AP Economics

1
AP Economics

• Warm Up Question There is an economic recession!
  List and explain at least five different types
  of laborers that are losing their jobs.

Have on Desk Free Response Questions
2
Do you remember this economic model?
Consumers are buying the gs these laborers make!!
Households
Firms
Labor will only be hired when
3
Input Demand

• Derived Demand
• The demand for resources (inputs) is dependent on
  the demand for the outputs those resources can be
  used to produce
• We need more workers when their good or service
  is in demand!

4

• What determines how much a person is paid the
  service he/she provides?
• Skill needed, education level needed, scarcity of
  talent, value society places on output, number of
  consumers of product, etc.
• Peyton Manning makes over 15,000,000 between his
  salary and endorsement deals a teacher working
  the same amount of years makes just over 50,000.
  Why does one earn more than the other?

5
A firm must determine

• 1. how many units each worker produces
• 2. how much is earned from each unit produced
• 3. how much each unit costs to produce
• A firm will never hire a worker who costs more
  than he/she earns.

6
Marginal Product of Labor (MPL)

• the additional output produced by one additional
  unit of labor
• What do you expect to happen to the MPL in the
  short run? Explain.
• Increase due to the fixed scale of operations
  more workers leads to eventual inefficiencies.

7
Marginal Revenue Product (MRP)

• The additional revenue a firm earns by employing
  one additional unit of input, ceteris paribus.
• MRPL MPL PX
• where PX is the price of the product

8
Short Run Conditions
Total Labor Units Total Product Marginal Product of Labor Price (PX) Marginal Revenue Product (MPL PX)
0 0 --
1 10 .50
2 25
3 35
4 40
5 42
6 42
-
5.00
10
15
.50
7.50
10
.50
5.00
5
.50
2.50
2
1.00
.50
0
0
.50
9
When does a firm stop hiring labor?

• RULE
• a profit maximizing firm will add inputs as long
  as the marginal revenue product of that input is
  equal to or exceeds the market price of that
  input MRPL PL

10
According to the chart above, if the workers are
being paid 4 per hour, how many workers would be
hired?
Total Labor Units
0
1
2
3
4
5
6
Marginal Revenue Product
-
5.00
7.50
5.00
2.50
1.00
0
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ANSWER

• 3 Workers!!
• This firm will keep hiring as long as the MRPL is
  greater than (or equal to) the wage paid to the
  laborer.
• In other words, keep hiring as long as that
  workers output can cover the cost of the hire.

12
Some Practice Problems

• A bookstore clerk observes that for each
  additional security guard hired, there is some
  reduction in the number of books stolen. The
  store devised the following schedule

of Guards Total Value of Books Saved MRPL
1 800
2 1,100
3 1,300
4 1,400
5 1,450
800
300
200
100
50
The security guards are paid 120 per day. How
many guards show this store hire? Explain.
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Workers Apple Bushels/ day MPL MRPL
0 0
1 40
2 70
3 90
4 100
5 105
6 102

• If apples sell
• for 2 per bushel and workers can be hired in a
  competitive labor market for 30 per day.
• How many workers should be hired?

-
-
80
40
30
60
20
40
10
20
10
5
-2
-4

• What if workers unionized and the wage rose to
  50?