Factors Market$ Land (rent)

$ Labor (wages),

$ Capital (interest)

$ Entrepreneurship (profit)

Factors Firms use the factors to produce the goods and

services. Central question of Economics is the question of scarcity.

How much or many of a factor is very dependent on the demand for a product or serviceShifts of demand in the product market

industry will effect the demand for the factor being used

Take what we have studied with production theory and market structures apply to labor market

Industry : Labor Market simply Supply and Demand

Demand for the Factor is derived demandAll the firms need for laborBased on the demand for their productIndirect relationship between Q and wage

Supply of workers or The factor is the actual Number of workers seeking work.Direct relationship between Q and wage

Purely Competitive labor market

Supply simply is number of workers availableCan shift if wages in another increase change

Derived Demand for labor: can shift if the price of the product changes or price of other factors change Machine or man which costs more Changes in labor productivity Tires up in the product market Shifts demand for

product

Demand for the factor (labor)/ non-price or wage determinant Is the result of the elasticity of the product, ease of substitution the amount of time the firm has to change production

methods and materials

Labor industry

Market clears at equilibrium with no shortages or surplus. If wage above equilibrium more workers than

firms want= surplus If wage below equilibrium, firm willing to hire

more but workers do not want to work

Wage determined at equilibrium and quantity at equilibrium

Min. wage a price floor above Causes lay offs, surplus of workers and

unemployment

Now the firm hiring workers Four assumptions effect the behavior of

the firm and they do use marginal analysis to set the wage and number

Many workers With identical skills: unskilled Total knowledge by firm and workers of

what the equilibrium wage should be Easy exit and entry of workers

Results

Firm is a wage taker

Therefore wage is horizontal and is MFC---reason wage is constant, perfectly elastic

MFC equals the supply of labor for the firm since it perceives it can get all the workers it needs at the market equilibrium wage

Labor Input (workers per week)

The firm

D

S

Labor Input (workers per week)

W1

SL = MFC

Industry labor market

W1

L1

Results

Firm is a wage taker

With no hiring power Firm knows it does not need to hire

above the equilibrium Firm knows if it hires below

equilibrium the workers will go work in another industry or for someone else

Productivity Therefore using marginal analysis the

number of workers hired need to equal the productivity of the workers to the firm and their contribution to revenue

MPP= output of the workers

MR= the contribution of hiring one more worker and output

Therefore it’s the price of the product also in purely competitive market structure

MPP X MR = MRP or the firms demand for labor

Summary Wage taker No market power Firm will hire where MFC=MRP Remember that

MRP=MPP x MR MFC is the firm’s

supply of workers MRP is the firm’s

demand for workers based on their productivity

MFC < MRP

MFC > MRP

• MRP = MFC• Optimal number of workers

Labor Input (workers per week)

MRP

$4981

12

SL = MFC

Wag

e an

d M

RP

per

wor

ker

($)

Make connections: Efficient use of resources Should be where the

Cost MFC ratio to mpp X mr (MRP) is equal for the use of all resources or factors

Every firm wants to use its factors in a profit maximizing combination were MR=MC

Least cost combination: true efficiencyAnd for the factors were the ratio of

Cost minimization

MPP of laborprice of labor

= MPP of captialprice of capital

MPP of landprice of land

=

mrp/wage=mrp=rent=mrp/interest=mrp/profit

Purely competitive Factors market

Labor Input (workers per week)

The firm

D

S

Labor Input (workers per week)

W1

SL = MFC

Industry labor market

W1

L1

Now line it up with purely competitive product market

Initial market conditions

S

D

Quantity of Wheat(industry)

Quantity of Wheat(firm)

d = MRPe

Qe

Break-even

MC

ATC

qe

Now what if nonprice determinants effect the product market

Higher price createseconomic profit

S1

D1

Quantity of Wheat(industry)

Quantity of Wheat(firm)

P1

Q1 q1

MC

ATC

q2

D2

Q1

P2

European crop failure increases U.S. Demand

Is the product market related to the factors market

Shifts of demand will effect DD and cause DD to shift right or left influencing wage and the firm’s MFC

Changes in the productivity of labor, wages will effect the supply curve up in the product market resulting in higher or lower prices. This then effects the factors market DD

Remember to shift MRP if mpp or mr effected

New profits in the product market

S1

D1

Quantity of Wheat(industry)

Quantity of Wheat(firm)

P1

Q1 q1

MC

ATC

D2

S2

Economic profit attracts new firmsPrice fall to break-even

MRP = MFC

Figure 27-1, Panel (a)

How to find MRP

TotalPhysical Marginal MarginalProduct Physical Product Revenue Product

Labor Input (TPP) (MPP) (MRP) (MR = $6)

6 882

7 1,000

8 1,111

9 1,215

10 1,312

11 1,402

12 1,485

13 1,561

118 $708

111 $666

104 $624

97 $582

90 $540

83 $498

76 $456

What if the firm has power Monopoly=1 firm with unique product Monopsony is a firm that hires with power It could control wage ==wage setter It would hire fewer workers at lower wages Assumptions would be different

Fewer workers With unskills –can be replaced Firm knows it has power to pay less Workers have a difficult time finding work with

someone else

Monopsony The firm has hiring power Many workers but one or several firms that

have power Therefore industry derived demand

curve(downward sloping) is the Firm’s The firms MRP or demand line is a function

of their power The Wage line will move up from supply--

just the opposite of MR derived from Demand in the product market.

Wage Setter with power

MRP is DDFor the firm

Supply of all workers

MFC moves upwardFirm must pay more to hire more workers

PC wage

Firm goes toMrp=mfc andLooks down to The lowestWage he canpay

DWL unemployment welfare

MFC

dwl

Hiring DecisionGoes to MRP=MFCLooks downPays less and hires

Fewer workers

Firm has the power

Monopsony and min wage

MFC