Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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 2 Competitive Factor Markets 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 ©2005 Pearson Education, Inc. Chapter 14 3 Competitive Factor Markets 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 firm’s level of output and the cost of inputs Demand for computer programmers is derived from how much software Microsoft expects to sell ©2005 Pearson Education, Inc. Chapter 14 4 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 ©2005 Pearson Education, Inc. Chapter 14 5 Factor Input Demand – One Variable Input 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 ©2005 Pearson Education, Inc. Chapter 14 6 Factor Input Demand – One Variable Input 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 ©2005 Pearson Education, Inc. Chapter 14 7 Factor Input Demand – One Variable Input 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 ©2005 Pearson Education, Inc. Chapter 14 8 Factor Input Demand – One Variable Input 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 ) ©2005 Pearson Education, Inc. Chapter 14 9 Factor Input Demand – One Variable Input In a competitive market, MR = P This means, for a competitive market MRPL ( MPL )( P ) Graphically, diminishing marginal returns, MPL falls as L increases ©2005 Pearson Education, Inc. 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 ©2005 Pearson Education, Inc. Chapter 14 11 Factor Input Demand – One Variable Input 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 ©2005 Pearson Education, Inc. 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 Factor Input Demand – One Variable Input 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 ©2005 Pearson Education, Inc. Chapter 14 14 A Shift in the Supply of Labor Price of Labor w1 S1 w2 S2 MRPL = DL L1 ©2005 Pearson Education, Inc. L2 Chapter 14 Quantity of Labor 15 Factor Input Demand – One Variable Input 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 Factor Input Demand – One Variable Input 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 ©2005 Pearson Education, Inc. 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 ©2005 Pearson Education, Inc. machinery Chapter 14 18 Factor Input Demand – Many Inputs 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 ©2005 Pearson Education, Inc. Chapter 14 19 Factor Input Demand – Many Inputs If wage rate is $20/hr, firm hires 100 worker hours – point A Wage rate falls to $15/hr MRPL > W, firm demands more labor MRPL1 is demand for labor w/machinery fixed Increased labor causes MPK to rise, encouraging the firm to rent more machinery MPL increases MRPL curve shifts right, firm uses 140 hrs labor ©2005 Pearson Education, Inc. Chapter 14 20 Factor Input Demand – Many Inputs Wages ($ per hour) When the wage rate falls to $15, the MRP curve shifts, generating a new point C on the firm’s demand for labor curve. Thus A and C are on the demand for labor curve, but B is not. A 20 C 15 B DL 10 MRPL1 MRPL2 5 0 40 ©2005 Pearson Education, Inc. 80 120 Chapter 14 160 Hours of Work 21 Market Demand Curve All firms’ demand for labor vary substantially Assume that all firms respond to a lower wage All firms would hire more workers Market supply would increase The market price will fall The quantity demanded for labor by the firm will be smaller ©2005 Pearson Education, Inc. Chapter 14 22 Industry Demand for Labor Firm Wage ($ per hour) 15 15 10 10 MRPL2 MRPL1 5 0 5 50 100 120 150 Labor (worker-hours) ©2005 Pearson Education, Inc. Industry Wage ($ per hour) Chapter 14 0 Horizontal sum if product price unchanged Industry Demand Curve L0 DL1 DL2 L1 L2 Labor (worker-hours) 23 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 ©2005 Pearson Education, Inc. Chapter 14 24 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 1990’s – Jet fuel cost equaled 15.0% of total operating cost ©2005 Pearson Education, Inc. Chapter 14 25 The Demand for Jet Fuel Airlines responded to higher prices in the 1970’s 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 ©2005 Pearson Education, Inc. Chapter 14 26 The Demand for Jet Fuel 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 ©2005 Pearson Education, Inc. Chapter 14 27 Short-Run Price Elasticity of Demand for Jet Fuel Airline Elasticity American Continental Northwest ©2005 Pearson Education, Inc. -0.06 -0.09 -0.07 Airline Delta TWA United Chapter 14 Elasticity -0.15 -0.10 -0.10 28 The Demand for Jet Fuel 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 ©2005 Pearson Education, Inc. Chapter 14 29 The Short- and Long-Run Demand for Jet Fuel Price MRPSR MRPLR Quantity of Jet Fuel ©2005 Pearson Education, Inc. Chapter 14 30 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 ©2005 Pearson Education, Inc. Chapter 14 31 A Firm’s Input Supply in a Competitive Factor Market Price ($ per yard) Market Supply of Fabric S Price ($ per yard) Supply of Fabric Facing Firm Market Demand for Fabric 10 10 ME = AE D 100 ©2005 Pearson Education, Inc. Yards of Fabric (thousands) Chapter 14 Demand for Fabric 50 MRP Yards of Fabric (thousands) 32 The Supply of Inputs to a Firm 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 firm’s expenditures on an additional unit that it buys Analogous to MR curve in output market ©2005 Pearson Education, Inc. Chapter 14 33 The Supply of Inputs to a Firm 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 ©2005 Pearson Education, Inc. Chapter 14 34 The Supply of Inputs to a Firm 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 ©2005 Pearson Education, Inc. 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 ©2005 Pearson Education, Inc. Chapter 14 36 The Supply of Inputs to a Firm 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 ©2005 Pearson Education, Inc. 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 ©2005 Pearson Education, Inc. income effect Chapter 14 38 Competitive Factor Markets 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 ©2005 Pearson Education, Inc. Chapter 14 39 Substitution and Income Effects of Wage Increase R 720 Income ($ per day) Worker initially chooses point A: •16 hours leisure, 8 hour work •Income = $80 w = $30 Wage increases to $30. New budget line RQ. •19 hours leisure, 5 hours work •Income = $150 Income effect overrides substitution effect 240 P C w = $10 B A Q 0 8 ©2005 Pearson Education, Inc. 12 16 19 24 Substitution effect Income effect Hours of Leisure 40 Backward-Bending Supply of Labor Wage ($ per hour) Supply of Labor Income Effect > Substitution Effect Income Effect < Substitution Effect Hours of Work per Day ©2005 Pearson Education, Inc. Chapter 14 41 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 ©2005 Pearson Education, Inc. Chapter 14 42 Elasticities of Labor Supply (Hours Worked) ©2005 Pearson Education, Inc. 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 ©2005 Pearson Education, Inc. Chapter 14 44 Equilibrium in a Competitive Factor Market 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 ©2005 Pearson Education, Inc. Chapter 14 45 Equilibrium in a Competitive Factor Market 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 ©2005 Pearson Education, Inc. Chapter 14 46 Equilibrium in a Competitive Factor Market 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) ©2005 Pearson Education, Inc. Chapter 14 47 Equilibrium in a Competitive Factor Market 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 ©2005 Pearson Education, Inc. Chapter 14 48 Equilibrium in a Competitive Factor Market 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 firm’s lost profit ©2005 Pearson Education, Inc. Chapter 14 49 Labor Market Equilibrium Monopolistic Output Market Competitive Output Market Wage Wage SL = AE SL = AE wC A vM wM B P * MPL DL = MRPL LC ©2005 Pearson Education, Inc. Number of Workers Chapter 14 DL = MRPL LM Number of Workers 50 Equilibrium in a Competitive Factor Market 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 ©2005 Pearson Education, Inc. Chapter 14 51 Economic Rent Wage SL = AE A Total expenditure (wage) paid is 0w* x 0L* w* Economic Rent DL = MRPL B Economic rent is ABW* 0 ©2005 Pearson Education, Inc. L* Chapter 14 Number of Workers 52 Equilibrium in a Competitive Factor Market 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 ©2005 Pearson Education, Inc. 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 ©2005 Pearson Education, Inc. Chapter 14 54 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 ©2005 Pearson Education, Inc. 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 ©2005 Pearson Education, Inc. Chapter 14 56 The Shortage of Skilled Military Personnel Wage SL w* w0 Shortage DL = MRPL Number of Skilled Workers ©2005 Pearson Education, Inc. Chapter 14 57 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 ©2005 Pearson Education, Inc. 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 ©2005 Pearson Education, Inc. Chapter 14 59 Factor Markets with Monopsony Power 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 ©2005 Pearson Education, Inc. Chapter 14 60 Factor Markets with Monopsony Power 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 ©2005 Pearson Education, Inc. Chapter 14 61 Marginal and Average Expenditure Marginal Expenditure (ME) Price 20 (per unit of input) C 15 wc SL = Average Expenditure (AE) w* = 13 10 D = MRPL •Hires where ME = MRP 5 0 •LC is competitive market level 1 2 ©2005 Pearson Education, Inc. 3 4 L* 5 6 Units of Input Lc 62 Factor Markets with Monopsony Power Examples of Monopsony Power Government Soldiers Missiles B2 Bombers NASA Astronauts Company town ©2005 Pearson Education, Inc. 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 ©2005 Pearson Education, Inc. Chapter 14 64 Monopsony Power in the Market for Baseball Players During 1960’s and 70’s, 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 ©2005 Pearson Education, Inc. Chapter 14 65 Monopsony Power in the Market for Baseball Players 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 player’s contracts went from 25% of team expenditures to 40% Average player salary doubled in real terms ©2005 Pearson Education, Inc. 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 ©2005 Pearson Education, Inc. 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 SL w* DL MR L* ©2005 Pearson Education, Inc. Chapter 14 Number of Workers 68 Monopoly Power of Sellers of Labor The union’s 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. ©2005 Pearson Education, Inc. Chapter 14 69 Monopoly Power of Sellers of Labor Wage per worker •Labor market competitive with L* workers hired at wage w* •Labor sellers with monopoly power at L1 and w1 w1 A SL w* DL MR L1 ©2005 Pearson Education, Inc. L* Chapter 14 Number of Workers 70 Monopoly Power of Sellers of Labor 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 ©2005 Pearson Education, Inc. Chapter 14 71 Monopoly Power of Sellers of Labor 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 ©2005 Pearson Education, Inc. Chapter 14 72 Monopoly Power of Sellers of Labor 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 ©2005 Pearson Education, Inc. Chapter 14 73 Monopoly Power of Sellers of Labor Wage per worker Maximizing rents to workers means choosing labor where MR crosses S. Wage comes from demand. w1 w2 SL Economic Rent A w* DL MR L1 ©2005 Pearson Education, Inc. L2 L* Chapter 14 Number of Workers 74 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 ©2005 Pearson Education, Inc. 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 ©2005 Pearson Education, Inc. Chapter 14 76 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 ©2005 Pearson Education, Inc. Chapter 14 77 Wage Discrimination in Labor Market SL Wage per worker When a monopolistic union raises the wage rate in the unionized sector of the economy from w* to wU, employment in that sector falls. For the total supply of labor to remain unchanged, the wage in the non-unionized sector must fall from w* to wNU wU w* wNU DU LU ©2005 Pearson Education, Inc. DNU LMU DL Number of Workers 78 The Decline of Private Sector Unionism Observations Union membership and monopoly power has been declining Initially, during the 1970’s, union wages relative to non-union wages fell ©2005 Pearson Education, Inc. Chapter 14 79 The Decline of Private Sector Unionism Observations In the 1980’s, union wages stabilized relative to non-union wages Since the 1990’s, membership has been falling and wage differential has remained stable ©2005 Pearson Education, Inc. Chapter 14 80 The Decline of Private Sector Unionism 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 ©2005 Pearson Education, Inc. 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 ©2005 Pearson Education, Inc. Chapter 14 82 Wage Inequality – Have Computers Changed the Labor Market? In 1984, 25.1% of all workers used computers 1993 – 45.8% 2001 – 53.5% For managers and professionals, it was over 80% ©2005 Pearson Education, Inc. Chapter 14 83 Wage Inequality – Have Computers Changed the Labor Market? Percent change in use of computers College degrees 1984-1993: from 42% to 82% Less than high school degree 11%: from 5% to 16% With high school degree 21%: ©2005 Pearson Education, Inc. from 19% to 40% Chapter 14 84 Wage Inequality – Have Computers Changed the Labor Market? 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 ©2005 Pearson Education, Inc. Chapter 14 85 Wage Inequality – Have Computers Changed the Labor Market? 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 ©2005 Pearson Education, Inc. Chapter 14 86 Wage Inequality – Have Computers Changed the Labor Market? 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 ©2005 Pearson Education, Inc. Chapter 14 87