factors market $ land (rent) $ labor (wages), $ capital (interest) $ entrepreneurship (profit)
TRANSCRIPT
Factors Market$ Land (rent)
$ Labor (wages),
$ Capital (interest)
$ Entrepreneurship (profit)
Factors Firms use the factors to produce the goods and
services. Central question of Economics is the question of scarcity.
How much or many of a factor is very dependent on the demand for a product or serviceShifts of demand in the product market
industry will effect the demand for the factor being used
Take what we have studied with production theory and market structures apply to labor market
Industry : Labor Market simply Supply and Demand
Demand for the Factor is derived demandAll the firms need for laborBased on the demand for their productIndirect relationship between Q and wage
Supply of workers or The factor is the actual Number of workers seeking work.Direct relationship between Q and wage
Purely Competitive labor market
Supply simply is number of workers availableCan shift if wages in another increase change
Derived Demand for labor: can shift if the price of the product changes or price of other factors change Machine or man which costs more Changes in labor productivity Tires up in the product market Shifts demand for
product
Demand for the factor (labor)/ non-price or wage determinant Is the result of the elasticity of the product, ease of substitution the amount of time the firm has to change production
methods and materials
Labor industry
Market clears at equilibrium with no shortages or surplus. If wage above equilibrium more workers than
firms want= surplus If wage below equilibrium, firm willing to hire
more but workers do not want to work
Wage determined at equilibrium and quantity at equilibrium
Min. wage a price floor above Causes lay offs, surplus of workers and
unemployment
Now the firm hiring workers Four assumptions effect the behavior of
the firm and they do use marginal analysis to set the wage and number
Many workers With identical skills: unskilled Total knowledge by firm and workers of
what the equilibrium wage should be Easy exit and entry of workers
Results
Firm is a wage taker
Therefore wage is horizontal and is MFC---reason wage is constant, perfectly elastic
MFC equals the supply of labor for the firm since it perceives it can get all the workers it needs at the market equilibrium wage
Labor Input (workers per week)
The firm
D
S
Labor Input (workers per week)
W1
SL = MFC
Industry labor market
W1
L1
Results
Firm is a wage taker
With no hiring power Firm knows it does not need to hire
above the equilibrium Firm knows if it hires below
equilibrium the workers will go work in another industry or for someone else
Productivity Therefore using marginal analysis the
number of workers hired need to equal the productivity of the workers to the firm and their contribution to revenue
MPP= output of the workers
MR= the contribution of hiring one more worker and output
Therefore it’s the price of the product also in purely competitive market structure
MPP X MR = MRP or the firms demand for labor
Summary Wage taker No market power Firm will hire where MFC=MRP Remember that
MRP=MPP x MR MFC is the firm’s
supply of workers MRP is the firm’s
demand for workers based on their productivity
MFC < MRP
MFC > MRP
• MRP = MFC• Optimal number of workers
Labor Input (workers per week)
MRP
$4981
12
SL = MFC
Wag
e an
d M
RP
per
wor
ker
($)
Make connections: Efficient use of resources Should be where the
Cost MFC ratio to mpp X mr (MRP) is equal for the use of all resources or factors
Every firm wants to use its factors in a profit maximizing combination were MR=MC
Least cost combination: true efficiencyAnd for the factors were the ratio of
Cost minimization
MPP of laborprice of labor
= MPP of captialprice of capital
MPP of landprice of land
=
mrp/wage=mrp=rent=mrp/interest=mrp/profit
Purely competitive Factors market
Labor Input (workers per week)
The firm
D
S
Labor Input (workers per week)
W1
SL = MFC
Industry labor market
W1
L1
Now line it up with purely competitive product market
Initial market conditions
S
D
Quantity of Wheat(industry)
Quantity of Wheat(firm)
d = MRPe
Qe
Break-even
MC
ATC
qe
Now what if nonprice determinants effect the product market
Higher price createseconomic profit
S1
D1
Quantity of Wheat(industry)
Quantity of Wheat(firm)
P1
Q1 q1
MC
ATC
q2
D2
Q1
P2
European crop failure increases U.S. Demand
Is the product market related to the factors market
Shifts of demand will effect DD and cause DD to shift right or left influencing wage and the firm’s MFC
Changes in the productivity of labor, wages will effect the supply curve up in the product market resulting in higher or lower prices. This then effects the factors market DD
Remember to shift MRP if mpp or mr effected
New profits in the product market
S1
D1
Quantity of Wheat(industry)
Quantity of Wheat(firm)
P1
Q1 q1
MC
ATC
D2
S2
Economic profit attracts new firmsPrice fall to break-even
MRP = MFC
Figure 27-1, Panel (a)
How to find MRP
TotalPhysical Marginal MarginalProduct Physical Product Revenue Product
Labor Input (TPP) (MPP) (MRP) (MR = $6)
6 882
7 1,000
8 1,111
9 1,215
10 1,312
11 1,402
12 1,485
13 1,561
118 $708
111 $666
104 $624
97 $582
90 $540
83 $498
76 $456
What if the firm has power Monopoly=1 firm with unique product Monopsony is a firm that hires with power It could control wage ==wage setter It would hire fewer workers at lower wages Assumptions would be different
Fewer workers With unskills –can be replaced Firm knows it has power to pay less Workers have a difficult time finding work with
someone else
Monopsony The firm has hiring power Many workers but one or several firms that
have power Therefore industry derived demand
curve(downward sloping) is the Firm’s The firms MRP or demand line is a function
of their power The Wage line will move up from supply--
just the opposite of MR derived from Demand in the product market.
Wage Setter with power
MRP is DDFor the firm
Supply of all workers
MFC moves upwardFirm must pay more to hire more workers
PC wage
Firm goes toMrp=mfc andLooks down to The lowestWage he canpay
DWL unemployment welfare
MFC
dwl
Hiring DecisionGoes to MRP=MFCLooks downPays less and hires
Fewer workers
Firm has the power
Monopsony and min wage
MFC