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Markets for Factor Inputs

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

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Markets for Factor Inputs

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  1. Markets for Factor Inputs

  2. 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.

  3. 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?

  4. 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)

  5. Competitive Factor Markets Demand for a Factor Input When Only One Input Is Variable • Assume perfect competition in the product market • Then MR = P

  6. 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?

  7. Competitive Output Market (P = MR) MRPL = MPLxP Monopolistic Output Market (MR <P) MRPL = MPL x MR Marginal Revenue Product Wages ($ per hour) Hours of Work

  8. 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

  9. 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 MRPL = DL L* Hiring by a Firm in theLabor Market (with Capital Fixed) Price of Labor Why not hire fewer or more workers than L*. Quantity of Labor

  10. 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?

  11. S1 w1 w2 S2 MRPL = DL L1 L2 A Shift in the Supply of Labor Price of Labor Quantity of Labor

  12. Competitive Factor Markets • Comparing Input and Output Markets

  13. 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

  14. SL = AE SL = AE vM wM B A wC P * MPL DL = MRPL DL = MRPL LC LM Labor Market Equilibrium Wage Wage Competitive Output Market Monopolistic Output Market Number of Workers Number of Workers

  15. Equilibrium in a Competitive Output Market DL(MRPL) = SL wC = MRPL MRPL = (P)(MPL) Markets are efficient Equilibrium in a Monopolistic Output Market Profits maximized Using less than the efficient level of input Labor Market Equilibrium

  16. Exam questions • Essay 1, 2001

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