1、Chapter 14Markets for Factor Inputs2005 Pearson Education,Inc.Chapter 142Topics to be DiscussedlCompetitive Factor MarketslEquilibrium in a Competitive Factor MarketlFactor Markets with Monopsony PowerlFactor Markets with Monopoly Power2005 Pearson Education,Inc.Chapter 143Competitive Factor Markets
2、l Characteristics1.Large number of sellers of the factor of production2.Large number of buyers of the factor of production3.The buyers and sellers of the factor of production are price takers2005 Pearson Education,Inc.Chapter 144Competitive Factor MarketslDemand for a factor input when only one inpu
3、t is variable:mFactor demands are derived demandlDemand for an input that depends on,and is derived from,both the firms level of output and the cost of inputslDemand for computer programmers is derived from how much software Microsoft expects to sell2005 Pearson Education,Inc.Chapter 145Factor Input
4、 Demand One Variable InputlAssume firm produces output using two inputs:mCapital(K)and Labor(L)mHired at prices r(rental cost of capital)and w(wage rate)mK is fixed(short run analysis)and L is variablemFirm must decide how much labor to hire2005 Pearson Education,Inc.Chapter 146Factor Input Demand O
5、ne Variable InputlHow does a firm decide if it is profitable to hire another worker?mIf the additional revenue from the output of hiring another worker is greater than its costmMarginal Revenue Product of Labor(MPRL)lAdditional revenue resulting from the sale of output created by the use of one addi
6、tional unit of an input2005 Pearson Education,Inc.Chapter 147Factor Input Demand One Variable InputlThe incremental cost of a unit of labor is the wage rate,wlProfitable to hire more labor if the MRPL is at least as large as the wage rate,wlMust measure the MRPL2005 Pearson Education,Inc.Chapter 148
7、Factor Input Demand One Variable InputlMRPL is the additional output obtained from an additional unit of labor,multiplied by the additional revenue from an extra unit of outputlAdditional output is given by MPL and additional revenue is MR2005 Pearson Education,Inc.Chapter 149Factor Input Demand One
8、 Variable Input)(MRMPMRPLQQRLRQRMRLQMPLRMRPLLLLandlabor is L and revenue is R where2005 Pearson Education,Inc.Chapter 1410Factor Input Demand One Variable InputlIn a competitive market,MR=PlThis means,for a competitive market)(PMPMRPLLlGraphically,diminishing marginal returns,MPL falls as L increase
9、s2005 Pearson Education,Inc.Chapter 1411Marginal Revenue ProductHours of WorkWages($perhour)MRPL=MPLx PCompetitive Output Market(P=MR)MRPL=MPL x MRMonopolistic Output Market(P w(the marginal cost of hiring a worker):hire the workermIf MRPL W,firm demands more laborl MRPL1 is demand for labor w/machi
10、nery fixedl Increased labor causes MPK to rise,encouraging the firm to rent more machineryl MPL increasesl MRPL curve shifts right,firm uses 140 hrs labor2005 Pearson Education,Inc.Chapter 1421MRPL1MRPL2Factor Input Demand Many InputsWages($perhour)5101520Hours of Work04080120160When the wage rate f
11、alls to$15,theMRP curve shifts,generating a newpoint C on the firms demand forlabor curve.Thus A and C are on the demand for labor curve,but B is not.DLABC2005 Pearson Education,Inc.Chapter 1422Market Demand CurvelAll firms demand for labor vary substantiallylAssume that all firms respond to a lower
12、 wagemAll firms would hire more workersmMarket supply would increasemThe market price will fallmThe quantity demanded for labor by the firm will be smaller2005 Pearson Education,Inc.Chapter 1423Industry Demand for LaborMRPL1Labor(worker-hours)Labor(worker-hours)Wage($perhour)Wage($perhour)0510150510
13、1550100150L0L2120MRPL2DL1Horizontal sum ifproduct priceunchangedL1IndustryDemandCurveDL2FirmIndustry2005 Pearson Education,Inc.Chapter 1424The Industry Demand for LaborlIf the wage rate falls for all firms in industry,all firms will demand more laborlMore industry output and supply for output will r
14、ise,causing prices to falllThe increase in labor is smaller than if the product price were fixedlAdding all labor demand curves in all industries gives market demand curve for labor2005 Pearson Education,Inc.Chapter 1425The Demand for Jet FuellJet fuel is a factor(input)for airlineslCost of jet fuel
15、m1971 Jet fuel cost equaled 12.4%of total operating costm1980 Jet fuel cost equaled 30.0%of total operating costm1990s Jet fuel cost equaled 15.0%of total operating cost2005 Pearson Education,Inc.Chapter 1426The Demand for Jet FuellAirlines responded to higher prices in the 1970s by reducing the qua
16、ntity of jet fuel usedlOutput of airlines(ton-miles)increased by 29.6%and jet fuel consumed rose by 8.8%lEffect of increased fuel costs on airlines depends on ability to cut fuel usage by reducing weight2005 Pearson Education,Inc.Chapter 1427The Demand for Jet FuellPrice elasticity of demand for jet
17、 fuel depends on ability to conserve fuel and elasticities of demand and supply of travellThe demand for jet fuel impacts the airlines and refineries alikelThe short-run price elasticity of demand for jet fuel is very inelastic2005 Pearson Education,Inc.Chapter 1428Short-Run Price Elasticityof Deman
18、d for Jet FuelAmerican-0.06Delta-0.15Continental-0.09TWA-0.10Northwest-0.07United-0.10AirlineElasticityAirlineElasticity2005 Pearson Education,Inc.Chapter 1429The Demand for Jet FuellThere is no good substitute for jet fuellLong run elasticity of demand is higher,however,because airlines can eventua
19、lly introduce more energy-efficient airplaneslCan show short-and long-run demands for jet fuelmMRPSR is much less elastic than long run demand since it takes time to substitute2005 Pearson Education,Inc.Chapter 1430The Short-and Long-RunDemand for Jet FuelQuantity of Jet FuelPriceMRPLRMRPSR2005 Pear
20、son Education,Inc.Chapter 1431The Supply of Inputs to a FirmlIn a competitive market,a firm can purchase as much of an input it wants at the market pricemDetermined by supply/demand of input marketlInput supply to a firm is perfectly elasticlFirm is small part of market so does not affect market pri
21、ce2005 Pearson Education,Inc.Chapter 1432A Firms Input Supply in a Competitive Factor MarketSMarket Supplyof FabricYards ofFabric(thousands)Yards ofFabric(thousands)Price($peryard)Price($peryard)DMarket Demandfor Fabric100ME=AE1010Supply ofFabric Facing FirmDemand for FabricMRP502005 Pearson Educati
22、on,Inc.Chapter 1433The Supply of Inputs to a FirmlRemember that the supply curve is the average expenditure curvemSupply curve representing the price per unit that the firm pays for a goodlAlso,marginal expenditure curve represents the firms expenditures on an additional unit that it buysmAnalogous
23、to MR curve in output market2005 Pearson Education,Inc.Chapter 1434The Supply of Inputs to a FirmlWhen factor market is competitive,average expenditure and marginal expenditure are identical horizontal lineslHow much of the input should the firm purchase?mAs long as MRP ME,profit can be increased by
24、 buying more inputmWhen MRP ME,benefits lower than costs2005 Pearson Education,Inc.Chapter 1435The Supply of Inputs to a FirmlProfit maximization requires the marginal expenditure to be equal to the marginal revenue productME=MRPlA special case of competitive output market shows profit maximization
25、whereME=w2005 Pearson Education,Inc.Chapter 1436The Market Supply of InputslThe market supply for factor inputs is upward slopingmExamples:jet fuel,fabric,steellThe market supply for labor may be upward sloping and backward bending2005 Pearson Education,Inc.Chapter 1437The Supply of Inputs to a Firm
26、lThe Supply of LabormThe choice to supply labor is based on utility maximizationmLeisure competes with income for utilitymWage rate measures the price of leisuremHigher wage rate causes the price of leisure to increase2005 Pearson Education,Inc.Chapter 1438The Market Supply of InputslThe Supply of L
27、abormHigher wages encourage workers to substitute work for leisurelThe substitution effectmHigher wages allow the worker to purchase more goods,including leisure,which reduces work hours lThe income effect2005 Pearson Education,Inc.Chapter 1439Competitive Factor MarketslThe Supply of LabormIf the in
28、come effect exceeds the substitution effect,the supply curve is backward bendingmBy using utility and budget line graph,we can show how the supply curve can be backward bendinglCan show how the income effect can exceed the substitution effect2005 Pearson Education,Inc.40Substitution and Income Effec
29、ts of Wage IncreaseWorker initially chooses point A:16 hours leisure,8 hour workIncome=$80QPw=$10Income($perday)2407201216Hours of Leisure082419Wage increases to$30.New budget line RQ.19 hours leisure,5 hours workIncome=$150 Substitution effectIncome effectABCw=$30RIncome effect overrides substituti
30、on effect2005 Pearson Education,Inc.Chapter 1441Income Effect Substitution EffectBackward-Bending Supply of LaborHours of Work per DayWage($perhour)Supply of Labor2005 Pearson Education,Inc.Chapter 1442Labor Supply for One-andTwo-Earner Householdsl In twentieth century,the percent of females in labo
31、r force has increasedm1950 34%m2001 60%l Compared the work choices of 94 unmarried females with work decisions of heads of households and spouses in 397 familiesmCan describe work decisions by calculating elasticity of supply for labor2005 Pearson Education,Inc.Chapter 1443Elasticities of Labor Supp
32、ly(Hours Worked)2005 Pearson Education,Inc.Chapter 1444Labor Supply for One-andTwo-Earner HouseholdslWhen higher wage rate leads to fewer hours worked:mLabor supply curve is backward bendingmIncome effect outweighs the substitution effectmElasticity of labor supply is negative2005 Pearson Education,
33、Inc.Chapter 1445Equilibrium in a Competitive Factor MarketlCompetitive factor market is in equilibrium when the prevailing price equates quantity supplied and quantity demandedlSince workers are well informed,all receive the same wage and generate identical MRPL when employed2005 Pearson Education,I
34、nc.Chapter 1446Equilibrium in a Competitive Factor MarketlIf output market is perfectly competitive,demand curve for an input measures benefit consumers place on use of input in production processlWage rate also reflects the cost of the firm and to society of using additional unit of inputlAt equili
35、brium,MBL=MCL=wage2005 Pearson Education,Inc.Chapter 1447Equilibrium in a Competitive Factor MarketlWhen output and input markets are both perfectly competitive,resources are used efficientlymMaximize TB TClEfficiency requires that MRPL equals the benefit to consumers of the additional output,given
36、by(P)(MPL)2005 Pearson Education,Inc.Chapter 1448Equilibrium in a Competitive Factor MarketlIf output market is not competitive:mMRPL=(P)(MPL)no longer holdsm(P)(MPL)MRPLmAt equilibrium number of workers,marginal cost to firm,wM,is less than marginal benefit to consumers,vMmAlthough the firm maximiz
37、es profits,output is below efficient level and uses less than efficient level of output2005 Pearson Education,Inc.Chapter 1449Equilibrium in a Competitive Factor MarketlIf output market is not competitive:mAlthough the firm maximizes profits,output is below efficient level and uses less than efficie
38、nt level of inputmEconomic efficiency would be increased if more laborers were hired and more output were producedlGains to consumers would outweigh firms lost profit2005 Pearson Education,Inc.Chapter 1450Labor Market EquilibriumSL=AESL=AEDL=MRPLDL=MRPLP*MPLNumber of WorkersNumber of WorkersWageWage
39、Competitive Output MarketMonopolistic Output MarketwCLCwMLMvMAB2005 Pearson Education,Inc.Chapter 1451Equilibrium in aCompetitive Factor MarketlEconomic RentmFor a factor market,economic rent is the difference between the payments made to a factor of production and the minimum amount that must be sp
40、ent to obtain the use of that factormThe economic rent associated with the employment of labor is the excess of wages paid above the minimum amount needed to hire workers2005 Pearson Education,Inc.Chapter 1452Total expenditure(wage)paidis 0w*x 0L*Economic RentEconomic rent is ABW*BEconomic RentNumbe
41、r of WorkersWageSL=AEDL=MRPLw*L*A02005 Pearson Education,Inc.Chapter 1453Equilibrium in aCompetitive Factor MarketlLand:A Perfectly Inelastic SupplymOccurs when land for housing or agriculture is fixed,at least in short runmIts price is determined entirely by demandmWhen demand increases,rental valu
42、e per unit increases and total land rent increases2005 Pearson Education,Inc.Chapter 1454EconomicRents1s2Land RentNumber of AcresPrice($peracre)Supply of LandD2D1When demand increases,price and economic rent increase.2005 Pearson Education,Inc.Chapter 1455Pay in the MilitarylDuring the Civil War,90%
43、of the armed forces were unskilled workers involved in ground combatlToday,only 16%are unskilled workers involved in ground combatlLead to severe shortages in skilled workers2005 Pearson Education,Inc.Chapter 1456Pay in the MilitarylRank structure has stayed the samemPay increases are determined pri
44、marily by years of servicemSimilarly,officers with differing skill levels are often paid similar salariesmMany skilled workers leave the army since salaries in private sector are much higher2005 Pearson Education,Inc.Chapter 1457The Shortage ofSkilled Military PersonnelNumber of Skilled WorkersWageS
45、LDL=MRPLw*w0Shortage2005 Pearson Education,Inc.Chapter 1458Pay in the MilitarylSolutionmSelective reenlistment bonuses targeted at skilled jobs where there are shortagesmWith increases in demand for skilled military jobs,we should expect the military to increase reenlistment bonuses and other market
46、 based incentives2005 Pearson Education,Inc.Chapter 1459Factor Markets with Monopsony PowerlWe showed before that many firms have monopsony buying powermUS automobile companies as buyers of parts and componentslAssumemThe output market is perfectly competitivemInput market is pure monopsony2005 Pear
47、son Education,Inc.Chapter 1460Factor Markets with Monopsony PowerlMarginal and Average ExpendituremWhen choosing to purchase a good,increase amount purchased until the marginal value equals marginal expendituremPrice paid for good is average expenditure and is equal to marginal expenditure2005 Pears
48、on Education,Inc.Chapter 1461Factor Markets with Monopsony Powerl Since a monopsonist pays the same price for each unit,the supply curve is the average expenditure curvel Upward sloping,since deciding to buy an extra unit raises price it must pay for all unitsl For profit maximizing firm,marginal ex
49、penditure curve lies above the average expenditure curvel Firm must pay all units the higher price,not just last unit hired2005 Pearson Education,Inc.62SL=Average Expenditure(AE)MarginalExpenditure(ME)D=MRPLMarginal and Average ExpenditureUnits of InputPrice(per unitof input)01234655101520w*=13L*wcL
50、cCHires where ME=MRPLC is competitive market level2005 Pearson Education,Inc.Chapter 1463Factor Markets with Monopsony PowerlExamples of Monopsony PowermGovernmentlSoldierslMissileslB2 BombersmNASAlAstronautsmCompany town2005 Pearson Education,Inc.Chapter 1464Monopsony Power in the Market for Baseba
