Download Chapter 27

• Chapter 27 Factor Markets
• Up to now we only consider a
competitive input market. That is, a firm
is a price taker in the input market. We
can now relax this a bit.
• A monopsony is the situation where there
is a single buyer. The buyer is called a
monopsonist. For simplicity assume the
monopsonist sells in a competitive
market.
• The profit maximization of a
monopsonist is maxx (=pf(x)-w(x)x)
where w(x) gives the factor price when
the monopsonist employs x amount of
factor. In other words, w(x) is the inverse
upward sloping factor supply curve. The
FOC becomes pf’(x)=w(x)+w’(x)x. The
LHS is the value of marginal product.
The RHS is new. To use one more x, the
marginal unit cost w(x), however, since
supply is upward sloping, all units
employed before cost more too.
• We can do some algebra.
w(x)+w’(x)x=w(x)[1+w’(x)x/w(x)]=w(x)
[1+1/(x)] where (x) is the factor
supply elasticity. As in what we
discussed for a firm’s revenue, we can
now define the marginal expenditure and
average expenditure in the factor market.
ME= w(x)[1+1/(x)] and
AE=w(x)x/x=w(x) so ME>AE (again,
this is due to (x)>0 and moreover when
supply is upward sloping, ME>AE.)
• We can graphically illustrate the
optimum.