Competitive Labor Markets Factor Markets Part II Chapter

Competitive Labor Markets Factor Markets Part II (Chapter 18)

Derived Demand for Inputs Product Market 1 Firm in Factor Market T-Shirt Market Low Skilled Workers Price S ------- $10 ------- Q Demand for product E 1 D D 2 Wages/hr MRP 1 MRP 2 Qty Price of Product MFC $200 MRP = MPL * P End Result: ↑ Workers hired Wage rate Unchanged! MRP = Value of what additional worker produces MRP = MP (input) X Price (output)

Individual Firms are Wage Takers Entire Factor Market 1 Company Factor Market (All LAW FIRMS) 1 LAW FIRM Entry level Lawyers Wage Rate S Q 1 $160, 000 D 1 Qty When all firms hire more workers => wage rate rises E 1 ------------- $160, 000 ------- E 1 Wages Q 1 MFC 1 MRP 1 Qty When one firm hires more workers => wage rate is unchanged

Supply Curve for Inputs • Marginal Factor Cost (MFC) is the supply curve for inputs • • In labor market MFC = Wage Rate Also called MRC (marginal resource cost) Supply curve for 1 firm Regardless if firms is a monopoly, oligopoly, perfect or monopolistic competition => MFC is horizontal MFC MRP • Most firms are competitive in the factor market (input market) • the firm has no effect on market price for inputs • All 4 market structures are “wage takers” in the labor market. -Individual Firms have a horizontal supply curve -

Shifts in Demand for Labor MRP shifts right when: • Demand for Product ↑ • Productivity Rises (MP ↑) – Technology, working conditions, etc. . . MRP 2 • Price falls of complementary resource – MRPL Example: Workers & Machines that work together If Machine price ↓ => Demand for workers ↑

Substitute Resource A substitute input replaces another input: i. e. when machines can replace workers When price of substitute input ↓ => MRPL shift is indeterminate machines workers (could ↓ , ↑ or be same) Labor Market ? MRPL MRP shift is dependent on two opposing effects. 1) Substitution Effect- implies you would hire less workers (MRPL ↓ ) • Logic: machines prices fall => hire less workers 2) Output Effect- implies you hire more workers (MRPL ↑ ) • Logic: machine prices fall => MC falls => so output increases => hire more workers • End result: dominant force determines MRP shift

Competitive Labor Market Worksheet