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Competitive vs. Market Power Firms in the Factor Market

Competitive vs. Market Power Firms in the Factor Market. Chapter 18 - Part 3. What will Get me to work?. Market Supply Curve of Labor. Market supply curve for labor is upward sloping represents trade-off between Work & Leisure

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Competitive vs. Market Power Firms in the Factor Market

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  1. Competitivevs.Market Power Firms in the Factor Market Chapter 18 - Part 3

  2. What will Get me to work? Market Supply Curve of Labor • Market supply curve for labor is upward sloping • represents trade-off between Work & Leisure • upward-sloping means an ↑ in wages induces more people to work Entire Labor Market

  3. Entire Labor Market Increase in Supply of Workers Increase in Demand for Workers

  4. SL -------------- $10 E1 SL = MFC $10 ------------- ------------------- DL= MRPL DL Q1 Q1 Competitive FACTOR Markets LABOR MARKET Entire Factory Industry 1- Individual Firm Low Skilled Workers Low Skilled Workers Wage Wage A single Firm can hire all their workers at market wage rate Qty Qty

  5. Market Power Firms Competitive Firm Market Power Firms Perfect Competition Monopolistic Competition Monopoly Oligopoly Lowest Quantity Highest Quantity • Most market power firms are competitive in the FACTOR MARKET • Market Power industries produce _______ than Competitive Industries • So they need _______ INPUTS!

  6. Wage Rate MRPC MRPM --------------- --------------- End Result: Market power firms hire less workers but pay same wage! (Monopoly, Oligopoly, Monopolistic Competition Competitive vs. Market Power Firm MR = P for a competitive firm MR < P for a firm with market power MRP = [MPL * Price] only for competitive firms in output market! Therefore: MRPC > MRPM MRPC = MPL * P (or MR) MRPM = MPL * MR P P1 QM QC Qty

  7. Competitive vs. Market Power • Competitive firm(output market) (Price = MR) • Hire labor where MRPL = wage rate (MFCL) • They are wage takers (factor market) • They are price takers (product market) so P = MR • MRP = MR * MPL • Market Power firm (output market) (P > MR) • Hire labor where MRPL = wage rate (MFCL) • They are wage takers • Not price takers (product market) so P > MR • MRP = MR * MPL (means: MRP ≠P * MPL) • Market power industries hire less of all factors (including workers)

  8. Worksheet #3:Competitive vs. Market Power Firms

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