BAB 12. PASAR INPUT. Topics to be Discussed. Competitive Factor Markets Equilibrium in a Competitive Factor Market Factor Markets with Monopsony Power Factor Markets with Monopoly Power. Competitive Factor Markets. Characteristics 1)Large number of sellers of the factor of production
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1)Large number of sellers of the factor of production
2)Large number of buyers of the factor of production
3)The buyers and sellers of the factor of production are price takers
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Demand for a Factor Input When
Only One Input Is Variable
Assume
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Demand for a Factor Input When
Only One Input Is Variable
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Demand for a Factor Input When
Only One Input Is Variable
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Demand for a Factor Input When
Only One Input Is Variable
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Demand for a Factor Input When
Only One Input Is Variable
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Competitive Output Market (P = MR)
MRPL = MPLxP
Monopolistic
Output Market
(P < MR)
MRPL = MPL x MR
Wages
($ per
hour)
Hours of Work
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Demand for a Factor Input When
Only One Input Is Variable
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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*
Price of
Labor
Why not hire fewer
or more workers than L*.
Quantity of Labor
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Demand for a Factor Input When
Only One Input Is Variable
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S1
w1
w2
S2
MRPL = DL
L1
L2
Price of
Labor
Quantity of Labor
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Demand for a Factor Input When
Several Inputs Are Variable
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Demand for a Factor Input When
Several Inputs Are Variable
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When two or more inputs are
variable, a firmâ€™s demand for one input
depends on the marginal revenue
product of both inputs.
When the wage rate is $20, A
represents one point on the firmâ€™s
demand for labor curve.
When the wage rate falls to $15, the
MRP curve shifts, generating a new
point C on the firmâ€™s demand for
labor curve. Thus A and C are
on the demand for labor curve, but
B is not.
A
C
B
DL
MRPL1
MRPL2
Wages
($ per
hour)
20
15
10
5
0
40
80
120
160
Hours of Work
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Industry Demand for Labor
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Horizontal sum if
product price
unchanged
Industry
Demand
Curve
MRPL2
MRPL1
DL1
DL2
120
L1
L2
Firm
Industry
Wage
($ per
hour)
Wage
($ per
hour)
15
15
10
10
5
5
0
50
100
150
0
L0
Labor
(worker-hours)
Labor
(worker-hours)
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American-.06Delta-.15
Continental-.09TWA-.10
Northwest-.07United-.10
AirlineElasticityAirlineElasticity
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MRPSR
MRPLR
Price
Quantity of Jet Fuel
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Observations
1) The firm is a price taker at $10.
2) S = AE = ME = $10
3) ME = MRP @ 50 units
Market Supply
of fabric
S
Supply of
Fabric Facing Firm
Market Demand
for fabric
10
10
ME = AE
MRP
D
Demand
for Fabric
100
50
Price
($ per
yard)
Price
($ per
yard)
Yards of
Fabric (thousands)
Yards of
Fabric (thousands)
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Supply of Labor
Income Effect >
Substitution Effect
Income Effect <
Substitution Effect
Wage
($ per
hour)
Hours of Work per Day
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480
w = $20
Suppose wages increase to $20
P
Increase wage to $20 worker chooses:
20 hour leisure, 4 hours work
income = $80
w = $10
C
A
B
Q
12
16
20
Substitution effect
Income effect
Income
($ per
day)
240
0
8
24
Hours of Leisure
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Headâ€™s HoursSpouseâ€™s HoursHeadâ€™s Hours
with Respect towith Respect towith Respect to
GroupHeadâ€™s WageSpouseâ€™s WageSpouseâ€™s Wage
Unmarried males.026(no children)Unmarried females.106(with children)Unmarried females.011(no children)One-earner family-.078(with children)One-earner family.007(no children)Two-earner family-.002-.086-.004(with children)Two-earner family-.107-.028-.059(no children)
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SL = AE
SL = AE
vM
wM
B
A
wC
P * MPL
DL = MRPL
DL = MRPL
LC
LM
Wage
Wage
Competitive Output Market
Monopolistic Output Market
Number of Workers
Number of Workers
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Equilibrium in a Competitive Output Market
DL(MRPL) = SL
wC = MRPL
MRPL = (P)(MPL)
Markets are efficient
Equilibrium in a Monopolistic Output Market
MR < P
MRP = (MR)(MPL)
Hire LMat wage wM
vM = marginal benefit to consumers
wM = marginal cost to the firm
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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
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SL = AE
A
Total expenditure (wage) paid
is 0w* x AL*
w*
Economic Rent
DL = MRPL
B
Economic rent is ABW*
L*
The economic rent associated with the
employment of labor is the excess of wages
paid above the minimum amount needed
to hire workers.
Wage
0
Number of Workers
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Supply of Land
s2
Economic
Rent
s1
Economic
Rent
D2
D1
Price
($ per
acre)
Number of Acres
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SL
w*
w0
Shortage
DL = MRPL
Wage
Number of Skilled Workers
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Why is marginal expenditure
greater than SL?
Marginal
Expenditure (ME)
SL = Average
Expenditure (AE)
C
wc
w* = 13
D = MRPL
Lc
L*
Price
(per unit
of input)
20
15
10
5
0
1
2
3
4
5
6
Units of Input
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When a labor union is a monopolist, it
chooses among points on the buyerâ€™s
demand for labor curve.
The seller can maximize the number of workers
hired, at L*, by agreeing that workers will
work at wage w*.
SL
A
w*
DL
MR
L*
Wage
per
worker
Number of Workers
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The quantity of labor L1 that maximizes
the rent that employees earn is determined
by the intersection of the marginal revenue
and supply or labor curves; union members
receive a wage rate of w1.
Finally, if the union wishes to maximize total
wages paid to workers, it should allow L2
union members to be employed at a wage
rate of w2 because the marginal revenue
to the union will then be zero.
w1
w2
Economic
Rent
L1
L2
Wage
per
worker
SL
A
w*
DL
MR
L*
Number of Workers
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SL
When a monopolistic union
raises the wage rate in the
unionized sector of the
economy from w* to wU,
employment in that
sector falls.
wU
For the total supply of labor to
remain unchanged, the wage in
the nonunionized sector
must fall from w* to wNU..
w*
wNU
DNU
DU
DL
Wage
per
worker
Number of Workers
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ME
SL = AE
19
wC
Wage
Possibilities
DL = MRPL
MR
25
Wage
per
worker
25
20
15
10
5
Number
of Workers
10
20
40
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Observations
Hiring without union monopoly power
MRP = ME at 20 workers and w = $10/hr
Unionâ€™s objective
MR = MC at 25 workers and w = $19/hr
Wage
per
worker
ME
25
SL = (AE)
20
19
wC
15
DL = MRPL
10
MR
5
Number
of Workers
10
20
25
40
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