Download Factor Markets With Emphasis on the Labor Market

Labor Market
Demand For a Factor
• Demand for factors is a derived demand.
• If the demand for the product rises, the
demand for the factors used to produce the
product rises.
Marginal Revenue Product
•
•
MRP is the additional revenue generated
by employing an additional factor unit.
There are two ways of figuring out MRP:
1.
2.
MRP= Total Revenue/  Quantity of the Factor
MRP= Marginal Revenue x Marginal Physical Product
Value Marginal Product
• Value Marginal Product (VMP) is equal to the price
of the product times the marginal physical product
of the factor. VMP=P*MPP
• MRP=VMP for a perfectly competitive firm.
Marginal Factor Cost
• Marginal factor cost (MFC) is the additional
cost incurred by employing an additional
factor unit.
• MFC =  TC/  Quantity of the factor
• Factor Price Taker: a firm can buy all it
wants of a factor at the equilibrium price.
• A company should keep buying additional
units of the factor until MRP = MFC.
LEAST COST RULE
• Say a firm is faced with two factors of
production x and y.
• The firm purchases the two factors until:
MPP (x) /P (x) = MPP (y) / P (y)
• This is called the “Least Cost Rule”
Optimal Factor of production
.The firm continues
to purchase a factor
as long as the
factor’s MRP
exceeds its MFC. .
. MRP=MFC this
is the optimum
factor.
The Labor Market
• As the price of the product that labor
produces changes, the factor demand curve
for labor shifts.
• A rise in product price shifts the firm’s MRP
( factor demand curve) rightward.
• A fall in product price shifts the firm’s
MRP, or factor demand, curve leftward.
Factor Demand Curve Shifter (s)
• The price of the product that the factor
(labor) produces is a shifter for the MRP
curve.
• A rise in product price shifts the firm’s MRP
( factor demand curve) rightward.
• A fall in product price shifts the firm’s
MRP, or factor demand, curve leftward.
Shifts in the Firm’s MRP, or Factor
Demand, Curve
Market Demand For Labor
We would expect the market demand curve
for labor to be the horizontal “addition” of
the firms’ demand curves (MRP curves) for
labor. However, this is not the case.
The Elasticity of Demand for Labor
• The elasticity of demand for labor:
El = %∆Q l/ %∆ W
• The higher the elasticity of demand for the
product, the higher the elasticity of demand
for the labor that produces the product. The
lower the elasticity of demand for the
product, the lower the elasticity of demand
for the labor that produces the product.
Ratios & Substitute Factors
• Ratio of Labor Costs to Total Costs: The higher
the labor cost-total cost ratio, the higher the
elasticity of demand for labor (the greater the
cutback in labor for any given wage increase); the
lower the labor cost-total cost ratio, the lower the
elasticity of demand for labor (the less the cutback
in labor for any given wage increase)
• Number of Substitute Factors: The more
substitutes for labor, the higher the elasticity of
demand for labor; the fewer substitutes for labor,
the lower the elasticity of demand for labor.
The Supply of Labor
• As the wage rate rises, the quantity of supplied of
labor rises.
• Substitution Effect: As the wage rate rises,
workers recognize the monetary reward from
working has increased, and people will want to
work more.
• Income Effect: If leisure is a normal good, then
workers will want to consume more leisure as
their income rises.
The Market Supply of Labor
A direct relationship
exists between the
wage rate and the
quantity of labor
supplied.
Changes in the Supply of Labor
• Wage Rates in Other Labor Markets: the wage rate
offered in other labor markets can bring about a
change in the supply of labor in a particular labor
market.
• Nonmoney or Nonpecuniary Aspects of a Job: An
increase in the overall “pleasantness” of a job will
cause an increase in the supply of labor to that
firm or industry.
• The equilibrium wage rate and quantity of labor
are established by the forces of supply and
demand.
The forces of supply
and demand bring
about the equilibrium
wage rate and
quantity of labor. At
the equilibrium wage
rate, the quantity
demanded of labor
equals the quantity
supplied. At any
other wage rate, there
is either a surplus or a
shortage of labor.
Equilibrium in a
Particular Labor
Market
Why do Wage Rates Differ?
Assuming: The demand for every type of labor is the
same; There are no special nonpecuniary aspects
to any job; All labor is ultimately homogeneous
and can costlessly be trained for different types of
employment.; All labor is mobile at zero cost.
Given these conditions, there would be no difference
in wage rates in the long run.
Workers would relocate to the other market until the
equilibrium wage rate in both markets is the same.
Why Demand And Supply Curves
Differ in Different Labor Markets
Demand for Labor: Because the supply and demand
conditions in different product markets are different, it
follows that the demand for labor in different labor markets
will be different, too. The Marginal Physical Product of
labor, is affected by individual workers’ own abilities and
skills, degree of effort, and other factors of production
available to them.
Supply of Labor: Jobs have different nonpecuniary qualities;
supply is also a reflection of the number of persons who can
actually do a job; even if individuals have the ability to
work at a certain job, they may perceive the training costs as
too high; sometimes supply in different labor markets
reflects a difference in the cost of moving across markets.
The Wage Rate
Marginal Productivity Theory
• Marginal Productivity Theory : if a firm sells its
product and purchases its factors in competitive or
perfect markets, it pays its factors their MRP or
VMP.
• Under the competitive conditions specified, if a
factor unit is withdrawn from the productive
process and the amount of all other factors
remains the same, then the decrease in the value of
the product produced equals the factor payment
received by the factor unit.
Employee Screening
• Screening is the process used by employers to
increase the probability of choosing “good”
employees based on certain criteria.
• Sometimes employers promote from within the
company because they have more information
about company employees, than about potential
employees.
• Legislation mandating equal employment
opportunities requires employers to absorb some
of the costs in order to open up labor markets to
all.