Download Factor Markets

Factor Markets
Unit IV
Basic concepts
• Similar to those of:
– supply and demand
– And product markets
– Same concepts with new application
Circular Flow (review)
• Shows the difference and interaction
between factor and product markets
• The real flow and money flow
• Households supply the factor market
• Business supply the product market
• Households are demand in the product
market
• Business is the demand in the factor
market
Factor, or resource markets
( inputs)
• What is the difference between factor
markets and product markets?
• A firm is both a seller in the product
market and a buyer in the factor market
• Factor markets may be perfectly
competitive or imperfectly competitive.
• MRP=MRC rule
Big Ideas about Factor, or Resource, Markets
1. Economic concepts are similar to those for product
markets.
2. The demand for a factor of production is derived from
the demand for the good or service produced from this
resource.
3. A firm tries to hire additional units of a resources up
to the point where the resource’s marginal revenue
product (MRP) is equal to its marginal resource cost
(MRC).
4. In hiring labor, a perfectly competitive firm will do
best if it hires up to the point where MRP= the wage
rate. Wages are the marginal resource cost of labor.
More
Big Ideas about Factor, or Resource, Markets
5. If you want a high wage:
A. Make something people will pay a lot for.
B. Work for a highly productive firm.
C. Be in relatively short supply.
D. Invest in your human capital.
6. Real wages depend on productivity.
7. Productivity depends on real or physical capital,
human capital, labor quality and technology
Important terms
•
•
•
•
•
Derived demand
Marginal revenue product
Marginal physical product
Marginal resource cost
Profit maximizing rule for employing
resources
Factor Markets
day 2
• Journal:
Explain the profit maximizing rule for
factor markets. Don’t just state it. Make
sure you understand how and why it
works.
• Why is the MRP or demand downward
slopping?
Changes in demand
• What factors that can shift demand for a
resource?
• Remember that the product market and
factor market are interrelated: derived
demand
• Factors that can shift demand for a
resource:
1. change in product price
2. change in productivity
3. changes in the price of substitutes or
complementary resources depending on
the substitution effect and the output effect
Determinants of the elasticity of
resource demand:
•
•
•
•
Rate of MRP decline
Elasticity of product demand
Ease of resource substitutability
The proportion of total costs that the
resource represents
Complete Activity 46 in class
• Things to keep in mind:
– A monopoly firm will hire fewer workers than a
perfectly competitive firm.
– The examples in # 46 compare monopoly and
perfectly competitive firms in the product
markets, even though the analysis is for the
factor markets. They are interrelated.
– Activity #47 for homework
COMPETITIVE MODEL:
• 1. Many firms hiring
• 2. Many qualified workers with identical
skills acting independently
• 3. Wage taker (too small to set the wage
rate) Notice that different types of
companies demanding the same type of
labor (ex. business managers) will make
up a market.
COMPETITIVE MODEL
• In the perfectly
competitive factor market,
the demand curve is the
sum of the individual firms
demand curves. The
demand curve is the MRP
of the market.
• The supply curve for the
factor market supply
curve is upsloping
because the firms must
pay more to the workers
to get them away from
other occupations. (Pay
for opportunity costs)
• For the individual firm the demand curve is also the
mrp. In a perfectly competitive industry the firm has no
influence on the wage rate paid to the workers. (They do
not hire enough workers to change the rate) Since this
is the case they have to accept the rate set by the
market. Price taker.
• A firm will also look at how much more it costs to hire
each variable resource. This is known as Marginal
Resource Cost.
• In order to maximize profits, the firm will hire resources
up to the point where MRP = MRC. This makes sense.
If the last person hired adds more to cost than it adds to
product than the company is losing money.
• This means that when a new worker is hired the total
resource cost will increase by the amount of the wage.
The bottom line is that the wage rate and the marginal
resource cost are the same.
Monopsony model
• MONOPSONY MODEL: (Regarding labor usage, not
necessarily sellers)
• This type of firm is not very common. Usually towns
have many employers and workers are free to change
occupations. (Ex. Steel mills, sugar producers) Other
examples are when the workers are not totally free to
move (Ex. hospitals, major league sports, school
teachers...)
•
1) Firm is large portion of the total employment
•
2) Labor is immobile
•
3) Firm is Wage Maker
Sometimes defined as the only buyer of the resource.
• Since it must pay all workers a higher wage
when it pays a higher wage to attract the
additional worker, its Marginal Resource Cost
will increase at a higher rate than its supply
curve.
•
• The firm will hire until MRC is equal to MRP. At
this point we go to the supply curve to get the
wage.
• If. you were to
look at the
monopsony, it
will hire less
workers than a
perfectly
competitive
industry. It is
not an efficient
wage rate paid
Minimum Wage
• How does minimum wage affect Ql in a
monopsonistic labor market?
• What does a normal monopsonistic firm
look like?
•If the government
imposes a minimum
wage what happens to
Ql? We have to know
where the minimum
wage will be set in
order to know that
answer.
• If minimum wage is
set below the wage
rate that the
monopsonist is
paying , then it is
ineffective because
the monoponist will
just ignore it and pay
the people what they
were paying them
• If minimum wage is
set above old wage
rate but below S and
MRP intersection then
the monopsonist will
hire up to the Supply
curve and no further.
• This means they will
stop at the supply
curve. They will hire
more workers at the
higher wage rate but
only up to the supply
curve.
• If minimum wage is set
above old wage rate, &
above S and MRP
intersection but below
the MRP/MRC
intersection then
minimum wage is the
MRC curve, so we hire
where MRP = MRC.
This means we hire
more workers at this
higher wage.
• If minimum
wage is set
above the
MRP/MRC
intersection the
minimum wage
is the MRC so
we still hire
where MRP =
MRC but the
quantity of
labor hired is
less than
before.
The net effect is that it depends where the minimum wage is set as to
how many workers we will hire. Employment rate=indeterminant