Module Micro 35 Econ 71 The Market for

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Module Micro: 35 Econ: 71 The Market for Labor KRUGMAN'S MICROECONOMICS for AP* Margaret

Module Micro: 35 Econ: 71 The Market for Labor KRUGMAN'S MICROECONOMICS for AP* Margaret Ray and David Anderson

Do Now Your Labor Supply

Do Now Your Labor Supply

Reading ahead 1/5: Module 69 1/6 & 7: Module 71 1/ 7 & 8

Reading ahead 1/5: Module 69 1/6 & 7: Module 71 1/ 7 & 8 : Module 70, hand in FRQ #2, page 694. 1/8: Module 72 1/9 : Module 73

Housekeeping 1/14: Microeconomics cumulative test.

Housekeeping 1/14: Microeconomics cumulative test.

What you will learn in this Module: • What factors determine labor supply. •

What you will learn in this Module: • What factors determine labor supply. • How to find equilibrium in the perfectly competitive labor market. • How equilibrium in the labor market is determined if either the product, or the factor, market is not perfectly competitive.

The Supply of labor • Work versus leisure • Wages and labor supply

The Supply of labor • Work versus leisure • Wages and labor supply

The Supply of labor Hourly wage • Substitution effect Labor supply IE>SE, downward sloping

The Supply of labor Hourly wage • Substitution effect Labor supply IE>SE, downward sloping • Income effect • How do rising wages impact each? SE>IE, upward sloping Hours of work (week)

Shifts of the Labor Supply Curve • Changes in preferences and social norms •

Shifts of the Labor Supply Curve • Changes in preferences and social norms • Changes in population • Changes in opportunities (structural) • Changes in wealth

Equilibrium in the Labor Market • Up to this point we have assumed that

Equilibrium in the Labor Market • Up to this point we have assumed that both the product and labor markets are perfectly competitive • There are differences when either the product market or labor market is not perfectly competitive Wage Market Labor Supply W* Market Labor Demand E* Quantity of Labor (workers)

Imperfect Competition in the Product Market W* • Recall that MR < P with

Imperfect Competition in the Product Market W* • Recall that MR < P with imperfect competition. That means the value of the marginal product = MP x MR. Wage VMPL • With imperfect competition the value of the marginal product is called marginal revenue product (MRP). MRP = MP x MR MRPL Em Ec Quantity of Labor (workers)

Table 71. 1 Marginal Revenue Product of Labor with Imperfect Competition in the Product

Table 71. 1 Marginal Revenue Product of Labor with Imperfect Competition in the Product Market Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Imperfect Competition in the Labor Market MFCL Wage • A monoposony is a single

Imperfect Competition in the Labor Market MFCL Wage • A monoposony is a single buyer of a factor of production. Labor Supply $12 $10 • With imperfect competition in a factor market, MFC > W 3 Quantity of Labor (workers)

Snow Shoveling • Homeowner is monopsonist. • Teenagers are workers. • Different leisure /

Snow Shoveling • Homeowner is monopsonist. • Teenagers are workers. • Different leisure / work tradeoffs. • First hire costs $ 10 per hour. • Second hire costs $ 20 per hour. But marginal cost is $30…. because first worker gets paid another $10.

Table 71. 2 Marginal Factor Cost of Labor with Imperfect Competition in the Labor

Table 71. 2 Marginal Factor Cost of Labor with Imperfect Competition in the Labor Market Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Terminology • Marginal Factor Cost (MFC): cost of additional factor of production. • Marginal

Terminology • Marginal Factor Cost (MFC): cost of additional factor of production. • Marginal Resource Cost (MRC): means same thing. Used often on AP Exam.

Practice Labor Supply Under Monopsony # 14 and # 15

Practice Labor Supply Under Monopsony # 14 and # 15

How does this compare with perfect competition? Figure 71. 6 Equilibrium in the Labor

How does this compare with perfect competition? Figure 71. 6 Equilibrium in the Labor Market with Imperfect Competition Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Equilibrium with Imperfect Competition MFCL Wage Labor Supply MRP W* • Monopsony power allows

Equilibrium with Imperfect Competition MFCL Wage Labor Supply MRP W* • Monopsony power allows firms to pay a wage below MRPL E* Quantity of Labor (workers)

Summary – Supply and Demand • Supply – income and substitution effects • Shifts:

Summary – Supply and Demand • Supply – income and substitution effects • Shifts: preference, population, opportunities, and wealth. • Equilibrium determines wage. • In perfect competition, firm is wage taker.

Summary – Imperfect Competition • Monopoly – Marginal revenue product § Hire based on

Summary – Imperfect Competition • Monopoly – Marginal revenue product § Hire based on MRP = MFC § At same wage, fewer workers than PC • Monopsony – Marginal factor cost. § Hire based on MFC = MRP § Fewer workers than pure competition at lower wages.

Exit Ticket • Graph a labor market under monopsony. • Show wages and employment

Exit Ticket • Graph a labor market under monopsony. • Show wages and employment if there was perfect competition.