Week 13 — Lecture Outline · Factor / Labor Markets

Course: Principles of Microeconomics (ECON 1) · Silver Oak University (fictional sample) · Prof. Kessler
Objective 7 — monopolistic competition, oligopoly & game theory; factor/labor markets · SLO A & B
Meeting pattern: two 75-min sessions (≈150 min). Segment minutes below total ~150 — scale to your room.

The deck (E), the tutorial (C), and the workshop (P) all teach from this outline. Every number here is pre-computed and independently verified (see the verified box in §4).

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Week at a glance

Big question	How does a firm decide how many workers to hire — and what drives wages across different jobs?
By week's end students can	(1) define derived demand and explain why labor demand comes from product demand; (2) compute VMPL = MPL × output price for any worker; (3) apply the hiring rule VMPL ≥ wage; (4) predict how output-price or productivity changes shift labor demand; (5) discuss wage differentials using human capital, compensating differentials, discrimination, and market power — keeping positive and normative separate.
Key vocabulary	factor market, derived demand, marginal product of labor (MPL), diminishing MPL, value of the marginal product of labor (VMPL), labor-demand curve, wage, profit-maximizing hiring rule, human capital, compensating differential, monopsony
Materials	whiteboard; VMPL table (paper or spreadsheet); the Week-13 readings/links; an approved chatbot
Timing note	8 segments ≈ 150 min across two sessions.

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Segment 1 — HOOK: "Why does a nurse earn what a nurse earns?" (10 min)

Open with a direct question to the room: "Why does a nurse earn roughly $80,000 a year while a retail associate might earn $30,000 — even though both work full time and both jobs are important?" Take a few quick answers (people will say: education, risk, supply and demand).

Then preview the two-part answer this week provides: (1) the demand side — firms hire based on how much value a worker adds, which is driven by how much customers pay for the output, and (2) the wage-differential question — why the supply and demand curves themselves are in different places for different jobs.

Promise: "By the end of today you'll have a clean model of how the demand side works — and you'll be able to say something sharp about the wage question."

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Segment 2 — PLAIN-LANGUAGE IDEA: derived demand (15 min)

Derived demand: firms do not want labor for its own sake. They want labor because labor produces output, and customers want the output. So labor demand is derived from (flows from) the demand for the final good.

Plain-language illustration: when streaming services became popular, the demand for actors, writers, and directors rose sharply — not because Hollywood suddenly loved those workers more, but because more people were watching more content. A fall in the price of concert tickets (shifts demand for concerts) eventually shifts the demand for musicians and sound engineers.

Key implication: anything that raises the value of what a firm sells — a higher product price, a new technology that raises productivity — also raises the demand for the workers who make it. The product market and the labor market are linked through this channel.

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Segment 3 — THE MPL: what each additional worker adds (15 min)

Before we can price a worker's contribution, we need to measure it.

Marginal product of labor (MPL): the extra output produced when the firm hires one more worker, holding all other inputs fixed.

Diminishing MPL: as more workers are added to a fixed amount of capital (machines, floor space), each additional worker adds less to output than the previous one. Not because later workers are worse — but because there are fewer machines and space for them to use. First worker turns on every machine; the fifth worker is sharing equipment with four others.

Why this is the engine of everything this week: if each additional worker adds less output, and that output has a fixed price, then each additional worker is worth less in dollar terms to the firm. That's the logic behind the downward-sloping labor-demand curve.

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Segment 4 — THE VMPL AND THE HIRING RULE (35 min)

Now the week's core model. Work through this on the board step by step.

Step 1 — From MPL to VMPL

VMPL (Value of the Marginal Product of Labor) = MPL × output price (P)

VMPL translates physical productivity into dollars — it tells the firm exactly how much revenue hiring one more worker brings in.

Step 2 — The pre-computed verified table

✅ VERIFIED NUMBERS (pre-computed; do not recompute live)

A firm sells output at P = $5 per unit. The MPL schedule as workers are added:

Workers	MPL (extra units)	VMPL = MPL × $5	Wage = $50
1st	20	$100	$50
2nd	18	$90	$50
3rd	14	$70	$50
4th	10	$50	$50
5th	6	$30	$50

Hiring rule: hire the worker if VMPL ≥ wage. Stop if VMPL < wage.

• Workers 1–4: VMPL ≥ $50 → hire.
• Worker 5: VMPL = $30 < $50 → do not hire.
• Optimal employment = 4 workers.

Note: Worker 4's VMPL exactly equals the wage ($50 = $50). The rule says hire at equality — the firm is exactly breaking even on that worker, so there is no reason to stop before.

Reading the table: VMPL falls from $100 to $90 to $70 to $50 to $30 — reflecting diminishing MPL. Each worker adds less than the one before. The labor-demand curve is simply a plot of VMPL against employment; it slopes downward for exactly this reason.

Step 3 — The hiring rule as a graph

Draw the VMPL schedule on axes (workers on x, dollars on y). Plot the five points: (1,$100), (2,$90), (3,$70), (4,$50), (5,$30). Draw the horizontal wage line at $50. The optimal employment is where VMPL = wage — at 4 workers. To the left, VMPL > wage → hire more. To the right, VMPL < wage → cut back. This is the microeconomic mirror of the MR = MC rule.

Step 4 — What shifts the VMPL curve?

The entire labor-demand curve (VMPL) shifts when:
- Output price rises → VMPL at every employment level rises → firm wants more workers at every wage → labor demand shifts right.
- Productivity rises (higher MPL) → same effect; VMPL rises → demand shifts right.
- Output price falls or productivity falls → demand shifts left.

Classic trap to kill: "The wage changed — does that shift the curve?" NO. The wage is on the y-axis; changing the wage moves the firm along the existing VMPL curve (changes the quantity of labor demanded, not the demand itself). Only output price and productivity shift the curve.

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Segment 5 — WAGE DIFFERENTIALS: why some jobs pay more (20 min)

The VMPL model explains the demand side. But wages also differ because the supply and demand curves for different types of labor sit in different places. Here are the four main explanations — present each clearly, then note the positive vs. normative line.

1. Human capital. Education, training, and experience raise productivity (MPL). Higher MPL → higher VMPL → firms bid up the wage. The positive claim: workers with more human capital are more productive, so firms pay more to attract them. The normative questions: who should pay for that education? Is a wage gap "fair" if it reflects a deliberate investment?

2. Compensating differentials. Dangerous, dirty, or unpleasant jobs must pay a premium to attract workers who could earn the same in safer jobs. The wage gap compensates for non-monetary costs, not productivity differences. Example: a mine operator may earn a premium over a warehouse worker with similar skills.

3. Discrimination. If employers, customers, or co-workers have a taste for excluding a group, members of that group can be paid less than their VMPL — the wage gap exceeds what human capital or compensating differentials explain. This is a contested empirical area: studies that control for occupation and hours find smaller gaps; studies that use audit methods find direct evidence of discrimination. Both sets of findings belong in a careful discussion.

4. Market power (monopsony). If a firm is the only (or dominant) buyer of labor in a market — a monopsonist — it can offer wages below VMPL. Hospital systems, mining towns, and some tech firms have faced this argument. The result: workers earn less than they would in a competitive labor market.

Keep the line clear: What drives wage gaps (human capital, compensating differentials, discrimination, monopsony) is a positive question — amenable to evidence. Whether a given gap is "fair" is normative — and careful economists keep those two arguments distinct.

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Segment 6 — TECHNOLOGY WORKFLOW + AI-CRITIQUE (20 min)

Live demo (spreadsheet or scratch paper): build the VMPL table from the verified numbers on the board or in a shared spreadsheet. Enter the MPL column → multiply by P=$5 → draw the VMPL column → compare to the wage line.

AI-critique moment: ask an approved chatbot: "A firm has 5 workers with MPL values of 20, 18, 14, 10, and 6. Output sells at $5 per unit and the wage is $50. How many workers should the firm hire?" The correct answer is 4 (VMPL at worker 4 = $50 = wage; VMPL at worker 5 = $30 < $50). Common chatbot errors: (1) the bot computes VMPL correctly but then stops at 3 workers (misapplying the strict inequality), (2) it fails to multiply MPL × P and just compares MPL to the wage directly, or (3) it includes the 5th worker because "30 is close enough." Have the class catch the error and state the correct reasoning.

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Segment 7 — INTERACTION: think-pair-share (15 min)

Pose: "Robots are becoming better at performing routine warehouse tasks. What does your model predict will happen to the demand for warehouse workers? For robot technicians?" Pairs argue, then share. Guide toward: robot technology → higher MPL for technicians (demand rises) + possibly lower MPL for routine warehouse workers (demand falls). The VMPL curve shifts in opposite directions for the two types of labor. This is derived demand in action.

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Segment 8 — CALLBACKS, TEASE & THE WEEK'S WORK (10 min)

• Callback: the MR = MC rule from Weeks 10–11 and the VMPL ≥ wage rule from today are the same logic: keep hiring (or producing) as long as the marginal benefit exceeds the marginal cost, stop when they're equal.
• Connection to Week 12: oligopolists who collude set a high price → higher VMPL → higher labor demand. Market power on the output side affects the labor market.
• Tease next week (Week 14): we've been assuming markets work well. Next week: what happens when they don't — externalities, public goods, and the Coase theorem.
• The week's work: Lecture Tutorial, Practice, Quiz 13, Discussion 13 (wage differentials — keep it evenhanded), Assignment 13, and Workshop 13 (build the VMPL table and find the optimal hiring level).

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Instructor FAQ — common stumbles

• "Is VMPL the same as MR × MPL?" In perfect competition, P = MR, so VMPL = MPL × P = MPL × MR. In principles we stay with VMPL = MPL × P (output price). The general form (MRP = MR × MPL) is intermediate micro.
• "Why hire at exactly VMPL = wage?" At equality, the worker adds exactly what the firm pays; economic profit from that worker = 0. Hiring is still justified — stopping earlier would leave positive surplus on the table.
• "Does the wage change shift the curve?" No. The VMPL curve is fixed by the technology (MPL) and the output price. The wage determines where on the curve the firm operates.
• "Which way does the curve shift if the product becomes more valuable?" Right (demand increases). VMPL = MPL × P; if P rises, VMPL at every employment level rises, so the firm wants more workers at every wage.
• "Is the wage-gap always discrimination?" The positive answer is: part of it reflects human capital and compensating differentials; studies that carefully control for those factors still find residual gaps that are hard to explain without discrimination or monopsony. The normative answer (what to do about it) is genuinely contested.