Value of the Marginal Product

The demand for inputs is considered to be, and referred to as, a "derived demand" since the amount of inputs hired actually comes from demand for the product that the inputs produce. Labor (and, of course, all other inputs) has demand ONLY because of the demand that exists for the end result --- the product (or service) that labor & the other inputs produce. Obviously.

However, the essential point to understand in the input (or resource) market is a concept called the "value of the marginal product". While the idea of the VMP isn't too complicated, it requires a few new graphs, and an understanding of some earlier concepts such as Diminishing Marginal Returns, Marginal Physical Product, and how the price of the output produced is determined. To make the analysis easier, we'll assume some characteristics talked about in perfect competition too.

And, as expected, the concept of elasticity applies to the VMP as well, and its elasticity is affected by factors such as: time, how easily other inputs can be substituted, the price elasticity of the output* produced, and the share of total cost that the input represents.

(*and where the price elasticity of the output also depends on time, the number of substitutes available, the cost of the output relative to other things that could be purchased instead, whether the output is a necessity or a luxury, etc.)


Keep this in mind ---
VMP = MP times the price of the output = MRP

Much more to follow, including a discussion of MRP.

Economic Rent

Economic rent is the difference in the amount of money that an individual would be willing to work for, and the amount of money that they are actually paid. Consider a rock star, or a sports figure who earns, say, a million dollars each year, but would actually be willing to work for $100,000/year. Economic rent, then, equals $900,000 which is a payment provided to the individual (or any type of input) due to their "uniqueness". Another way of thinking about this concept is that an increase in wages does not increase the quantity of labor supplied.

More later as this concept applies to any input, not just labor.

Another note to Christian

Christian,

You'll be wrapping up your micro course this semester by studying a few more international trade topics (recall absolute and comparative advantage, gains from specialization, etc.) such as free trade vs. protectionism, exchange rates, balance of payments, etc..

Since we have a few weeks before these topics become crucial to know, I'm going to back-up and complete some of the previous topics where I may have said "more to follow".

All the information, beginning with "Theory of the Firm" goes together, so we can continue to work on it until it all falls into place for you.

Love you,
mom

Poverty and Income Inequality

There are two types of poverty --- relative poverty and absolute poverty. Know the distinction between these two types and give an example of each. Definitions are in the text.

Also, be sure to take a look at how the "Gini coefficient" is calculated as it measures the range of income inequality in an economy.

Resource Markets --- Present Value

Question:

Would a rational individual invest in a capital expenditure if the cost of capital is $100,000 today, $100,000 after one year, the interest rate is 10%, and there exists a total (guaranteed) benefit of $250,000 after 2 years? after 3 years?

Yes or no?

Resource Markets --- Backward-bending Labor Supply

In this section, we'll figure out why (and at what wage) an individual's labor supply curve will begin to bend backward. First a question.

When you get a pay raise, does this cause you to work more hours, or less hours? Assume that you have the ability to choose how many hours you'd like to work.

More to follow.

Resource Markets --- Introduction

A microeconomics principles course typically wraps up with topics about resource markets. If you remember the "Circular Flow Model" talked about in macroeconomics, the details about resource markets make a lot more sense. Think back to the earlier chapters on demand and supply when the "market" studied was the product (i.e., output) market, not the resource (i.e., input) market.

In product markets --- households demand products and firms supply products. Households are the buyers and firms are the sellers.

In resource markets --- households supply labor (& other resources) and firms demand labor (& other resources). Households are now sellers and firms are now buyers.

Other than that, the same rules hold. The Laws of Demand and Supply still exist, as do shortages and surpluses and the market adjustment process. Prices still move towards equilibrium, not away from it, and the shifts in demand and supply also cause P* (equilibrium price) and Q* (equilibrium quantity) to change.

Get ready to study some more great stuff about labor markets and capital markets!

Anti-trust Laws

This is a good chapter for anyone interested in the law or the economics of law. There's a bit of a history lesson in this chapter as well. The two most important anti-trust laws studied in microeconomics are:

1. The Sherman Act of 1890 --- sections 1 and 2

2. The Clayton Act of 1914 --- four sections

Be sure you understand the meaning of the terms --- price fixing, price discrimination, monopolization, predatory pricing, tying contracts, interlocking directorates, exclusive dealing, per se illegal, rule of reason, etc. These terms apply to the laws above.

More to follow.

Market Failure

Not knowing how many topics under "Market Failure" will be covered by your instructor, I'll just mention a few here, and elaborate on each a little more later:

Public Goods
Moral Hazard
Rent-Seeking
etc.

Market Failure --- Externalities

This is another of my favorite topics!
There are two types of externalities, which can also be thought of as "external" costs and benefits:


1. Negative (i.e., detrimental) externalities ... spillover costs

2. Positive (i.e., beneficial) externalities ... spillover benefits


In a free market system, there tends to be too much of #1 (negative externalities) and too little of #2 (positive externalities) produced. This type of "market failure" leads to a good argument for government intervention --- intending that the government will provide more goods that have positive externality characteristics and to enforce laws, pay for cleanup, etc. for firms that cause negative externalities in society.

When most people think of negative externalities, they think of the classic example --- pollution. And while pollution (both air and water) illustrates spillover costs very well --- an activity caused by a firm that causes uncompensated costs on others, and for which the firm has little to no incentive to pay for the cleanup process, as well as to compensate society for the damage created.

Other, less-dramatic examples of negative externalities would include "noisy neighbors", "barking dogs", "littering", etc.

Can you think of three examples of goods with positive externality characteristics?

More to follow ... graphs, inequalities, etc.

Note to Christian

Christian,
Don't worry, I'll be filling in and finishing each of the topics below by the time you study them in class. Do focus first on the way your professor writes his questions, but as I said earlier --- another exposition of a concept is often helpful.
Love you, mom