants to work, they must offer their services at the wage set by the market.
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MRC is constant because the firm can hire as many workers as it wants at wage set by market.
Another way to calculate MRC is: Marginal Change in Total Cost Resource Cost = Change in Inputs
• • •
Demand for Labor
The firm
’
s demand for workers depends on how profitable each worker is How can we determine how much each worker is worth to the firm?
If a worker generates 5 additional output that can be sold for $10 each, how much is he worth to the firm?
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Since the worker generates $50, the firm profits from if they can pay him a wage less than $50.
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Demand for each worker equals the Marginal Revenue Product.
MARGINAL REVENUE PRODUCT (MRP)
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The additional revenue generated by an additional resources (worker).
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In perfectly competitive product markets the MRP equals the marginal product of the resource times the price of the product. (MP x P) Ex: If the Marginal Product of the 3 rd worker is 5 units and the price of the good is constant at $20 the MRP is..
$100 Another way to calculate MRP is: Marginal Revenue Product = Change in Total Revenue Change in Inputs
Let
’
s show you what this looks like with a real life simulation… (Simulation Worksheet)
Special Delivery Simulation
Overview
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There will be several rounds in which workers will deliver paper balls from one side of the room to the other side Each round lasts exactly 1 minute
•
I am going to hire one more worker at the start of each round. Workers must work together. Resources
• •
2 boxes and plenty of wadded paper or balls Rules Workers must transport the balls from the
“
home
”
the
“
delivery
”
box. placed inside the box. box to Workers cannot throw the balls in the box. They must be Workers MUST work as a team. They cannot work independently.
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The first worker must hand off the ball to the second worker. They hand it to the third worker, and so forth, until the ball goes in the delivery box Everyone must keep track of the results on the following chart
Special Delivery Simulation
Number of Workers (inputs) Total Product (output) Marginal Product Marginal Revenue Product (MRP) Marginal Resource Cost (MRC) 0 1 2 3 4 5 6 7
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Special Delivery Debrief
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Supply Supply and demand in the INDUSTRY GRAPH has resulted in a equilibrium wage of $5. How much MUST each worker work for?
Why not ask for more? Why not less?
• • •
Demand Each push up generative $1 worth of energy Calculate MP and MRP How much is each worker worth?
Special Delivery Debrief
• •
Why is the MRP the demand for Labor? The firm is willing and able to pay each worker up to the amount they generate.
Each worker is worth the amount of money they generate for the firm.
• •
Why does the MRP eventually fall?
Diminishing Marginal Returns.
Fixed resources means each worker will eventually add less than the previous workers.
How many workers should I hire?
Continue to hire until…
MRP = MRC
Side-by-side graph showing Market and Firm Draw and label both at wage set at $5 S $5 (1000) Quantity of Labor
Labor Market
D $5 S = MRC ($5)
D
’
= mrp
’
(5) Quantity of Labor
Individual Firm
d = mrp
Practice
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Activity-You
’
re the Boss
You and your partner own a business.
Assume the you are selling the goods in a PERFECTLY COMPEATIVE PRODUCT MARKET so the price is constant at $10 .
Assume that you are hiring workers in a PERFECTLY COMPEATIVE LABOR MARKET so the wage is constant at $15 . Also assume the wage is the ONLY cost.
To maximize profit how many workers should you hire?
Use the following data: Units of Labor Total Product (Output) 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 Price = $10 Wage = $15 *Hint* How much is each worker worth?
Use the following data: Units of Labor Total Product (Output) 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 Price = $10 Wage = $15 1. What is happening to Total Product?
2. Why does this occur?
3. Where are the three stages?
Use the following data: Units of Labor Total Product (Output) Marginal Product (MP) 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 7 10 7 3 2 1 -3 Price = $10 Wage = $15 This shows the PRODUCTIVITY of each worker.
Why does productivity decrease?
Use the following data: Units of Labor Total Product (Output) Marginal Product (MP) Product Price Price = $10 Wage = $15 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 7 10 7 3 2 1 -3 0 10 10 10 10 10 10 10 Price constant because we are in a perfectly competitive market
Use the following data: Units of Labor Total Product (Output) Marginal Product (MP) Product Price Price = $10 Additional Revenue per worker Wage = $15 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 7 10 7 3 2 1 -3 0 10 10 10 10 10 10 10 0 70 100 70 30 20 10 -30 Shows how much each worker is worth
Use the following data: Units of Labor Total Product (Output) Marginal Product (MP) Product Price Price = $10 Additional Revenue per worker Wage = $15 Additional Cost for each worker 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 7 10 7 3 2 1 -3 0 10 10 10 10 10 10 10 0 70 100 70 30 20 10 -30 How many should we hire?
0 15 15 15 15 15 15 15
Use the following data: Units of Labor Total Product (Output) Marginal Product (MP) Product Price Price = $10 Additional Revenue per worker Wage = $15 Additional Cost for each worker 0 1 2 3 4 5 6 7 0 7 17 24 27 29 30 27 7 10 7 3 2 1 -3 0 10 10 10 10 10 10 10 0 70 100 70 30 20 10 -30 5 Workers MAXIMIZES Profit!!!!!
0 15 15 15 15 15 15 15 0 $55 $140 $195 $210 $215 $210 $165