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    Week 3

    Uploaded by

    Pushkar Raj

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd

    Week 3

    Uploaded by

    Pushkar Raj
    4 views11 pages

    Copyright

    © © All Rights Reserved

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    PPTX, PDF, TXT or read online from Scribd

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    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    4 views11 pages

    Week 3

    Uploaded by

    Pushkar Raj

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 11

    Labor & Financial

    Markets
    Demand and Supply at Work
    in Labor Markets
    Labor markets are markets for employees or jobs.
    Financial services markets are markets for saving
    or borrowing.
    The law of demand applies in labor markets this way: A
    higher salary or wage—that is, a higher price in the
    labor market—leads to a decrease in the quantity of
    labor demanded by employers, while a lower salary or
    wage leads to an increase in the quantity of labor
    demanded.
    The law of supply functions in labor markets, too: A
    higher price for labor leads to a higher quantity of labor
    supplied; a lower price leads to a lower quantity
    supplied.
    Financial
    System in the
    CFI
    Labor Demand & Supply
    The firm's demand for labor is a derived demand; it is derived from the
    demand for the firm's output. If demand for the firm's output increases, the firm
    will demand more labor and will hire more workers. If demand for the firm's output
    falls, the firm will demand less labor and will reduce its work force.
    When the firm knows the level of demand for its output, it determines how much
    labor to demand by looking at the marginal revenue product of labor. The
    marginal revenue product of labor (or any input) is the additional revenue the firm
    earns by employing one more unit of labor.
    The marginal revenue product of labor is related to the marginal product of
    labor. In a perfectly competitive market, the firm's marginal revenue product of
    labor is the value of the marginal product of labor.
    Shifts
    in
    Labor
    Deman
    d
    Shifts
    in
    Labor
    Deman
    d
    Shifts
    in
    Labor
    Suppl
    y
    Demand & Supply in Financial
    Markets
    In any market, the price is what suppliers receive and what demanders pay. In financial markets,
    those who supply financial capital through saving expect to receive a rate of return, while those
    who demand financial capital by receiving funds expect to pay a rate of return. The simplest
    example of a rate of return is the interest rate.
    According to the law of demand, a higher rate of return (that is, a higher price) will decrease
    the quantity demanded. As the interest rate rises, consumers will reduce the quantity that they
    borrow. According to the law of supply, a higher price increases the quantity supplied.
    Shifts in Demand and
    Supply in Financial Markets
    • Participants in financial markets must decide when they prefer to consume goods: now or in the
    future. Economists call this intertemporal decision making because it involves
    decisions across time. Unlike a decision about what to buy from the grocery store, people make
    investment or savings decisions across a period of time, sometimes a long period.
    • Most workers save for retirement because their income in the present is greater than their needs,
    while the opposite will be true once they retire. Thus, they save today and supply financial markets.
    • By contrast, many college students need money today when their income is low (or nonexistent) to
    pay their college expenses. As a result, they borrow today and demand from financial markets.
    Once they graduate and become employed, they will pay back the loans.
    Example: The Effect of Growing U.S.
    Debt
    Imagine that foreign investors viewed the U.S. economy as a less desirable place to put their
    money because of fears about the growth of the U.S. public debt.
    Step 1. Draw a diagram showing demand and supply for financial capital that
    represents the original scenario in which foreign investors are pouring money into
    the U.S. economy.
    Step 2. Will the diminished confidence in the U.S. economy as a place to invest affect demand or
    supply of financial capital?
    Step 3. Will supply increase or decrease?
    Example: The Effect of Growing
    U.S. Debt

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