Markets For Factor Inputs

Chapter 14
Markets for Factor Inputs
Topics to be Discussed
Competitive Factor Markets
Equilibrium in a Competitive Factor Market

Factor Markets with Monopsony Power Factor Markets with Monopoly Power
2005 Pearson Education, Inc.
Chapter 14

Characteristics
1. Large number of sellers of the factor of production 2. Large number of buyers of the factor of production 3. The buyers and sellers of the factor of production are price takers
Chapter 14

Demand for a factor input when only one input is variable:
Factor demands are derived demand
Demand
for an input that depends on, and is derived from, both the firms level of output and the cost of inputs Demand for computer programmers is derived from how much software Microsoft expects to sell
Chapter 14
Factor Input Demand One Variable Input

Assume firm produces output using two inputs:
Capital (K) and Labor (L) Hired at prices r (rental cost of capital) and w (wage rate) K is fixed (short run analysis) and L is variable Firm must decide how much labor to hire
Chapter 14

How does a firm decide if it is profitable to hire another worker?
If the additional revenue from the output of hiring another worker is greater than its cost Marginal Revenue Product of Labor (MPRL)
Additional
revenue resulting from the sale of output created by the use of one additional unit of an input
Chapter 14

The incremental cost of a unit of labor is the wage rate, w Profitable to hire more labor if the MRPL is at least as large as the wage rate, w Must measure the MRPL
Chapter 14

MRPL is the additional output obtained from an additional unit of labor, multiplied by the additional revenue from an extra unit of output Additional output is given by MPL and additional revenue is MR
Chapter 14

R MRPL where R is revenue and L is labor L Q R MPL and MR L Q R R Q L Q L MRPL ( MPL )( MR)
Chapter 14

In a competitive market, MR = P This means, for a competitive market
MRPL ( MPL )( P )
Graphically, diminishing marginal returns, MPL falls as L increases
Chapter 14
10
Marginal Revenue Product

Wages ($ per hour)
Competitive Output Market (P = MR)
Monopolistic Output Market (P < MR)
MRPL = MPLx P MRPL = MPL x MR

Hours of Work
Chapter 14
11

Choosing the profit-maximizing amount of labor:
If MRPL > w (the marginal cost of hiring a worker): hire the worker If MRPL < w: hire less labor If MRPL = w: profit maximizing amount of labor
Chapter 14
12
Hiring by a Firm in the Labor Market

Price of Labor In a competitive labor market, a firm faces a perfectly elastic supply of labor and can hire as many workers as it wants at w*.
w*
SL
The profit maximizing firm will hire L* units of labor at the point where the marginal revenue product of labor is equal to the wage rate.
MRPL = DL
2005 Pearson Education, Inc. L*
Chapter 14
Quantity of Labor
13

Quantity of labor demand changes in response to the wage rate If the market supply of labor increases relative to demand (baby boomers or female entry), a surplus of labor will exist and the wage rate will fall
Chapter 14
14
A Shift in the Supply of Labor

Price of Labor
w1
w2
S1 S2 MRPL = DL
Quantity of Labor
15
L1
L2
Chapter 14

Comparing Input and Output Markets
MRPL (MPL )(MR) and at profit maximizing number of workers MRPL w (MPL )(MR) w MR w MPL w MPL MC of production
2005 Pearson Education, Inc. Chapter 14 16

Both the hiring and output choices of the firm follow the same rule
Inputs or outputs are chosen so that marginal revenue from the sale of output is equal to marginal cost from the purchase of inputs True for both competitive and noncompetitive markets
Chapter 14
17
Factor Input Demand Many Inputs

In choosing more than one variable input, a change in the price of one input changes the demand for the others Scenario
Producing farm equipment with two variable inputs:
Labor Assembly-line
machinery
Chapter 14
18

If the wage rate falls:
More labor will be demanded even if amount of machinery does not change MC of producing farm equipment falls Profitable for firm to increase output Will invest in additional machinery to expand production MRPL will shift right, quantity of labor demanded increases

If wage rate is $20/hr, firm hires 100 worker hours point A Wage rate falls to $15/hr MRPL > W, firm demands more labor MRPL1 is demand for labor w/machinery fixed Increased labor causes MPK to rise, encouraging the firm to rent more machinery MPL increases MRPL curve shifts right, firm uses 140 hrs labor

Wages ($ per hour)
When the wage rate falls to $15, the MRP curve shifts, generating a new point C on the firms demand for labor curve. Thus A and C are on the demand for labor curve, but B is not.
20 15
C
B 10 5 0 40 80 120
Chapter 14
DL
MRPL1 MRPL2 160
Hours of Work
21
Market Demand Curve

All firms demand for labor vary substantially Assume that all firms respond to a lower wage
All firms would hire more workers Market supply would increase The market price will fall The quantity demanded for labor by the firm will be smaller
Chapter 14
22
Industry Demand for Labor

Wage ($ per hour)
Firm
Wage ($ per hour)
Industry
Horizontal sum if product price unchanged
15
15
10
MRPL2 MRPL1
10
Industry Demand Curve
DL1 DL2
50
100 120 150 Labor

(worker-hours)
L0
L1
L2
Labor (worker-hours)
23
Chapter 14
The Industry Demand for Labor

If the wage rate falls for all firms in industry, all firms will demand more labor More industry output and supply for output will rise, causing prices to fall The increase in labor is smaller than if the product price were fixed Adding all labor demand curves in all industries gives market demand curve for labor
The Demand for Jet Fuel

Jet fuel is a factor (input) for airlines Cost of jet fuel
1971 Jet fuel cost equaled 12.4% of total operating cost 1980 Jet fuel cost equaled 30.0% of total operating cost 1990s Jet fuel cost equaled 15.0% of total operating cost
Chapter 14
25

Airlines responded to higher prices in the 1970s by reducing the quantity of jet fuel used Output of airlines (ton-miles) increased by 29.6% and jet fuel consumed rose by 8.8% Effect of increased fuel costs on airlines depends on ability to cut fuel usage by reducing weight

Price elasticity of demand for jet fuel depends on ability to conserve fuel and elasticities of demand and supply of travel The demand for jet fuel impacts the airlines and refineries alike The short-run price elasticity of demand for jet fuel is very inelastic
Short-Run Price Elasticity of Demand for Jet Fuel

Airline
American Continental Northwest
Elasticity
-0.06 -0.09 -0.07
Airline
Delta TWA United
Elasticity
-0.15 -0.10 -0.10
Chapter 14
28

There is no good substitute for jet fuel Long run elasticity of demand is higher, however, because airlines can eventually introduce more energy-efficient airplanes Can show short- and long-run demands for jet fuel
MRPSR is much less elastic than long run demand since it takes time to substitute
Chapter 14
29
The Short- and Long-Run Demand for Jet Fuel

Price
MRPSR
2005 Pearson Education, Inc. Chapter 14
MRPLR
30
Quantity of Jet Fuel
The Supply of Inputs to a Firm

In a competitive market, a firm can purchase as much of an input it wants at the market price
Determined by supply/demand of input market
Input supply to a firm is perfectly elastic Firm is small part of market so does not affect market price
Chapter 14
31
A Firms Input Supply in a Competitive Factor Market

Price ($ per yard)
Market Supply of Fabric
Price ($ per yard)
Supply of Fabric Facing Firm
10
Market Demand for Fabric
10
ME = AE
D
Yards of Fabric (thousands)
Demand for Fabric
MRP
100
50
Yards of Fabric (thousands)
Chapter 14
32

Remember that the supply curve is the average expenditure curve
Supply curve representing the price per unit that the firm pays for a good
Also, marginal expenditure curve represents the firms expenditures on an additional unit that it buys
Analogous to MR curve in output market
Chapter 14
33

When factor market is competitive, average expenditure and marginal expenditure are identical horizontal lines How much of the input should the firm purchase?
As long as MRP > ME, profit can be increased by buying more input When MRP < ME, benefits lower than costs
Chapter 14
34

Profit maximization requires the marginal expenditure to be equal to the marginal revenue product ME = MRP A special case of competitive output market shows profit maximization where ME = w
Chapter 14
35
The Market Supply of Inputs

The market supply for factor inputs is upward sloping
Examples: jet fuel, fabric, steel
The market supply for labor may be upward sloping and backward bending
Chapter 14
36

The Supply of Labor
The choice to supply labor is based on utility maximization Leisure competes with income for utility Wage rate measures the price of leisure Higher wage rate causes the price of leisure to increase
Chapter 14
37
The Market Supply of Inputs

The Supply of Labor
Higher wages encourage workers to substitute work for leisure
The
substitution effect
Higher wages allow the worker to purchase more goods, including leisure, which reduces work hours
The
income effect
Chapter 14
38

The Supply of Labor
If the income effect exceeds the substitution effect, the supply curve is backward bending By using utility and budget line graph, we can show how the supply curve can be backward bending
Can
show how the income effect can exceed the substitution effect
Chapter 14
39
Substitution and Income Effects of Wage Increase

720
Income ($ per day)
R
w = $30
Worker initially chooses point A: 16 hours leisure, 8 hour work Income = $80
Wage increases to $30. New budget line RQ. 19 hours leisure, 5 hours work Income = $150 Income effect overrides substitution effect
240
P
w = $10
C
A
Q
0 8 12 16 19 24
Substitution effect Income effect
Hours of Leisure
40
Backward-Bending Supply of Labor

Wage ($ per hour)
Income Effect > Substitution Effect
Supply of Labor
Income Effect < Substitution Effect
Hours of Work per Day

Labor Supply for One- and Two-Earner Households

In twentieth century, the percent of females in labor force has increased
1950 34% 2001 60%
Compared the work choices of 94 unmarried females with work decisions of heads of households and spouses in 397 families
Can describe work decisions by calculating elasticity of supply for labor
Chapter 14
42
Elasticities of Labor Supply (Hours Worked)
Chapter 14
43
Labor Supply for One- and Two-Earner Households

When higher wage rate leads to fewer hours worked:
Labor supply curve is backward bending Income effect outweighs the substitution effect Elasticity of labor supply is negative
Chapter 14
44

Competitive factor market is in equilibrium when the prevailing price equates quantity supplied and quantity demanded Since workers are well informed, all receive the same wage and generate identical MRPL when employed
Chapter 14
45

If output market is perfectly competitive, demand curve for an input measures benefit consumers place on use of input in production process Wage rate also reflects the cost of the firm and to society of using additional unit of input At equilibrium, MBL = MCL = wage

When output and input markets are both perfectly competitive, resources are used efficiently
Maximize TB TC
Efficiency requires that MRPL equals the benefit to consumers of the additional output, given by (P)(MPL)
Chapter 14
47

If output market is not competitive:
MRPL = (P)(MPL) no longer holds (P)(MPL) > MRPL At equilibrium number of workers, marginal cost to firm, wM, is less than marginal benefit to consumers, vM Although the firm maximizes profits, output is below efficient level and uses less than efficient level of output
Chapter 14
48

If output market is not competitive:
Although the firm maximizes profits, output is below efficient level and uses less than efficient level of input Economic efficiency would be increased if more laborers were hired and more output were produced
Gains
to consumers would outweigh firms lost
profit
Chapter 14
49
Labor Market Equilibrium

Competitive Output Market
Wage Wage
Monopolistic Output Market
SL = AE SL = AE
vM wM
wC
B
P * MPL
DL = MRPL
DL = MRPL
LC
Number of Workers
LM
Number of Workers
Chapter 14
50

Economic Rent
For a factor market, economic rent is the difference between the payments made to a factor of production and the minimum amount that must be spent to obtain the use of that factor The economic rent associated with the employment of labor is the excess of wages paid above the minimum amount needed to hire workers
Economic Rent
Wage
SL = AE A
w*
Economic Rent
Total expenditure (wage) paid is 0w* x 0L*
DL = MRPL
Economic rent is ABW*
0
L*
Chapter 14
Number of Workers
52

Land: A Perfectly Inelastic Supply
Occurs when land for housing or agriculture is fixed, at least in short run Its price is determined entirely by demand When demand increases, rental value per unit increases and total land rent increases
Chapter 14
53
Land Rent
Price ($ per acre)
Supply of Land
When demand increases, price and economic rent increase. s2
s1
D2 Economic Rent D1
Number of Acres
Pay in the Military

During the Civil War, 90% of the armed forces were unskilled workers involved in ground combat Today, only 16% are unskilled workers involved in ground combat Lead to severe shortages in skilled workers
Chapter 14
55
Pay in the Military

Rank structure has stayed the same
Pay increases are determined primarily by years of service Similarly, officers with differing skill levels are often paid similar salaries Many skilled workers leave the army since salaries in private sector are much higher
Chapter 14
56
The Shortage of Skilled Military Personnel

Wage
SL
w*
w0
Shortage
DL = MRPL
Number of Skilled Workers
Pay in the Military

Solution
Selective reenlistment bonuses targeted at skilled jobs where there are shortages With increases in demand for skilled military jobs, we should expect the military to increase reenlistment bonuses and other market based incentives
Chapter 14
58
Factor Markets with Monopsony Power

We showed before that many firms have monopsony buying power
US automobile companies as buyers of parts and components
Assume
The output market is perfectly competitive Input market is pure monopsony
Chapter 14
59

Marginal and Average Expenditure
When choosing to purchase a good, increase amount purchased until the marginal value equals marginal expenditure Price paid for good is average expenditure and is equal to marginal expenditure
Chapter 14
60

Since a monopsonist pays the same price for each unit, the supply curve is the average expenditure curve Upward sloping, since deciding to buy an extra unit raises price it must pay for all units For profit maximizing firm, marginal expenditure curve lies above the average expenditure curve Firm must pay all units the higher price, not just last unit hired
Chapter 14
61
Marginal and Average Expenditure

Price 20 (per unit of input) 15 wc w* = 13 10 D = MRPL Hires where ME = MRP Marginal Expenditure (ME)
SL = Average Expenditure (AE)
LC is competitive market level
4 L*
5 Lc
6 Units of Input
62

Examples of Monopsony Power
Government
Soldiers Missiles B2
Bombers
NASA
Astronauts
Company town
Chapter 14
63
Monopsony Power in the Market for Baseball Players

Baseball owners operate a monopsonistic cartel
Reserve clause prevented competition for players Each player tied to one team for life Once drafted, could not play for another team unless rights were sold Baseball owners had monopsony power in negotiating new contracts

During 1960s and 70s, players salaries were far below market value of MP If competitive market
Players receiving $42,000 in 1969 would have instead received a salary of $300,000 in 1969 dollars
Strike in 1972 followed by lawsuit
Chapter 14
65

In 1975, players could become free agents after playing for a team for six years Reserve clause no longer in effect Market became more competitive From 1975 to 1980, expenditures on players contracts went from 25% of team expenditures to 40% Average player salary doubled in real terms
Chapter 14
66
Factor Markets with Monopoly Power

Just as buyers of inputs can have monopsony power, sellers of inputs can have monopoly power The most important example of monopoly power in factor markets involves labor unions
Chapter 14
67
Monopoly Power of Sellers of Labor

Wage per worker
Demand with no monopsony power. Supply of union labor w/ no monopoly power. Labor market competitive with L* workers hired at wage w* Demand equals Supply
A w*
SL
DL MR
L*
2005 Pearson Education, Inc. Chapter 14
Number of Workers
68

The unions monopoly power allows it to choose any wage rate and quantity supplied
If it wanted to maximize number of workers hired, it would choose competitive outcome If it wanted to obtain higher wages, it would restrict membership to L1 workers to get higher wage w1 Those who find jobs are better off. Those without jobs are worse off.

Wage per worker
Labor market competitive with L* workers hired at wage w* Labor sellers with monopoly power at L1 and w1
w1
SL
A w*
DL MR
L1
L*
Chapter 14
Number of Workers
70

Is restrictive union worthwhile?
Yes, if maximizing economic rent is the goal The union acts like a monopolist restricting output to maximize profits Rent for a union represents the wages earned in excess of opportunity cost Union must choose workers so that the marginal cost equals the marginal revenue
Chapter 14
71

Cost is the marginal opportunity cost since it is a measure of what an employer has to offer an additional worker to get him or her to work for the firm But, the wage necessary to encourage additional workers to take jobs is given by supply curve for labor, SL
Chapter 14
72

Rent maximizing combination of wage rate and number of workers is where MR crosses supply Price comes from the demand curve This gives a combination of L1 and w1 Shaded area below the demand curve and above the supply curve to the left of L1 is the economic rent that all workers receive

Wage per worker
Maximizing rents to workers means choosing labor where MR crosses S. Wage comes from demand.
w1 w2 w*
Economic Rent
SL
DL MR
L1
L2
L*
Number of Workers
74
Chapter 14
Factor Markets with Monopoly Power

Rent maximizing policy can help nonunion workers if they can find nonunion jobs If jobs are not available, this could cause too much of a distinction between winners and losers Looking back at graph, an alternative objective is to maximize aggregate wages that all union members receive
This gives L2 and w2
Chapter 14
75
Unionized and Non-Unionized Workers

When union uses monopoly power, some workers are not hired. Those workers either try to find nonunion jobs or choose initially not to join union. Assume the total supply of workers is fixed supply is SL Demand for unionized labor is DU and demand for non-unionized labor is DNU Total market demand is DU + DNU = DL
Unionized and Non-Unionized Workers

What if union chooses to raise wage above competitive wage w*, to wU ? Number of workers hired by the union falls by amount LU As these workers find employment in non-union sector, wage rate in that sector adjusts until labor market is in equilibrium At new wage rate, wNU, additional numbers hired in sector is LNU
Equals number of workers who left unionized sector
Chapter 14
77
Wage Discrimination in Labor Market

Wage per worker
SL
When a monopolistic union raises the wage rate in the unionized sector of the economy from w* to wU, employment in that sector falls.
wU w* wNU DU DNU
For the total supply of labor to remain unchanged, the wage in the non-unionized sector must fall from w* to wNU
DL
Number of Workers
78
LU
LMU
The Decline of Private Sector Unionism

Observations
Union membership and monopoly power has been declining Initially, during the 1970s, union wages relative to non-union wages fell
Chapter 14
79

Observations
In the 1980s, union wages stabilized relative to non-union wages Since the 1990s, membership has been falling and wage differential has remained stable
Chapter 14
80

Explanation
The unions have been attempting to maximize the individual wage rate instead of total wages paid The demand for unionized employees has probably become increasingly elastic as firms find it easier to substitute capital for skilled labor
Chapter 14
81
Wage Inequality Have Computers Changed the Labor Market?

1950-1980
Relative wage of college graduates to high school graduates hardly changed
1980-1995
The relative wage grew rapidly
Chapter 14
82

In 1984, 25.1% of all workers used computers 1993 45.8% 2001 53.5%
For managers and professionals, it was over 80%
Chapter 14
83

Percent change in use of computers
College degrees
1984-1993:
from 42% to 82%
Less than high school degree

11%:
from 5% to 16%
from 19% to 40%
With high school degree

21%:
Chapter 14
84

Growth in wages 1983 to 1993
College graduates using computers 11% Non-computer users less than 4% Statistical analysis shows that, overall, the spread of computer technology is responsible for nearly half the increase in relative wages during this period
Chapter 14
85

Is this increase in the relative wages of skilled workers bad?
Although growing inequality can disadvantage low-wage workers, it can also motivate workers
Opportunities
for upward mobility through highwage jobs have never been better
Chapter 14
86

Should you complete a college degree?
In 2000, college graduates age 25 and over earned nearly $400 more per week than those with only a high school diploma This is a real wage increase for college grads and a real wage decrease for high school dropouts compared to 1979 Unemployment rate among college grads is four times less than for high school drop outs
Chapter 14
87

Markets For Factor Inputs

Caricato da

Informazioni sul documento

Descrizione originale:

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Markets For Factor Inputs

Caricato da

Copyright:

Formati disponibili

Chapter 14

Markets for Factor Inputs

Equilibrium in a Competitive Factor Market

2005 Pearson Education, Inc.

Competitive Factor Markets

2005 Pearson Education, Inc.

Competitive Factor Markets

2005 Pearson Education, Inc.

Factor Input Demand One Variable Input

2005 Pearson Education, Inc.

Factor Input Demand One Variable Input

2005 Pearson Education, Inc.

Factor Input Demand One Variable Input

2005 Pearson Education, Inc.

Factor Input Demand One Variable Input

2005 Pearson Education, Inc.

Factor Input Demand One Variable Input

2005 Pearson Education, Inc.

Factor Input Demand One Variable Input

2005 Pearson Education, Inc.

Marginal Revenue Product

Competitive Output Market (P = MR)

Monopolistic Output Market (P < MR)

MRPL = MPLx P MRPL = MPL x MR

2005 Pearson Education, Inc.

Factor Input Demand One Variable Input

2005 Pearson Education, Inc.

Hiring by a Firm in the Labor Market

2005 Pearson Education, Inc. L*

Factor Input Demand One Variable Input

2005 Pearson Education, Inc.

A Shift in the Supply of Labor

Factor Input Demand One Variable Input

Factor Input Demand One Variable Input

2005 Pearson Education, Inc.

Factor Input Demand Many Inputs

2005 Pearson Education, Inc.

Factor Input Demand Many Inputs

Factor Input Demand Many Inputs

Factor Input Demand Many Inputs

2005 Pearson Education, Inc.

Market Demand Curve

2005 Pearson Education, Inc.

Industry Demand for Labor

Wage ($ per hour)

100 120 150 Labor

2005 Pearson Education, Inc.

The Industry Demand for Labor

The Demand for Jet Fuel

2005 Pearson Education, Inc.

The Demand for Jet Fuel

The Demand for Jet Fuel

Short-Run Price Elasticity of Demand for Jet Fuel

2005 Pearson Education, Inc.

The Demand for Jet Fuel

2005 Pearson Education, Inc.

The Short- and Long-Run Demand for Jet Fuel

Quantity of Jet Fuel

The Supply of Inputs to a Firm

2005 Pearson Education, Inc.

A Firms Input Supply in a Competitive Factor Market

Market Supply of Fabric