Input markets - supply and demand for labor including Marginal revenue product. Input procurement
Labor Supply:
Labor supply in its most basic form is the amount of hours that the labor market is willing to work. The labor market, according to BusinessDictionary.com, is "the nominal market in which workers find paying work, employers find willing workers, and wage rates are determined." The labor market is what provides the labor supply, without the labor market there would be no where for the labor supply to find work. When looking at the labor supply it is necessary to examine the trade-off that is created for the worker. This trade-off is represented in terms of hours worked and leisure time. The more hours the worker spends working equates to less hours that the worker can spend in leisure time. The main benefit for the worker is that if they choose to work longer then they have created an opportunity for themselves to earn more income. As stated earlier in order to earn more income they will have to give up more leisure time. The labor supply is responsive to the wage rate as you can see from the graph below as the wage rate rises the supply of labor increases and as the wage rate decreases the supply of labor decreases as well.
This graph provided by physicsarchives.com reiterates what I stated earlier about the responsiveness of the labor market to the wage rate. As the wages increase the chance for the labor market to earn extra money is what causes more hours to be worked and new entry into the market.
Labor Demand:
Labor demand is the amount of labor supply that is demanded by an employer, meaning the amount of hours of labor an employer is willing to pay for. Labor demand, like labor supply, is responsive to the wage rate as well as other factors that could cause a demand for labor. These factors include anything that would cause the employer's fixed or variable costs to raise. This would create a situation where the employer may look to cut their cost from wages in order to make up for the costs they are receiving elsewhere. In order to reduce the wage cause they could apply a cap on the amount of hours that each employee is allowed to work or they could take more drastic measures an lay-off employees to cover the costs. The graph below shows the responsiveness of labor demand to the wage rate:
The above graph was also found at physicsarchives.com it shows that as the wage rate goes down the quantity of labor demanded increases. This relationship happens because of the opportunity for the employer to increase the amount of hours worked thus increasing the output at a lower marginal cost than when the wage rate is high. This also explains why the quantity of labor demanded is less when the wages are high because the more hours of labor the employer purchases the higher their marginal cost will be.
Labor Market Equilibrium:
When the labor supplied intersects with the labor demanded the intersecting point is called the equilibrium. This intersecting point is the point at which the labor market is its most efficient. This equilibrium is subject to shift with an increase or decrease in the labor supplied or demanded. It will also shift with an increase or decrease in the wage rate. The graph below is an example of the labor market's equilibrium point:
As you can see the point of intersection provides the optimal level of labor supply and demand as well as the optimal wage rate.
Marginal Revenue Product of Labor:
The marginal revenue product of labor (MPL) is a way to measure the effect an additional unit of labor has on the amount of output a firm produces. However this is not as simple as it sounds because the MPL is not just the amount of output that is produced by that additional hour alone. It also has to take into consideration the amount of output that is already being produced. An example of this can be taken from the output of widgets at a given firm. Say the firm currently has one employee that can produce 10 widgets an hour by themselves, then another worker is added and the new maximum output per worker is 9 units. The total output is now 18 widgets between the two workers this shows that adding an additional unit of labor (the new worker) increases the total output by 8 widgets. So even though the new worker can now contribute 9 more widgets per hour the MPL is 8 because the previous worker has lost 1 unit of output with the addition of the new unit of labor.
Number
of
Workers
Output
of Widgets
Marginal Product of Labor
0
0
0
1
10
10
2
18
8
3
24
6
4
28
4
5
30
2
6
30
0
7
28
-2
I have created the above table to show the marginal product of labor with the addition of one worker at a time. As is evident in the table the optimal number if workers in this situation is 5, this is because after 5 workers the MPL is no longer contributing to the total output of the firm. This situation is created because the cost of adding an additional worker after 5 outweighs the output that they can create. When this occurs the firm experiences negative marginal returns and is no longer operating at an efficient level. To calculate the MPL simply take the change in output from the additional worker and subtract the previous output.
Input Procurement
There are three main methods of input procurement these methods include spot exchange, contract, and vertical integration. These are all methods that a firm can use to acquire inputs for production of their outputs. The goal of input procurement is to find the most efficient way of attaining these inputs as possible. We will now look into each specific method of input procurement starting with spot exchange.
Spot Exchange:
Spot exchange is "an information relationship between a buyer and a seller in which neither party is obligated to adhere to specific terms of exchange." (Baye 204-205) Basically this occurs when a producer buys inputs from an input supplier and then then both parties go on with their business. An example of this would be a car manufacturer buys tires from many different tire suppliers. The automobile company can choose any tire supplier it wants to purchase from at any specific time that it desires the input. This method can be useful if the producer wants to insure they are getting the most cost effective inputs that it can at that time. Once the transaction is complete the producer and supplier are not legally bond to each other, other than standard warranty issues. This gives the producer the option to change who they purchase inpits from at anytime.
Contract:
The second method of input procurement is by purchasing inputs under a contract. A contract is "a formal relationship between a buyer and a seller that obligates the buyer and the seller to exchange at terms specified in a legal document." (Baye 204-205) The contract method is the same thing as a consumer signing a contract with a mobile phone company, the consumer agrees to purchase the phone service from the phone company under specific terms and the phone company agrees to provide these services for the price agreed upon. If we look at the previous example of an automobile manufacturer and a tire company the car company agrees to purchase the tires from the company for a specific amount of time under specific terms of price agreed upon within the contract. The contract may also include an agreement on the amount of tires that are purchased at a time. This method is beneficial for both parties that are involved, the car company benefits because it does not have to take the time to shop around like they do in spot exchange. The tire company benefits because it knows that for a specific amount of time they are going to be able to have a steady amount of sales to the car company thus reducing the issue of having a large amount of overstock if it cannot find buyers for their products.
Vertical Integration:
Vertical integration is "a situation where a firm produces the inputs required to make its final product." (Baye 204-205) This method of input procurement is exactly as it sounds, instead of a company buying the inputs they require they will produce the inputs themselves. This can be done through the acquisition of a company that produces the inputs they require or through expansion within their firm by developing their own way to produce inputs. Referring back to the automobile manufacturer/tires example, if the car company bought the tire company then they would be using a vertical integration input procurement method. Also if the firm began to produce tires on their own without buying another company they would be participating in vertical integration. This is beneficial to the firm because it allows for the firm to control the production of their inputs and they no longer have to rely on outside suppliers. However this is a double edged sword because the firm now has to manage the production of another item. This leads to higher costs for the organization because with the new product comes a new management team, as well as additional production staffing.
Question #1
A motorcycle manufacturing company acquires inputs by shopping around to find the best possible price each time they purchase inputs, showing no loyalty to any specific input supplier. What type of procurement method is this an example of?
A. Contract
B. Bargin Selecting
C. Spot Exchange
D. Vertical Integration
Ans = C. Spot Exchange because the company is not producing the inputs itself or in a legally binding agreement with any one company.
Question #2
If the wage rate goes down then the demand for labor will?
A. Go Down
B. Go Up
C. Be unresponsive because the rate does not affect the demand
D. None of these
Ans = B. Go Up because the low wage will case the producer to want hire more workers because they can pay them less and gain more output per dollar spent.
Question #3
A manufacturing company requires wood to produce widgets, they agree to purchase all the wood they need solely from Wood Pecker Inc., the best wood producer in the nation, for 10 years at a price of $5.00 per sheet of wood.
A. Contract
B. Bargin Selecting
C. Spot Exchange
D. Vertical Integration
Ans. A. Contract because the widget manufacturer has reached an agreement with the Wood Producer to purchase only from them for ten years at a price of $5.00 per sheet of wood.
Question #4
The amount of hours that a given population is willing to work is known as?
A. The working population
B. The labor demand
C. The willing to work population
D. The labor supply
Ans. D. The labor supply because the labor supply is defined as the "amount of hours that the labor market is willing to work."
Question #5
Lyle's Own Construction Organization, LOCO for short, is a leading contractor that specializes in the design and build of custom brick homes. They have recently come across some capital and decide to buy their leading brick supplier in order to control the production of one of their most important inputs. This is an example of what input procurement method?
A. Contract
B. Bargin Selecting
C. Spot Exchange
D. Vertical Integration
Ans. D. Vertical integration because vertical integration is a method of input procurement where the producer acquires the capability to produce an input within their company, either through buying out their supplier or by expanding their current business to produce the inputs themselves.
Input procurement strives to find the optimal level of acquiring inputs at the most cost effective time for the business. In order to find the most cost effective method managers must look at the different options of input procurement. The first way is by a contract which is a binding agreement between producers and suppliers in which and agreement is made to buy a certain amount of product from the suppliers. the second type is spot exchange where no agreement is made and each transaction is done and then the supplier and producer separate. The third option is vertical integration, which means the company produces what it needs in house so there is no need to meet with a supplier to acquire inputs.
Copy and paste the below url's into your browser if the links don't work:
Summaries:
Government policies- - Anthony Christofaro Anthony begins his wiki with articles that he came across during the semester that had to do with his topic. He then shifts his major focus to that of alcohol and its impact on early american society. Naturally this leads him into talking about prohibition and the great depression. The other affects that he mentions about alcohol on society is that of the healthcare cost that arise among other negative affects such as decreased productivity.
Supply and Demand- -Thaddeus Bogardus
Thadd reports on the main points of supply and demand in his wiki. Touching on topics such as the Law of Demand, Market Demand Curves, surplus and equilibrium price. He then goes on to give an in depth look at Demand Shifter, as well as Supply Shifters. He then goes on to touch on several good real world examples of his concepts.
The Economics of a POW camp- -James Crews
In my opinion James had a very interesting topic to start with and that is what caught my eye when looking through my fellow classmates Wiki assignments. The fact the an economy was able to develop in such an extreme environment is an amazing concept for me to grasp. The most interesting part was when the POW's implemented a barter system amongst themselves with the scarce resources the received from the parcel's they we able to acquire.
Comparative advantage and trade- -Regina Gauger
Regina has a very profesional looking wiki that talks about comparative advantage and trade. She starts the paper off by explaining what a comparative advantage is, from what I read the buyer or seller with the lowest opportunity cost has a comparative advantage. She follows this by explaining some examples of comparative advantage followed by how to determine who has the comparative advantage. At the end I noticed that, in her last post, she defined comparative advantage as the person that can produce something at a lower cost than anyone else.
Monopoly- -Amy Kitzman
Amy has created a wiki that takes on the task of defining what a monopoly is, her initial topic i felt was very broad so i was curious to see what direction she took with writing the paper. She begins with defining what a monopoly is and give four sources that must be present to power a monopoly which include: Economies of Scale, Economies of Scope, Cost Complementary, Patents and Other Legal Barriers. She then gives examples of monopolies. I have always heard of the utility companies when talking about monopoly companies but what I found out about AT&T surprised me. I did know that they tried to buy T-Moble but it did not know that the DOJ refused to allow this to happen because it was not in the customers best interests. I Learned some interesting things from this wiki and am glad that I chose to summarize it.
Labor Supply:
Labor supply in its most basic form is the amount of hours that the labor market is willing to work. The labor market, according to BusinessDictionary.com, is "the nominal market in which workers find paying work, employers find willing workers, and wage rates are determined." The labor market is what provides the labor supply, without the labor market there would be no where for the labor supply to find work. When looking at the labor supply it is necessary to examine the trade-off that is created for the worker. This trade-off is represented in terms of hours worked and leisure time. The more hours the worker spends working equates to less hours that the worker can spend in leisure time. The main benefit for the worker is that if they choose to work longer then they have created an opportunity for themselves to earn more income. As stated earlier in order to earn more income they will have to give up more leisure time. The labor supply is responsive to the wage rate as you can see from the graph below as the wage rate rises the supply of labor increases and as the wage rate decreases the supply of labor decreases as well.
Labor Demand:
Labor demand is the amount of labor supply that is demanded by an employer, meaning the amount of hours of labor an employer is willing to pay for. Labor demand, like labor supply, is responsive to the wage rate as well as other factors that could cause a demand for labor. These factors include anything that would cause the employer's fixed or variable costs to raise. This would create a situation where the employer may look to cut their cost from wages in order to make up for the costs they are receiving elsewhere. In order to reduce the wage cause they could apply a cap on the amount of hours that each employee is allowed to work or they could take more drastic measures an lay-off employees to cover the costs. The graph below shows the responsiveness of labor demand to the wage rate:
Labor Market Equilibrium:
When the labor supplied intersects with the labor demanded the intersecting point is called the equilibrium. This intersecting point is the point at which the labor market is its most efficient. This equilibrium is subject to shift with an increase or decrease in the labor supplied or demanded. It will also shift with an increase or decrease in the wage rate. The graph below is an example of the labor market's equilibrium point:
Marginal Revenue Product of Labor:
The marginal revenue product of labor (MPL) is a way to measure the effect an additional unit of labor has on the amount of output a firm produces. However this is not as simple as it sounds because the MPL is not just the amount of output that is produced by that additional hour alone. It also has to take into consideration the amount of output that is already being produced. An example of this can be taken from the output of widgets at a given firm. Say the firm currently has one employee that can produce 10 widgets an hour by themselves, then another worker is added and the new maximum output per worker is 9 units. The total output is now 18 widgets between the two workers this shows that adding an additional unit of labor (the new worker) increases the total output by 8 widgets. So even though the new worker can now contribute 9 more widgets per hour the MPL is 8 because the previous worker has lost 1 unit of output with the addition of the new unit of labor.
of
Workers
of Widgets
Input Procurement
There are three main methods of input procurement these methods include spot exchange, contract, and vertical integration. These are all methods that a firm can use to acquire inputs for production of their outputs. The goal of input procurement is to find the most efficient way of attaining these inputs as possible. We will now look into each specific method of input procurement starting with spot exchange.
Spot Exchange:
Spot exchange is "an information relationship between a buyer and a seller in which neither party is obligated to adhere to specific terms of exchange." (Baye 204-205) Basically this occurs when a producer buys inputs from an input supplier and then then both parties go on with their business. An example of this would be a car manufacturer buys tires from many different tire suppliers. The automobile company can choose any tire supplier it wants to purchase from at any specific time that it desires the input. This method can be useful if the producer wants to insure they are getting the most cost effective inputs that it can at that time. Once the transaction is complete the producer and supplier are not legally bond to each other, other than standard warranty issues. This gives the producer the option to change who they purchase inpits from at anytime.
Contract:
The second method of input procurement is by purchasing inputs under a contract. A contract is "a formal relationship between a buyer and a seller that obligates the buyer and the seller to exchange at terms specified in a legal document." (Baye 204-205) The contract method is the same thing as a consumer signing a contract with a mobile phone company, the consumer agrees to purchase the phone service from the phone company under specific terms and the phone company agrees to provide these services for the price agreed upon. If we look at the previous example of an automobile manufacturer and a tire company the car company agrees to purchase the tires from the company for a specific amount of time under specific terms of price agreed upon within the contract. The contract may also include an agreement on the amount of tires that are purchased at a time. This method is beneficial for both parties that are involved, the car company benefits because it does not have to take the time to shop around like they do in spot exchange. The tire company benefits because it knows that for a specific amount of time they are going to be able to have a steady amount of sales to the car company thus reducing the issue of having a large amount of overstock if it cannot find buyers for their products.
Vertical Integration:
Vertical integration is "a situation where a firm produces the inputs required to make its final product." (Baye 204-205) This method of input procurement is exactly as it sounds, instead of a company buying the inputs they require they will produce the inputs themselves. This can be done through the acquisition of a company that produces the inputs they require or through expansion within their firm by developing their own way to produce inputs. Referring back to the automobile manufacturer/tires example, if the car company bought the tire company then they would be using a vertical integration input procurement method. Also if the firm began to produce tires on their own without buying another company they would be participating in vertical integration. This is beneficial to the firm because it allows for the firm to control the production of their inputs and they no longer have to rely on outside suppliers. However this is a double edged sword because the firm now has to manage the production of another item. This leads to higher costs for the organization because with the new product comes a new management team, as well as additional production staffing.
Question #1
A motorcycle manufacturing company acquires inputs by shopping around to find the best possible price each time they purchase inputs, showing no loyalty to any specific input supplier. What type of procurement method is this an example of?
A. Contract
B. Bargin Selecting
C. Spot Exchange
D. Vertical Integration
Ans = C. Spot Exchange because the company is not producing the inputs itself or in a legally binding agreement with any one company.
Question #2
If the wage rate goes down then the demand for labor will?
A. Go Down
B. Go Up
C. Be unresponsive because the rate does not affect the demand
D. None of these
Ans = B. Go Up because the low wage will case the producer to want hire more workers because they can pay them less and gain more output per dollar spent.
Question #3
A manufacturing company requires wood to produce widgets, they agree to purchase all the wood they need solely from Wood Pecker Inc., the best wood producer in the nation, for 10 years at a price of $5.00 per sheet of wood.
A. Contract
B. Bargin Selecting
C. Spot Exchange
D. Vertical Integration
Ans. A. Contract because the widget manufacturer has reached an agreement with the Wood Producer to purchase only from them for ten years at a price of $5.00 per sheet of wood.
Question #4
The amount of hours that a given population is willing to work is known as?
A. The working population
B. The labor demand
C. The willing to work population
D. The labor supply
Ans. D. The labor supply because the labor supply is defined as the "amount of hours that the labor market is willing to work."
Question #5
Lyle's Own Construction Organization, LOCO for short, is a leading contractor that specializes in the design and build of custom brick homes. They have recently come across some capital and decide to buy their leading brick supplier in order to control the production of one of their most important inputs. This is an example of what input procurement method?
A. Contract
B. Bargin Selecting
C. Spot Exchange
D. Vertical Integration
Ans. D. Vertical integration because vertical integration is a method of input procurement where the producer acquires the capability to produce an input within their company, either through buying out their supplier or by expanding their current business to produce the inputs themselves.
Sources:
http://physicsarchives.com/index.php/courses/993 - Economics and Geonomics Chapter 4
http://www.businessdictionary.com/definition/labor-supply.html
Baye , Michael. Managerial Economics and Business Strategy. 7th. New York: McGraw-Hill Irwin, 2010. 204-205. Print.
- Kreg Hunter
this is an interesting article about the demand of labor in the retail industry:
http://eon.businesswire.com/news/eon/20111011005326/en
Input procurement strives to find the optimal level of acquiring inputs at the most cost effective time for the business. In order to find the most cost effective method managers must look at the different options of input procurement. The first way is by a contract which is a binding agreement between producers and suppliers in which and agreement is made to buy a certain amount of product from the suppliers. the second type is spot exchange where no agreement is made and each transaction is done and then the supplier and producer separate. The third option is vertical integration, which means the company produces what it needs in house so there is no need to meet with a supplier to acquire inputs.
Copy and paste the below url's into your browser if the links don't work:
video about vertical integration in the ag industry
http://www.youtube.com/watch?v=ozqEnkiKvTg&feature=related
short clip from charlie brown about contracts
http://www.youtube.com/watch?v=HPYz2IzIii0
good video about labor supply and demand and example of what determines the wage
http://www.youtube.com/watch?v=kQc2YAbyI-k
Summaries:
Government policies- - Anthony Christofaro
Anthony begins his wiki with articles that he came across during the semester that had to do with his topic. He then shifts his major focus to that of alcohol and its impact on early american society. Naturally this leads him into talking about prohibition and the great depression. The other affects that he mentions about alcohol on society is that of the healthcare cost that arise among other negative affects such as decreased productivity.
Supply and Demand- -Thaddeus Bogardus
Thadd reports on the main points of supply and demand in his wiki. Touching on topics such as the Law of Demand, Market Demand Curves, surplus and equilibrium price. He then goes on to give an in depth look at Demand Shifter, as well as Supply Shifters. He then goes on to touch on several good real world examples of his concepts.
The Economics of a POW camp- -James Crews
In my opinion James had a very interesting topic to start with and that is what caught my eye when looking through my fellow classmates Wiki assignments. The fact the an economy was able to develop in such an extreme environment is an amazing concept for me to grasp. The most interesting part was when the POW's implemented a barter system amongst themselves with the scarce resources the received from the parcel's they we able to acquire.
Comparative advantage and trade- -Regina Gauger
Regina has a very profesional looking wiki that talks about comparative advantage and trade. She starts the paper off by explaining what a comparative advantage is, from what I read the buyer or seller with the lowest opportunity cost has a comparative advantage. She follows this by explaining some examples of comparative advantage followed by how to determine who has the comparative advantage. At the end I noticed that, in her last post, she defined comparative advantage as the person that can produce something at a lower cost than anyone else.
Monopoly- -Amy Kitzman
Amy has created a wiki that takes on the task of defining what a monopoly is, her initial topic i felt was very broad so i was curious to see what direction she took with writing the paper. She begins with defining what a monopoly is and give four sources that must be present to power a monopoly which include: Economies of Scale, Economies of Scope, Cost Complementary, Patents and Other Legal Barriers. She then gives examples of monopolies. I have always heard of the utility companies when talking about monopoly companies but what I found out about AT&T surprised me. I did know that they tried to buy T-Moble but it did not know that the DOJ refused to allow this to happen because it was not in the customers best interests. I Learned some interesting things from this wiki and am glad that I chose to summarize it.