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Competitive Labor Markets
Factor Markets Part II
(Chapter 18)
Derived Demand for Inputs
Product Market
1 Firm in Factor Market
T-Shirt Market
Low Skilled Workers
Price
S
-------------
$10 --------------
Q
Demand
for product
E1
Wages/hr
MFC
$200
D
D2
MRP1
Qty
Qty
Price of
Product
MRP2
MRP
MRP = MPL * P
End Result:
↑ Workers hired
Wage rate Unchanged!
MRP = Value of what additional worker produces
MRP = MP (input) X Price (output)
Individual Firms are Wage Takers
Entire Factor Market
1 Company Factor Market
(All LAW FIRMS)
1 LAW FIRM
Entry level Lawyers
Entry level Lawyers
Wage
Rate
S
Q1
$160,000
D1
Qty
When all firms hire more workers
=> wage rate rises
E1
----------
-------------
$160,000 -------------- E1
Wages
Q1
MFC1
MRP1
Qty
When one firm hires
more workers => wage
rate is unchanged
Supply Curve for Inputs
•
Marginal Factor Cost (MFC) is the supply curve for inputs
•
•
In labor market MFC = Wage Rate
Also called MRC (marginal resource cost)
Regardless if firms is a monopoly,
oligopoly, perfect or monopolistic
competition => MFC is horizontal
Wage
Rate
Supply curve for 1 firm
MFC
Market
wage
Marginal Revenue Product
(demand curve for labor)
MRP
0
Profit-maximizing quantity
Quantity of
Workers
• Most firms are competitive in the factor market (input market)
•
the firm has no effect on market price for inputs
• All 4 market structures are “wage takers” in the labor market.
-Individual Firms have a horizontal supply curve
-
Shifts in Demand for Labor
MRP shifts right when:
Wage
Rate
• Demand for Product ↑
• Productivity Rises (MP ↑)
– Technology, working conditions, etc...
Market
wage
MRP2
• Price falls of complementary resource
–
MRPL
Marginal Revenue Product
(demand curve for labor)
Example: Workers & Machines that work together
0
If Machine price ↓ =>
Profit-maximizing quantity
Quantity of
Workers
Demand for workers ↑
Substitute Resource
A substitute input replaces another input: i.e. when machines can replace workers
When price of substitute input ↓ => MRPL shift is indeterminate
machines
workers
Wage
Rate
(could ↓ ,↑ or be same)
Labor Market
?
Market
wage
MRPL
Marginal Revenue Product
(demand curve for labor)
0
Profit-maximizing quantity
Quantity of
Workers
MRP shift is dependent on two opposing effects.
1) Substitution Effect-
implies you would hire less workers (MRPL ↓ )
• Logic: machines prices fall => hire less workers
2) Output Effect- implies you hire more workers (MRPL ↑ )
• Logic: machine prices fall => MC falls => so output increases => hire more workers
•
End result: dominant force determines MRP shift
Competitive Labor Market
Worksheet