chapter 15 factor markets and vertical integration
TRANSCRIPT
Chapter 15
Factor Markets and Vertical Integration
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Factor markets
• For completeness - firms hire labour from workers/consumers
• Consumers use income to buy from firms
• Workers make labour supply decisions
• Firms make decisions on how much to produce and sell
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Questions
• How do firms decide how much labour (and other inputs) to hire?
• Related questions:– why do some jobs pay more than others?– what determines the distribution of (earned)
income?– what is the effect of trade unions?– why do men earn more than women?
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How much labour to hire?
• Where to start?
• Keep it simple, look at one input at a time
• Hence look at the demand for labour, holding capital (and any other inputs) constant
• Hence this is the short run
• Relax this assumption later
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The usual assumptions...
• Firms try to maximise profits
• The firm will only hire an additional worker if she generates extra profit– marginal revenue from labour > marginal cost
of labour
• Marginal revenue from labour = extra output price of output
• Marginal cost of labour = wage
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Marginal product of labour
• The additional output of the worker is the marginal product of labour - MPL
• Price of output = marginal revenue - MR
• The additional revenue the worker generates is the marginal revenue product of labour - MRPL = MR MPL
• For the competitive firm, MR = P, so we refer to the value marginal product of labour - VMPL = P MPL
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Table 15.1 Marginal Product of Labor, Marginal Revenue Product of Labor, and Marginal Cost
Should be VMPL, but never mind!
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Maximising profit
• As long as MRPL > w, the firm should continue hiring more workers
• The optimum is therefore...– MRPL = w
• At the margin, workers are paid what they are worth. David Beckham is worth £70,000 (or whatever!) per week.
• (No exploitation, etc. This is a competitive economy.)
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Diagrams
L
Q
L
LMP
AP
L
MP
MP ,
L
APL
APL
L
Production function Marginal and averageproducts
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MRPL curveVMPL = p MPLMRPL = MR MPL
w
L
w,VMP
LM LC
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Labour demand and supply - same as previous diagram
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Re-interpretation - MC = MR
• w = MR MPL
• Re-write as w/MPL = MR
• Note the LHS is the firm’s MC:– if w = 10, MPL = 2...
– MC of one unit of output is 10/2 = 5.
• Hence firm is setting MC = MR
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Wages change... obvious effect
Think aboutthe minimumwage...
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The long run... capital not fixed
• What difference does it make?
• Wage falls labour demand increases, with capital fixed
• But... this is an inefficient way to expand, surely the firm would change capital too?
• MC falls, but not as much as it could, if capital can vary too.
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• If K can vary too, MC falls by more, so output increases by more, so demand for labour increases by more.
• Hence, the long run demand curve for labour is flatter (more elastic) than the short run curve
• Firms may take time to fully adjust to changing wage levels.
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Figure 15.3 Labor Demand of a Thread Mill
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Market demand for labour
• Above we examined the demand of a single firm. What about the market demand for labour?
• We do not horizontally sum the firms’ labour demand curves
• Why not...
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• Wage falls...
• Each firm’s labour demand rises...
• Each firm produces more output...
• So the market price of output falls...
• Hence, MPL falls...
• The moderates the rise in labour demand. It is less than the sum of the firms’ effects in isolation.
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Figure 15.4a Market Demand for Labor
Wage falls from$25 to $10.Firm’s labour demand rises from 50 to 90. But, price fallstoo...
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Figure 15.4b Market Demand for Labor
Market demandcurve
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Market imperfections
• Labour/input markets are not always competitive
• We examine monopsony
Buyer/employer Many One Seller/ Many PC, monopoly monopsony workers One monopoly
union Bilateral monopoly
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Monopsony
• A single buyer faces multiple sellers, the reverse of monopoly.– Big employer in a small, isolated town– NHS and nurses/doctors– BBC buying football programmes– Tesco buying food from farmers
• How do we analyse monopsony?
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Adapt the monopoly analysis
• Market power is held by the buyer, not the seller
• Hence it is the reverse of monopoly
• Rather than the seller facing a downward sloping demand curve...
• The buyer faces an upward sloping supply (e.g. of labour) curve.
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Figure 15.9a Monopsony
Hint: it’s the monopoly diagramupside down!
The wage (price ofinput) is reduced
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Monopsony in buying televised football
Year Length of contract
B'caster Live matches per
season
Annual rights fee
£m per live match
1983 2 years BBC/ITV 10 2.6 0.26 1985 6 months BBC/ITV 6 1.3 0.22 1986 2 years BBC/ITV 14 3.1 0.22 1988 4 years ITV 18 11.0 0.61 1992 5 years BBC/Sky 60 42.8 0.71 1996 5 years Sky 60 170.0 2.83 Source: Baimbridge et al, Satellite TV and the Demand for Football: a Whole New Ball Game? SJPE, 43 (3) 1996
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Implications of monopsony
• Nurses and doctors are paid less because of the NHS (though doctors can do private work and nurses are beginning to use agencies)
• Sky is the best thing that happened for (top) football clubs
• Farmers are worse off because of the power of Tesco, etc. (though they have the CAP!)
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The minimum wage again
wM
wMW
LM LMW
demand
supply
MEDemand for labour increases
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Summary and conclusions
• Factor demand is an extension of what we have done before.
• Maximising agents - look at the results
• Wages reflect marginal products, in perfect markets
• Imperfect markets can alter our predictions
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Things to think about
• Why are wages in Third World countries so low?
• Should football league clubs be allowed to sell their own TV rights?