Before we begin something new, I wanted to give you the answers to the Game Theory Worksheet I gave you last week. Here it is:
Game Theory Worksheet Answers
If you did not get the correct answers, I would first suggest watching the three videos I posted last week about Game Theory. If that doesn't fix your problems, then you can wait until Thursday and ask me in the weekly Zoom meeting. Or you can email me, but it is harder to explain this by email.
2) Unit 4
Today we are beginning unit 4. As I've said previously, there are only 3 power points to cover in this unit. However, we will probably be breaking them up into 5 or so sets up online lessons.
Our first notes are about Resource Demand:
Resource Demand Part 1
Here's a picture of a circular flow diagram:
For the most part, the majority of what we've done so far has taken place in the Product Market. We have looked at how a business decides how much of a product to sell and how many of that product customers will buy.
For Unit 4, we now will travel down to the Resource Market/Factor Market. Because we are now looking at the buying and selling or resources or the factors of production, we will now look at how a business decides how much of a resource it should BUY and how a household decides how much of that resource it should SELL.
Over all Unit 4 is pretty simple, as it is just looking at the things we already know through a new lens. Still doing this often confuses students. In particular they start trying to mix their Unit 4 knowledge into questions that have nothing to do with Unit 4.
One of the things that makes Unit 4 tricky was highlighted by the ALLCAPS two paragraphs ago. When we are in the Factor market, the roles or supply and demand switch.
In the PRODUCT market: Businesses SELL products and Households BUY products.
In the RESOURCE market: Businesses BUY resources and Households SELL resources.
In other words the role of Supply and Demand have flipped.
In the PRODUCT market: Business SUPPLY and Households DEMAND.
In the RESOURCE market: Business DEMAND and Households SUPPLY.
Essentially the rules we've previously used about how Supply and Demand work, have not changed. We are just now flipping who they are applied to.
One of the differences is the type of demand we have in the resource market. It is different because it isn't a pure demand. Instead we say it is a "Derived Demand".
What does that mean?
Let's say you have a pizzeria. In the product market you supply pizzas. But in the resource market, you demand things like: tomato sauce, cheese, pepperoni, and labor.
In fact, most of the time in AP Micro, the questions they ask about the resource market limit themselves to Labor. There are occasionally questions with other things, but 95% of the time it's just labor. Because of that, we will mostly limit ourselves to just focusing on labor too.
Now back to derived demand.
In the product market your customers want pizza. They have a demand for pizza.
In the resource market your business has a demand for workers to make those pizzas. But your demand is different because your demand wouldn't exist without the first demand of customers wanting pizza.
Said differently, there is no demand for workers at the pizzeria, if there is not first a demand for pizza. Your demand for workers comes from (or is derived from) your customer's demand for pizza.
How this impacts your business is that your demand for workers can change in two ways. First we could have something happen in the resource market. Imagine a standard Market graph with an X made of Supply and Demand. Here's an example:
Notice that there are a few other changes on our graph. In the product market our y-axis was price of the product. In the resource market the y-axis is still price, but now it is price of the resource. Of course we have a special name for the price of labor. We call it wages. So when we are drawing a graph for the labor market, we label the y-axis "W".
In the product market the x-axis is labeled Q for the quantity of the product. In the resource market it is still quantity, but now it is the quantity of the resource. In the labor market, we are talking about the Quantity of Labor. So we usually label it "L". (Naturally this only applies if we are actually talking about the labor market. If the question happens to be one of the rare times that we aren't talking about labor, it wouldn't by W and L.)
If either the S or the D line shifts, the equilibrium quantity or workers needed in the resource market will change and consequently you will need more or fewer workers. Here's an example:
- Two new pizzerias open in your neighborhood. According to the determinants of demand, Demand will now increase. This is an increase in the number of buyers. There are now two new businesses in the market demanding pizzeria workers. This increase in demand. On our graph the demand line would shift to the right and both the wages and quantity of people hired would go up.
But your demand for workers will also change if something happens to the equilibrium quantity of pizzas in the product market. Here's and example:
- The popularity of pizza in America rises. This is an increase in Taste and Preferences in the PRODUCT market. In the product market Demand increases. This means that the price of pizza will go up and that the quantity of pizza sold will also go up.
HOWEVER, in order for your business to make more pizzas, you are going to need MORE workers at your pizzeria. In other words, your derive demand for workers goes up too! Thus the Demand line in the RESOURCE market also goes up. This drives wages up and the number of people working at a pizzeria also goes up.
That's enough for today. That gets us about halfway through the power point. We'll cover the second half next time.
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