FACTORMARKETS

OUTLINE
LO:EXPLAIN THE PECULIARITY OF
RESOURCE MARKETS, PARTICULARLY THE LABOUR MARKET -REVISE SUPPLY AND DEMAND ANALYSIS WITH RESPECT TO COMMODITY MARKETS -EXPLAIN DERIVED DEMAND FOR FACTORS -INCORPORATING MARGINAL REVENUE PRODUCT THEORY LO:APPLY GRAPHS OF CHANGES OF MARKET CONDITIONS TO ANALYSE THE OPERATION OF FACTOR MARKETS

-DRAW GRAPHS TO ANALYSE THE EFFECT ON THE PRICE IN THE COMMODITY MARKET.

REVISION: COMMODITY MARKETSDEMAND AND SUPPLY CURVES

DEMAND SHIFT:
D1 S1=ORIGINAL CURVES D3= P= INCREASE P= INCREASE D2= P= D2=DECREASE P=DECREASE REASONS FOR DEMAND CHANGE: level of income, the price of other goods (substitutes and complements), tastes, advertising,etc. ) SUPPLY SHIFT: S3= P= S3= INCREASE P=DECREASE S2= P= S2= DECREASE P=DECREASE REASONS FOR SUPPLY SHIFT: costs, profitability, objectives of the firm

P1 E P

E1

Q1

DERIVED DEMAND
Definition: The amount of demand for good A depends in turn on the amount of demand for good B, e.g. LABOUR:an increase in the demand for houses creates a direct demand for bricklayers. OR

NATURAL RESOURCES: For instance, the demand for steel is derived in part from the demand for cars.
EXAMPLE:Therefore, if household income increased, the demand for cars would increase (demand curve shift to the right), the higher demand for cars will increase the demand for the factors of production used to make a car. This will cause the demand for steel to increase (demand curve shift to the right).

THEORY OF MARGINAL REVENUE PRODUCT

Marginal physical product The increase in output resulting from employing an extra unit of the variable factor,for example labour

MARGINAL REVENUE PRODUCT

The marginal revenue product is the extra revenue earned by the firm when one more unit of the variable factor is employed.

FORMULA: The marginal revenue product is calculated by multiplying together the marginal physical product (the extra output produced) by the marginal revenue (the extra revenue earned). The result is the value of the output produced to the firm.

TABLE
No. of people 1 2 Wage rate ( per day) 30 30 Marginal Physical Product 40 50 Price of Product () 5 5 Marginal Revenue Product 200 250

3
4 5 6 7

30
30 30 30 30

44
34 24 12 0

5
5 5 5 5

No. of people 1 2 3 4 5 6 7

Wage rate ( per day) 30 30 30 30 30 30 30

Marginal Physical Product 40 50 44 34 24 12 0

Price of Product () 5 5 5 5 5 5 5

Marginal Revenue Product 200 250 110 85 60 30 0

GRAPH: MARGINAL REVENUE PRODUCT

The MRP curve shows the number of people employed at each wage rate. This means that the MRP curve represents the demand curve for labour. Any change in the productivity of labour or the price of the product will shift the demand curve. Any change in the wage rate and the firm will simply move along the MRP curve and alter the amount of labour they employ.

DEMAND AND SUPPLY:LABOUR MARKET EXERCISE: Demand for Chemical Engineers increase
1. DEMAND OR SUPPLY SHIFT? ________ AND 2. EFFECT ON WAGES?________

1.

DEMAND OR SUPPLY SHIFT: 2. EFFECT ON WAGES:

DEMAND CURVE WILL SHIFT TO RIGHT WAGES WILL INCREASE