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Competitive Labor Markets

Competitive Labor Markets. Factor Markets Part II (Chapter 18). All of Microeconomics in one slide:. You Buy Something when:. Firms produce another unit when:. MB ≥ MC. MR ≥ MC. Firms purchase another input when:. MRP ≥ MFC. MR = MC. MRP = MFC. -----------.

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Competitive Labor Markets

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  1. Competitive Labor Markets Factor Markets Part II (Chapter 18)

  2. All of Microeconomicsin one slide: You Buy Something when: Firms produce another unit when: MB ≥ MC MR ≥ MC Firms purchase anotherinput when: MRP ≥ MFC

  3. MR = MC MRP = MFC ----------- ------------- Product Market & Factor Markets MFC MRP Market for OUTPUTS Market for INPUTS

  4. Supply curve MFC MRP Demand & Supply of Factors • MRP is the demand curve for input • MP input X price output • MFC is the supply curve for inputs • Cost of input • Most firms are competitivein the factor market (input market) • So they are “wage takers” in the labor market. • This means a firm has a horizontal supply curve (perfectly elastic) • i.e. price is fixed

  5. D D2 MRP1 MRP2 Demand For product Price of Product MRP MRP = MPL * P Derived Demand for Inputs Product Market Factor Market T-Shirt Market Labor Market Wages/hr Price S -------------- $15 MFC E1 $20 ------------- Q Qty Qty More Workers Hired Wage rate Unchanged!

  6. MRP2 Shifts in Labor Demand Demand Curve shifts right when: • Demand for Product • Productivity • Technology, working conditions, etc... • Price of other resources: • Price ↓ of complementary resource • Price ↓ of substitute resource MRP • “It Depends” • Two different effects when the price of substitute falls: • Substitution Effect- you hire less workers • Output Effect- MC falls, so output increases => you hire more workers

  7. Competitive Labor Market Worksheet

  8. D2 D MRP1 MRP2 Worksheet Review Product Market Factor Market T-Shirt Market Labor Market Wages/day Price S -------------- $10 MFC E1 $200 ------------- Q Qty Qty

  9. D MRP1 Worksheet Review Low Skilled Workers One Firm Wages/day Price S -------------- $10 MFC E1 $10 ------------- Q Qty Qty

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