1、,Chapter 14,Markets for Factor Inputs,1,Chapter 1,Topics to be Discussed,Competitive Factor MarketsEquilibrium in a Competitive Factor MarketFactor Markets with Monopsony PowerFactor Markets with Monopoly Power,2,Chapter 1,Competitive Factor Markets,Characteristics1)Large number of sellers of the fa
2、ctor of production2)Large number of buyers of the factor of production3)The buyers and sellers of the factor of production are price takers,3,Chapter 1,Competitive Factor Markets,Demand for a Factor Input When Only One Input Is VariableDemand for factor inputs is a derived demandderived from factor
3、cost and output demand,4,Chapter 1,Competitive Factor Markets,AssumeTwo inputs:Capital(K)and Labor(L)Cost of K is r and the cost of labor is wK is fixed and L is variable,Demand for a Factor Input WhenOnly One Input Is Variable,5,Chapter 1,Competitive Factor Markets,ProblemHow much labor to hire,Dem
4、and for a Factor Input WhenOnly One Input Is Variable,6,Chapter 1,Competitive Factor Markets,Measuring the Value of a Workers OutputMarginal Revenue Product of Labor(MRPL)MRPL=(MPL)(MR),Demand for a Factor Input WhenOnly One Input Is Variable,7,Chapter 1,Competitive Factor Markets,Assume perfect com
5、petition in the product marketThen MR=P,Demand for a Factor Input WhenOnly One Input Is Variable,8,Chapter 1,Competitive Factor Markets,QuestionWhat will happen to the value of MRPL when more workers are hired?,Demand for a Factor Input WhenOnly One Input Is Variable,9,Chapter 1,Marginal Revenue Pro
6、duct,Hours of Work,Wages($perhour),10,Chapter 1,Competitive Factor Markets,Choosing the profit-maximizing amount of laborIf MRPL w(the marginal cost of hiring a worker):hire the workerIf MRPL w:hire less laborIf MRPL=w:profit maximizing amount of labor,Demand for a Factor Input WhenOnly One Input Is
7、 Variable,11,Chapter 1,Hiring by a Firm in theLabor Market(with Capital Fixed),Quantity of Labor,Price ofLabor,Why not hire fewer or more workers than L*.,12,Chapter 1,Competitive Factor Markets,If the market supply of labor increased relative to demand(baby boomers or female entry),a surplus of lab
8、or would exist and the wage rate would fall.QuestionHow would this impact the quantity demanded for labor?,Demand for a Factor Input WhenOnly One Input Is Variable,13,Chapter 1,A Shift in the Supply of Labor,Quantity of Labor,Price ofLabor,14,Chapter 1,Competitive Factor Markets,Comparing Input and
9、Output Markets,15,Chapter 1,Competitive Factor Markets,Comparing Input and Output MarketsIn both markets,input and output choices occur where MR=MCMR from the sale of the outputMC from the purchase of the input,16,Chapter 1,Competitive Factor Markets,ScenarioProducing farm equipment with two variabl
10、e inputs:LaborAssembly-line machineryAssume the wage rate falls,Demand for a Factor Input WhenSeveral Inputs Are Variable,17,Chapter 1,Competitive Factor Markets,QuestionHow will the decrease in the wage rate impact the demand for labor?,Demand for a Factor Input WhenSeveral Inputs Are Variable,18,C
11、hapter 1,Firms Demand Curve for Labor(with Variable Capital),Hours of Work,Wages($perhour),0,5,10,15,20,40,80,120,160,19,Chapter 1,Assume that all firms respond to a lower wageAll firms would hire more workers.Market supply would increase.The market price will fall.The quantity demanded for labor by
12、 the firm will be smaller.,Competitive Factor Markets,Industry Demand for Labor,20,Chapter 1,MRPL1,The Industry Demand for Labor,Labor(worker-hours),Labor(worker-hours),Wage($perhour),Wage($perhour),0,5,10,15,0,5,10,15,50,100,150,L0,Firm,Industry,21,Chapter 1,The Industry Demand for Labor,QuestionHo
13、w would a change to a non-competitive market impact the derivation of the market demand for labor?,22,Chapter 1,The Demand for Jet Fuel,ObservationsJet fuel is a factor(input)costCost of jet fuel1971-Jet fuel cost equaled 12.4%of total operating cost1980-Jet fuel cost equaled 30.0%of total operating
14、 cost1990s-Jet fuel cost equaled 15.0%of total operating cost,23,Chapter 1,The Demand for Jet Fuel,ObservationsAirlines responded to higher prices in the 1970s by reducing the quantity of jet fuel usedTon-miles increased by 29.6%&jet fuel consumed rose by 8.8%,24,Chapter 1,The Demand for Jet Fuel,Ob
15、servationsThe demand for jet fuel impacts the airlines and refineries alikeThe short-run price elasticity of demand for jet-fuel is very inelastic,25,Chapter 1,Short-run Price Elasticityof Demand for Jet Fuel,American-.06Delta-.15Continental-.09TWA-.10Northwest-.07United-.10,AirlineElasticityAirline
16、Elasticity,26,Chapter 1,The Demand for Jet Fuel,QuestionHow would the long-run price elasticity of demand compare to the short-run?,27,Chapter 1,The Short-and Long-RunDemand for Jet Fuel,Quantity of Jet Fuel,Price,MRPLR,MRPSR,28,Chapter 1,Competitive Factor Markets,The Supply of Inputs to a FirmDete
17、rmining how much of an input to purchaseAssume a perfectly competitive factor market,29,Chapter 1,A Firms Input Supply in aCompetitive Factor Market,Yards ofFabric(thousands),Yards ofFabric(thousands),Price($peryard),Price($peryard),30,Chapter 1,Competitive Factor Markets,The Market Supply of Inputs
18、The market supply for physical inputs is upward slopingExamples:jet fuel,fabric,steelThe market supply for labor may be upward sloping and backward bending,31,Chapter 1,Competitive Factor Markets,The Supply of LaborThe choice to supply labor is based on utility maximizationLeisure competes with labo
19、r for utilityWage rate measures the price of leisureHigher wage rate causes the price of leisure to increase,32,Chapter 1,Competitive Factor Markets,The Supply of LaborHigher wages encourage workers to substitute work for leisure(i.e.the substitution effect)Higher wages allow the worker to purchase
20、more goods,including leisure which reduces work hours(i.e.the income effect),33,Chapter 1,Competitive Factor Markets,The Supply of LaborIf the income effect exceeds the substitution effect the supply curve is backward bending,34,Chapter 1,Income Effect Substitution Effect,Income Effect Substitution
21、Effect,Backward-Bending Supply of Labor,Hours of Work per Day,Wage($perhour),Supply of Labor,35,Chapter 1,Substitution and IncomeEffects of a Wage Increase,Hours of Leisure,Income($perday),0,240,8,24,36,Chapter 1,Labor Supply for One-andTwo-Earner Households,Female Percent of Labor Force1950-29%1999
22、-60%,37,Chapter 1,Elasticities of Labor Supply(Hours Worked),Heads HoursSpouses HoursHeads Hourswith Respect towith Respect towith Respect toGroupHeads WageSpouses WageSpouses Wage,Unmarried males.026(no children)Unmarried females.106(with children)Unmarried females.011(no children)One-earner family
23、-.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),38,Chapter 1,Equilibrium in aCompetitive Factor Market,A competitive factor market is in equilibrium when the price of the input equates the quantity dem
24、anded to the quantity supplied.,39,Chapter 1,Labor Market Equilibrium,Number of Workers,Number of Workers,Wage,Wage,Competitive Output Market,Monopolistic Output Market,40,Chapter 1,Labor Market Equilibrium,Equilibrium in a Competitive Output MarketDL(MRPL)=SLwC=MRPLMRPL=(P)(MPL)Markets are efficien
25、t,Equilibrium in a Monopolistic Output MarketMR PMRP=(MR)(MPL)Hire LM at wage wMvM=marginal benefit to consumerswM=marginal cost to the firm,41,Chapter 1,Labor Market Equilibrium,Equilibrium in a Competitive Output MarketDL(MRPL)=SLwC=MRPLMRPL=(P)(MPL)Markets are efficient,Equilibrium in a Monopolis
26、tic Output MarketProfits maximizedUsing less than the efficient level of input,42,Chapter 1,Economic RentFor a factor market,economic rent is the difference between the payments made to a factor of production and the minimum amount that must be spent to obtain the use of that factor.,Equilibrium in
27、aCompetitive Factor Market,43,Chapter 1,Total expenditure(wage)paidis 0w*x AL*,Economic Rent,Number of Workers,Wage,0,The economic rent associated with theemployment of labor is the excess of wages paid above the minimum amount neededto hire workers.,44,Chapter 1,Economic Rent,QuestionWhat would be
28、the economic rent if SL is perfectly elastic or perfectly inelastic?,45,Chapter 1,Land:A Perfectly Inelastic SupplyWith land inelastically supplied,its price is determined entirely by demand,at least in the short run.,Equilibrium in aCompetitive Factor Market,46,Chapter 1,Land Rent,Number of Acres,P
29、rice($peracre),Supply of Land,D2,D1,47,Chapter 1,Pay in the Military,During the Civil War 90%of the armed forces were unskilled workers involved in ground combat.Today,only 16%are unskilled workers involved in ground combat.,48,Chapter 1,Pay in the Military,Shortages of skilled personnel has occurre
30、d?Why?Hint:If there is a shortage,the wage must be below the?,49,Chapter 1,The Shortage ofSkilled Military Personnel,Number of Skilled Workers,Wage,SL,DL=MRPL,w*,50,Chapter 1,Pay in the Military,Military pay is based on years of service not MRP.MRP increases and the private sector pay is greater tha
31、n military pay.Many leave the military.,51,Chapter 1,Pay in the Military,SolutionSelective reenlistment bonusesBase pay on MRP,52,Chapter 1,Factor Markets with Monopsony Power,AssumeThe output market is perfectly competitive.Input market is pure monopsony.,53,Chapter 1,D=MRPL,Marginal and Average Ex
32、penditure,Units of Input,Price(per unitof input),0,1,2,3,4,6,5,5,10,15,20,54,Chapter 1,Factor Markets with Monopsony Power,Examples of Monopsony PowerGovernmentSoldiersMissilesB2 BombersNASAAstronautsCompany town,55,Chapter 1,Monopsony Power inthe Market for Baseball Players,Baseball owners created
33、a monopsonistic cartelReserve clause prevented competition for players1975-Free agency after six years1969-Average salary was$42,000($200,000 in 1999 dollars)1997-Average salary was$1,383,578,56,Chapter 1,Baseball owners created a monopolistic cartel1975 salaries were 25%of team expenditures1980 salaries were 40%of team expenditures,Monopsony Power inthe Market for Baseball Players,57,Chapter 1,Te
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