Factor+Markets

Max Belinsky, Bennet Blachar, J-P I. Demand for Resources; MRP, MRC II. Wage Determination III. Rent, Interest, Profit - **Marginal Product (MP**): The additional output that each added unit of labor brings in - **Marginal Revenue Product (MRP**): The additional total revenue that each added unit of resource brings in - **Marginal Resource Cost (MRC):** The additional total cost that each added unit of resource brings in - **MRP=MRC Rule**: A firm will hire workers until the final worker’s MRP equals that worker’s MRC (Profit-maximizing Rule) - **Determinants of Resource Demand**: · Changes in Product Demand · Changes in Productivity · Changes in Prices of Other Resources · Occupational Employment Trends - **Elasticity of Resource Demand**: If Erd > 1, then resource demand is elastic; If Erd < 1, then resource demand is inelastic; If Erd = 1, then resource demand is unit-elastic - **Marginal Productivity Theory of Income Distribution**: workers receive payment based off of their marginal contributions made to their firms output
 * Key Terms**:

MRP= __Change in total Revenue__ Unit change in resource quantity
 * Helpful Formulai**:

MRC= __Change in total (resource) cost__ Unit change in resource quantity MRP=MRC=PR __Marginal Product of Labor (MPL)__ = __Marginal Product of Capital (MPC)__ Price of Labor (PL) Price of Capital (PC)

PL=MRPL PC=MRPC __MRPL__ = __MRP____C__ = 1 PL PC


 * Key Graphs**:

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Questions**: 1. Why is the labor demand curve downsloping? a) As wages decrease, companies want to hire more labor b) Demand curve is heavier on the right side, therefore it slopes downwards c) As wages decrease, more people want to work
 * media type="youtube" key="7Bv5YdVHN3E" height="385" width="480"

2. Why is the labor supply curve for a firm horizontal? a) Workers are price makers b) Workers are price takers c) The amount of workers in the world will never change

3. All of the following will shift the resource demand curve to the right EXCEPT: a) Higher Education b) Technological Advances c) Forrest Fire, burning all the trees in the Amazon

4. Last year, rubber mills across the country accounted for 50 tons of rubber production, at $2.00 a ton. This year, rubber demand has increased and the amount of rubber produced rose to 100 tons. However, the price of rubber rose to $5.00. The resource demand is a) inelastic b) elastic c) unit-elastic

5. In a purely competitive market, the wage rate is $5. A company produces mousepads at $2. How many workers should the company hire to maximize its profits? Use the following table to answer the question:

0 - 1 5 2 12 3 16 4 17 5 15
 * __Labor__ __Output__ __MP__ __MRP__**

a) 5 workers b) 3 workers c) 4 wokers

__**Chap 14. Rent, Interest, And Profit**__

Economic Rent**- Price paid for use of land and other natural resources whose supply is perfectly inelastic (completely fixed in total supply)
 * Key Terms
 * Time-value of money**- a specific amount of money is more valuable the sooner it is obtained
 * Future value of money (FV)-** The value of money in the future given a current value. The higher the interest rate, the larger the future value is for a specific amount today.
 * Present value of money (PV)-** The value of money today for a specific amount that will be received in the future. The higher the interest rate, the lower the present value is.

Math: FV=PV (1+ interest rate)^number of years of compounding interest. PV= FV/ (1+interest rate)^number of years of compounding interest.


 * Usury Laws-** Specify a maximum interest rate for loans. They were passed originally to limit borrowing costs.
 * Supply of Loanable Funds-** Provided by households. __There is a positive slope between interest rate and quantity of loanable funds supplied.__
 * Demand for Loanable Funds-** Provided by businesses for investment into capital goods. __There is an inverse relationship between the interest rate and the quantity of loanable funds demanded__.
 * Pure rate of interest-** This is "the interest rate" that economists and financial specialists talk about. Measured by interest paid on long-term and no risk securities (such as 20 years bonds of the US Government)
 * Nominal interest rate-** Interest rate expressed in current dollars.
 * Real interest rate-** Interest rate expressed in purchasing power. (Adjusted for inflation)

1. The supply of labor is perfectly inelastic because
 * Questions:**

a. land is very expensive. b. land is sometimes rented and not owned. c. it is virtually fixed in the quantity available. d. contractors are hired to build new additions on the land, thus increasing the land value.

2. If the interest rate was extremely high, there would be //BLANK// investing. //BLANK// interest rates provide better investing opportunities.

a. less; Lower b. more; Higher c. more; Lower d. less; Higher

3. The higher the interest rate, the //BLANK// the future value for a specific amount of money today. The lower the interest rate, the //BLANK// the present value of money today for a specific amount of money that is to be received in the future.

a. smaller, smaller b. smaller, larger c. larger, smaller d. larger, larger

4. What is the Future Value of $400 5 years from now if the interest rate is 3%?

1.c 2. a 3.d 4. $463.71 (For interest rate of 3%, .03 is plugged into formula, not 3)
 * Answers**

S (Land) is perfectly inelastic. Amount of land supplied remains at Q. Price will go from P1 to P2 depending on demand for land. If it's on the water, in a busy place, it will be higher (P1). http://image.absoluteastronomy.com/images/encyclopediaimages/v/ve/vertical-supply-left-shift-demand.svg.png

CHAPTER 13

Key terms Monopsony- a market in which a single employer of labor has substantial hiring power. Meaning there is only one employer for that particular type of labor. Minimum wage- a price floor for wages to insure that workers receive a fair income to improve their living conditions. Opponents of the minimum wage note that this wage floor causes unemployment. The principal agent problem- a problem that arises when the interests of the executives and shareholders are not the same. 1. As a result of the minimum wage in the United States, ______ jobs are available. A. More B. Less C. The same amount D. Lower paying jobs 2. The wage rate employed by a monopsonist varies _______ with the number of workers it employs. A. Directly B. Indirectly C. Has no effect D. Monosponists have total control over the wage

From American Banking News At the highly popular annual shareholders meeting of Berkshire Hathaway (NYSE:BRK), Warren Buffett came out strongly in defense of Goldman Sachs (NYSE:GS) over the fraud allegations leveled against them. Buffett told shareholders that while Goldman has been hurt by the charges, he reminded them that they are far from being proven yet. The allegations center around Goldman Sachs purportedly deceiving IKB and ACA in Abacus 2007 – which was a highly complex mortgage-backed derivative – to the benefit of Paulson & Co, a large hedge fund. Goldman continues to deny all of the allegations against them concerning the deal. What is new about what Buffett is saying concerning the inquiry is the culpability of ACA and RBS by doing stupid things or not even understanding what they were getting into. Concerning ACA’s ABN Amro unit, Buffett said they started insuring synthetic debt structures they were clueless about, and he was harder on RBS, where he said: “It’s a little hard for me to get terribly sympathetic that a bank made a dumb credit deal.” As far as there being some type of shenanigans going on with Goldman shorting a specific position, Buffett gave another lesson: “When we trade with them (referring to Berkshire with Goldman Sachs), they could very well be shorting a product, they do not owe us a divulgence of their position more than any reason why we need to explain what we are doing with our position.”

Buffett added he couldn’t begin to think he understood in bond insurance what those on the opposite side of the trade were thinking.

What is Buffett saying in a nice way here? From the SEC to those charging them with fraud, they have no idea what they’re talking about concerning these types of deals, and it wasn’t fraud on the part of Goldman Sachs but companies getting over their heads in areas they didn’t understand. He also lectures on how these deals are worked out, and revealing shorting positions by Goldman is a part of doing business undercuts the attempt to make it look shady, rather than how that type of business is operated.

It’ll be interesting to see how things go forward now that Buffett has made one of the boldest statements I’ve ever heard him make when it involves a government entity. This article is the other side to the whole Goldman Sachs controversy that has been dominating the news lately. It is a real world example of the principal agent problem where Goldman Sachs acted in their own interest and obviously not in the best interests of their clients. Whether or not Goldman Sachs acted illegally remains to be seen. Essentially what Goldman did was to sell risky CDOs (collateralized debt obligation) to their clients and then bet against those CDOs through something called a credit default swap. The reason that Goldman Sachs is being charged with fraud is because they knew those CDOs were likely to fail and were full of risky mortgages. If those CDOs failed, which most of them did, then Goldman makes a lot of money and their clients lose money.