Download MBA Cph - factor markets

Markets for
Factor Inputs
Markets for factor inputs

In some examination questions, one is
asked to comment on factor market
questions, such as wages
 This
is not really covered in any detail in
the textbook, although some major issues
are discussed verbally
 To
increase our understanding, let us look
at some relevant models also.
Slide 2
Competitive Factor Markets

Demand for factor inputs is a derived
demand, as demand is derived from factor
cost and output demand

We will look at the simplest case possible,
where factor markets are competitive and
only one factor (labour) is variable and the
other factor (capital) is fixed

How much labour should be hired at the
markets wage rate – w?
Slide 3
Competitive Factor Markets
Demand for a Factor Input When
Only One Input Is Variable

Measuring the Value of a Worker’s
Output

Marginal Revenue Product of Labor
(MRPL)

MRPL = (MPL)(MR)
Slide 4
Competitive Factor Markets
Demand for a Factor Input When
Only One Input Is Variable

Assume perfect competition in the
product market

Then MR = P
Slide 5
Competitive Factor Markets
Demand for a Factor Input When
Only One Input Is Variable

Question

What will happen to the value of MRPL
when more workers are hired?
Slide 6
Marginal Revenue Product
Wages
($ per
hour)
Competitive Output Market (P = MR)
Monopolistic
Output Market
(MR <P)
MRPL = MPLx P
MRPL = MPL x MR
Hours of Work
Slide 7
Competitive Factor Markets
Demand for a Factor Input When
Only One Input Is Variable

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
Slide 8
Hiring by a Firm in the
Labor Market (with Capital Fixed)
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*.
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.
w*
SL
Why not hire fewer
or more workers than L*.
MRPL = DL
L*
Quantity of Labor
Slide 9
Competitive Factor Markets
Demand for a Factor Input When
Only One Input Is Variable

If the market supply of labor increased
relative to demand (baby boomers or
female entry), a surplus of labor would
exist and the wage rate would fall.

Question

How would this impact the quantity
demanded for labor?
Slide 10
A Shift in the Supply of Labor
Price of
Labor
w1
S1
w2
S2
MRPL = DL
L1
L2
Quantity of Labor
Slide 11
Competitive Factor Markets

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
Slide 12
Competitive Factor Markets

Comparing Input and Output Markets

In both markets, input and output choices
occur where MR = MC

MR from the sale of the output

MC from the purchase of the input
Slide 13
Labor Market Equilibrium
Wage
Competitive Output Market
Wage
Monopolistic Output Market
SL = AE
SL = AE
wC
vM
wM
A
B
P * MPL
DL = MRPL
LC
Number of Workers
DL = MRPL
LM
Number of Workers
Slide 14
Labor Market Equilibrium

Equilibrium in a
Competitive Output
Market

Equilibrium in a
Monopolistic Output
Market

DL(MRPL) = SL

Profits maximized

wC = MRPL


MRPL = (P)(MPL)
Using less than the
efficient level of input

Markets are efficient
Slide 15
Exam questions

Essay 1, 2001
Slide 16