Download Competitive Labor Markets

Competitive Labor Markets
An Introduction to the Derived
Demand for Resources and the
Supply of Labor in Perfectly
Competitive Markets
Guiding Questions for Factor
Markets and Resource Pricing
 How
do factor markets fit into the
circular flow model?
 What
 How
determines resource pricing?
does a competitive labor market
function?
Resource Pricing

Household income is mainly the result of
selling resources to firms
 Resource prices are costs to firms
 Resource prices allocate resources to
industries and firms
 Government often intervenes in resource
markets
 Resource demand is derived:

Depends on how productive the resource is and
the value of the product it is used to produce.
Resources at the Margins

Marginal Product: the added output produced
when one additional unit of a resource is
employed

Marginal Revenue Product: the change in a
firm’s total revenue when it employs one
additional unit of a resource (MRP is the
demand curve for a product)

Marginal Resource Cost: the change in a
firm’s total cost of employing a resource when
one additional unit of the resource is used
Practicing MP and MRP

What is the marginal
product (MP) of
each added worker?

What is the marginal
revenue product
(MRP) of each
added worker?

Shortcut: MP x P
Determinants of Resource
Demand

Changes in product demand
 Changes in productivity




Quantity of other (complimentary) resources
Technological advance (e.g. mechanization)
Quality of a variable resource (e.g. education)
Changes in the Prices of Other Resources



Substitution effect (mechanization resulting from
decreased costs of robots or capital machines)
Output effect (increased output resulting from
declining resource prices leads to greater output,
increasing demand for resources)
Net effect (sum of output and substitution effects)
The MRP = MRC Rule
 Just
like when firms determine output,
when determining input the rule is that
marginal costs should equal the
marginal revenue…in this case it is the
extra costs of more of the resource and
the additional revenue gained by the
increase in production from the added
employment of the resource
Optimal Employment of
Resources

Least Cost



Profit Maximizing



When the last dollar spent on each resource yields
the same marginal cost
(MP1/P1)=(MP2/P2)
When each resource is employed to the point at
which its MRP equals its resource price
(MRP1/P1)=(MRP2/P2)=1
Profit maximization must be at the least cost
point, but least cost is not always profit
maximizing (e.g. a firm could minimize costs,
without maximizing output)
An Example of
Optimal Employment

Mr. Healea is considering opening up a factory to produce
Whatsits, but he is not sure how much labor and capital
machinery to purchase for his factory. Mr. Healea can sell the
Whatsits for $10. Using the least cost rule, and given the
information below, what should Mr. Healea do? What if Mr.
Healea uses the profit-maximizing rule?
Capital (Price = $20)
Labor (Price = $10)
Q TP MP MP/
P
TR
MRP
MRP/
P
Q TP MP MP/
P
TR
1
6
6
.3
60
60
3
1
5
5
.5
50
50
5
2
8
2
.1
80
20
1
2
8
3
.3
80
30
3
3 10
2
.1
100
20
1
3 12
4
.4
120
40
4
4 13
3
.15
130
30
1.5
4 14
2
.2
140
20
2
5 14
1
.05
140
10
0.5
5 15
1
.1
150
10
1
MRP MRP/
P
Classroom Experiment 6.A
 For
each scenario, determine your
reservation wage
 Raise your hand the first time the
offered daily wage meets or exceeds
your reservation wage (this will be done
three times, once for each scenario)
 Record and graph the class results
 Answer the reflection questions
Labor Supply in Competitive
Labor Markets

Critical Attributes of Purely Competitive Labor
Markets:




Firms compete for workers
Many workers with identical skill sets
Firms are wage takers
In pure competition workers individually
compete for jobs and there is no union
 It is assumed that workers may easily move
between alternate jobs and employers
 For individual firms the supply of labor is a
horizontal line (it is also the MRC)
 For the industry, labor supply slopes upward
Graphing a Perfectly
Competitive Labor Market
Practicing Competitive Labor
Markets

Whiteboard review: draw a basic graph of a
competitive labor market.





What if price of the resource changed?
What if a recession decreases the demand for the
resource?
What if a technology is developed that makes
workers more productive?
What if a technology is developed that replaces the
need for workers?
Workbook Unit 4 Lesson 3 Activity 48 (p. 239)
 Homework: Chapter 26 SQ3R