INPUT MARKET

PRICING OF FACTORS OF PRODUCTION

The demand for inputs the firm’s demand for

labor and other inputs is derived indirectly from the consumer demand for its final products

The supply of inputs

Basically, there are two ways, how the individual supply of labor can be perceived:

supply of one worker, supply to one firm.

INPUT DEMAND OF PROFIT-MAXIMIZING FIRMS

The input demand depends on:

the productivity of the input, how high return is from that input, what price for can be sold the product made by that input,

the cost expends on the input.

Marginal Revenue Product

Under perfect competition on product market – the marginal product that the worker brings in (MPL) can all be sold at the competitive output price (P) MRPL = MPL x PA

Under imperfect competition on product market – hence with MR < P, each unit of labor’s marginal product will be worth the MR to the firm

MRPL = MPL x MR

Marginal Revenue Product

EUR

F (L)

MRP = MP . P

Marginal Factor Costs – MFC

additional cost induced by engaging additional unit of input

„price-taker“ firm hires that small part of the input, that can’t affect its price therefore, additional costs on factor equals to the price: MFC = PF

F(L)

EUR (PF, w ..)

MFC = AFC

Equilibrium of the firm

to maximize the profit, input should be added until the marginal revenue product of input falls to equal its marginal input cost

MRP = MFC

MRP > MFC – an additional unit of input brings in more, than it costs therefore, firms hire additional unit and extend the production,

MRP < MFC – firm will hire less of given input and reduce the production.

F(L)

EUR (PF, w ..)

MFC = AFC

MRP = D

F*

LABOR MARKET

the change of wage rate can have two effects on the decision between work and free time and induces that the supply curve may slope positively or negatively:

substitution effect – higher wage rate can lead to substitution of free time for work to increase in quantity of labor supplied,

income effect – higher wage rate increases the real income (assuming, that the prices of goods and services stay constant) leads to decrease in quantity of labor supplied.

supply curve is backward-bending as a result of these effects

Individual Supply of Labor

w

L

SE

IE

LABOR MARKET IN SITUATION OF

IMPERFECT COMPETITION

Monopoly advantage on demand or supply side:

1. monopsony – monopoly power is on the side of buyer on the labor market,

2. labor unions – existence of monopoly power on the side of seller on the labor market.

FOUR WAYS LABOR UNIONS AFFECT THE WAGE RATE

a) Unions can reduce the supply of labor  - an effect is leftward shift of supply curve, which lower total employment and raise wages in this labor market

b) use their collective bargaining power to raise standard wage rates directly - as a result, some of the workers are excluded from jobs as if the union had directly limited entry

c)  increasing the demand for labor (for union labor) – shift in the demand for unionized labor will shift up both wage rates and employment

d)     combating monopsony power of business – if unions represent the monopoly on the demand side, if there is a single buyer of a labor (in a region or sector) it is called monopsonist

Tasks:

1. Graphically depict:

a) Impact of decline in marginal product of labor on the demand for labor,

b) Impact of decline in marginal product of capital on the demand for labor.

2. Explain and graphically depict the impact on wages level of:

a) Free migration of inhabitants among different regions inside the country,

b) Imposition of import quotas on products.

3. Graphically depict and explain decision of firm about the amount of workers hired, knowing:

a) The marginal product of labor has declined ceteris paribus,

b) The real wages has increased ceteris paribus.