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Chapter 11
Labor Markets
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2002 South-Western College Publishing
1
In a perfectly
competitive market,
what determines the
level of wages?
The intersection of the
demand for labor and
the supply of labor
2
Wages
Market Supply and Demand
S
D
Quantity of Labor
3
What does the demand
curve for labor show?
The different quantities
of labor employers are
willing to hire at
different wage rates in
a given time period,
ceteris paribus
4
60
40
30
20
Total Output
50
Production Function
Total Output
10
Quantity of Labor
1
2
3
4
5
6
5
What is marginal
revenue product?
The increase in total
revenue to a firm
resulting from hiring an
additional unit of labor or
other variable resource
6
10
8
6
4
Marginal Product
12
Marginal Product Curve
Law of
Diminishing
Returns
2
Quantity of Labor
1
2
3
4
5
6
7
What is the demand
curve for labor equal to?
It is equal to the marginal
revenue product of labor
8
$350
Demand Curve for Labor
$280
$210
$140
$70
1
2
3
4
5Q
9
Increase in
Quantity of labor an
employer will hire
Decrease in
Wage Rate
10
How do we measure
MRP in perfect
competition?
A perfectly competitive firm’s
marginal revenue product is
equal to the marginal
product of its labor times the
price of its product
11
What is
derived demand?
The demand for labor and
other factors of production
that depends on the
consumer demand for final
goods and services the
factors produce
12
What does the supply
curve for labor show?
The different quantities of
labor workers are willing to
offer employers at different
wage rates in a given time
period, ceteris paribus
13
$280
$210
$140
$70
Wage Rate per day
$350
Supply Curve of Labor
S
Quantity of Labor
10
20
30
40
50
14
Increase in Quantity of
labor willing to work
Increase in
Wage Rate
15
What is human capital?
The accumulation of
education, training,
experience, and health
that enables a worker to
enter an occupation and
be productive
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$280
$210
$140
$70
Wage Rate per day
$350
Competitive Labor Market
S
E
D
Quantity of Labor
10
20
30
40
50
17
$280
$210
$140
$70
Competitive Labor Market
Wage Rate per day
$350
E
S
D
Quantity of Labor
1
2
3
4
5
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Does the perfectly
competitive model apply
to workers in unions?
No
19
What are examples
of unions?
• Teamsters
• United Auto Workers
• National Education Assoc.
• American Federation of
Government Employees
20
How do unions attempt
to raise wages?
• Increase demand for labor
• Decrease supply for labor
• Power
21
What is
featherbedding?
Unions force firms to hire
more workers than are
required or to impose
work rules that reduce
output per worker
22
What else can unions
do to increase the
demand for labor?
Decrease competition
from other nations
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$280
$210
$140
$70
Wage Rate per day
$350
Unions cause an increase
in the demand for labor
E2
S
E1
Quantity of Labor
10
20
30
D1
40
D2
50
24
Increase in wages
and employment
Increase in the
demand for labor
Union
featherbeds
25
$350
$280
$210
$140
Wage Rate per day
$420
Unions cause a decrease
in the supply for labor
E2
S2
E1
D1
Quantity of Labor
10
20
30
S1
40
50
26
How else can unions
raise wages?
Collective bargaining
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What is
collective bargaining?
The process of negotiations
between the union and
management over wages
and working conditions
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$280
$210
$140
$70
Wage Rate per day
$350
Collective Bargaining causes a
Wage Rate increase
S
Unemployment
D
Quantity of Labor
10
20
30
40
50
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What factors can
cause a change in the
demand for labor?
• Unions
• Prices of substitute goods
• Demand for final products
• Marginal product of labor
30
What factors can
cause a change in the
supply for labor?
• Unions
• Demographic trends
• Expectations of future income
• Changes in immigrations laws
• Education and training
31
What has happened
to union membership
since WWII?
Union power has declined
32
How does union
membership in the
U.S. compare to
other countries?
Union membership is far
below that of other
industrialized countries
33
What is a
monopsony?
A labor market in which
a single firm hires labor
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87%
75%
40%
32% 32%
29%
15%
24%
U.S. Japan Canada U.K. Germany Italy Denmark Sweden
35
What is marginal
factor cost (MFC)?
The additional total
cost resulting from a
one-unit increase in
the quantity of labor
36
What conclusion can be
drawn from a
monopsonistic market?
Because the monopsonist
can hire additional
workers only by raising
the wage rate for all
workers, the MFC > W
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A Monopsonist determines its Wage Rate
$18
$12
$9
Dollars per hour
$15
MFC
E
S
F
D (MRP)
$6
Quantity of Labor
1
2
3
4
5
38
How are wages
compared between the
two markets?
A monopsony hires
fewer workers and pays
a lower wage than a
firm in a competitive
labor market
39
Key Concepts
40
Key Concepts
• In a perfectly competitive market, what
determines the level of wages?
• What is marginal revenue product?
• What is the demand curve for labor equal to?
• How do we measure mrp in perfect
competition?
• What does the supply curve for labor show?
41
Key Concepts cont.
•
•
•
•
How do unions attempt to raise wages?
What is featherbedding?
What is collective bargaining?
What factors can cause a change in the
demand for labor?
• What factors can cause a change in the
supply for labor?
42
Key Concepts cont.
• What has happened to union membership
since WWII?
• How does union membership in the u.S.
Compare to other countries?
• What is a monopsony?
• What is marginal factor cost (mfc)?
• How are wages compared between the two
markets?
43
Summary
44
Marginal revenue product (MRP)
is determined by a worker’s
contribution to a firm’s total
revenue. Algebraically, the MRP
equals the price of the product
times the worker’s marginal
product (MP).
45
The demand curve for labor is the
curve showing the quantities of
labor a firm is willing to hire at
different prices of labor. The
marginal revenue product (MRP)
of labor curve is the firm’s
demand curve for labor. Summing
individual demand for labor
curves gives the market demand
curve for labor.
46
$350
Demand Curve for Labor
$280
$210
$140
$70
1
2
3
4
5Q
47
Derived demand means that a
firm demands labor because
labor is productive. Changes in
consumer demand for a product
cause changes in demand for
labor and for other resources
used to make the product.
48
The supply curve of labor is the
curve showing the quantities of
workers willing to work at different
prices of labor. The market supply
curve of labor is derived by
adding the individual supply
curves of labor.
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$280
$210
$140
$70
Wage Rate per day
$350
Supply Curve of Labor
S
Quantity of Labor
10
20
30
40
50
50
Human capital is the
accumulated people make in
education, training, experience,
and health in order to make
themselves more productive.
One explanation for earnings
differences is differences in
human capital.
51
Collective bargaining is the
process through which a union
and management negotiate a
labor contract.
52
Monopsony is a labor market in
which a single firm hires labor.
Because the monopsonist faces the
industry supply curve of labor and
each worker is paid the same
wage, changes in total wage cost
exceed the wage rate necessary to
hire each additional worker. As a
result, the marginal factor cost
(MFC) of labor curve lies above the
supply curve of labor.
53
The monopsonist’s wage rate and
quantity of labor are determined
where the MFC equals MRP . Since
at this point the worker’s MRP is
greater than the wage paid, the
monopsonist exploits the workers.
54
A Monopsonist determines its Wage Rate
$18
$12
$9
Dollars per hour
$15
MFC
E
S
F
D (MRP)
$6
Quantity of Labor
1
2
3
4
5
55
Chapter 11 Quiz
©2002 South-Western College Publishing
56
1. Marginal revenue product measures the
increase in
a. output resulting from one more unit
of labor.
b. TR resulting from one ore unit of
output.
c. revenue per unit from one more unit
of output.
d. total revenue resulting from one more
unit of labor.
D. MRP is the increase in total revenue to
a firm resulting from hiring an additional
unit of labor or other variable resource.
57
2. Troll Corporation sells dolls for $10.00
each in a market that is perfectly
competitive. Increasing the number of
workers from 100 to 101 would cause
output to rise from 500 to 510 dolls per
day. Troll should hire the 101st worker
only when the wage is
a. $100 or less per day.
b. more than $100 per day.
c. $5.10 or less per day.
d. none of the above.
A. Under perfect competition, the firm
hires workers until the MRP equals the
wage rate. MRP equals $10 x MP (510 58
500) = $100.
3. Derived demand for labor depends on
the
a. cost of factors of production used in
the product.
b. market supply curve of labor.
c. consumer demand for the final
goods produced by labor.
d. firm’s total revenue less economic
profit.
C. If consumers do not purchase
goods, there is no MRP and no
workers are hired.
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4. If demand for a product falls, the
demand curve for labor used to
produce the product will shift
a. leftward.
b. rightward.
c. upward.
d. downward.
A. If consumers demand for a product
decreases and supply remains the
constant, the price of the product
falls and the MRP (P x MP)
decreases.
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5. The owner of a restaurant will hire
waiters if the
a. additional labor’s pay is close to
the minimum wage .
b. marginal product is at the
maximum.
c. additional work of the employees
adds more to total revenue than to
costs.
d. waiters do not belong to a union.
C. If MRP exceeds the wage rate paid
waiters, it is profitable for the
restaurant to hire more waiters.
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6. In a perfectly competitive market,
the demand curve for labor
a. slopes upward.
b. slopes downward because of
diminishing marginal productivity.
c. is perfectly elastic at the
equilibrium wage rate.
d. all of the above.
B. As output expands in the short run, a
fixed factor results in diminishing
returns causing MP to decrease.
Correspondingly, MRP decreases.
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7. A union can influence the
equilibrium wage rate by
a. featherbedding.
b. requiring longer
apprenticeships.
c. favoring trade restrictions on
foreign products.
d. all of the above.
D. Featherbedding and trade
protectionism increase the demand for
labor. Requiring longer apprenticeship
decreases the demand for labor.
63
8. In which of the following market
structures is the firm not a price
taker in the factor market?
a. Oligopoly.
b. Monopsony.
c. Monopoly.
d. Perfect competition.
B. Monopsony is a labor market in
which a single firm hires labor. For
example, the “company town” where
everyone works for the same
employer.
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9. The extra cost of obtaining each
additional unit of a factor of
production is called the marginal
a. physical product.
b. revenue product.
c. factor cost.
d. implicit cost.
C. The assumption of MFC is that the
firm must pay a higher wage to each
additional worker as well as to all
previously hired workers.
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10. A monopsonist’s marginal factor cost
curve lies above its supply curve because
the firm must
a. increase the price of its product to sell
more.
b. lower the price of its product to sell
more.
c. increase the wage rate to hire more
labor.
d. lower the wage rate to hire more labor.
C. The monopsonist can hire an
additional worker only by raising the
wage rate for all workers. Therefore,
the MFC exceeds the wage rate
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along the labor supply curve.
11. In order to maximize profits, a
monopsonist will hire the quantity of
labor to the point where the marginal
factor cost is equal to
a. marginal physical product.
b. marginal revenue product.
c. total revenue product.
d. any of the above.
B. The MRP curve is the contribution of
each worker to total revenue and MFC
the addition to total cost. When MRP >
MFC, the firm hires more workers.
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$8
$6
$4
$2
Dollars per hour
$10
Marginal Factor Cost (MFC) and
Marginal Revenue Product (MRP)
Surplus
Shortage
MFC
D (MRP)
Quantity of Labor
1
2
3
4
5
68
12. BigBiz, a local monopolist, currently
hires 50 workers and pays them $6 per
hour. To attract an additional worker to
its labor force, BigBiz would have to
raise the wage rate to $6.25 per hour.
What is BigBiz’s marginal factor cost?
a. $6.25 per hour.
b. $12.50 per hour.
c. $18.75 per hour.
d. $20.00 per hour.
C. Its total cost would increase by $18.75
to hire that additional worker (25 x 50 +
6.25).
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13. Suppose a firm can hire 100 workers
at $8.00 per hour, but must pay $8.05
per hour to hire 101 workers. Marginal
factor cost (MFC) for the 101st worker is
approximately equal to
a. $8.00.
b. $8.05.
c. $13.05.
d. $13.00.
C. The firm’s total cost would increase
$13.05 to hire the 101st worker (.05 x 100
+ 8.05).
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14. A monopsonist in equilibrium has a
marginal revenue product of $10 per
worker hour. Its equilibrium wage rate
must be
a. less than $10.
b. equal to $10.
c. greater than $10.
d. equal to $5.
A. Because of its monopoly in the labor
market, a monopsony hires fewer
workers and pays a lower wage than a
firm in a competitive labor market.
71
A Monopsonist determines its Wage Rate
$18
$12
$9
Dollars per hour
$15
MFC
E
S
F
D (MRP)
$6
Quantity of Labor
1
2
3
4
5
72
END
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