Unit 14 Markets for factor inputs Outcomes Define

Unit 14 Markets for factor inputs

Outcomes • Define and discuss competitive factor markets • Define and discuss factor markets with monopsony power • Define and discuss factor market with monopoly power 2

Competitive factor market • Definition: – A market with a large number of buyers and sellers – Of factors of production – Each is a price taker • Need to analyze the demand for a factor by individual firms. • Demand added = market demand 3

Demand for a factor input when only one is a variable • Short run! • FOP demand curve = Downward sloping • FOP demand = Derived demand – Demand for an input – That depends on and is derived from – Both the firm’s level of output, and – The cost of inputs 4

Demand for a factor input when only one is a variable • How to determine derived demand? – Firm produces only with 2 inputs: K and L – Hired at price r and wage w – L variable – Marginal revenue product of labour MRPL • Additional revenue from sale of output created by one additional unit of an input MRPL = (MR)(MPL) 5

Demand for a factor input when only one is a variable • Holds for all competitive factor markets • Examine MRPL: – Perfectly competitive output @ market price P – MR = P – Thus, MRPL = (MPL)(P) (Figure 14. 1) – But MRPL > w = hire more labour, if MRPL < w = lay off labour – MRPL = w : Profit maximizing amount of labour (Figure 14. 2) 6

Demand for a factor input when only one is a variable 7

Demand for a factor input when only one is a variable 8

Demand for a factor input when only one is a variable 9

Demand for a factor input when several inputs are variable • Firms choose simultaneously quantities of two or more variable inputs. – Hiring problem: Change in price for one will change demand for other. 10

The market demand curve • For each industry, the demand for labour must be calculated and added together. 11

Supply of inputs to a firm • Perfectly competitive = firm can purchase as much of input at a fixed market price 12

Supply of inputs to a firm • Average expenditure firm: – Supply curve representing the price per unit that a firm pays for a good • Marginal expenditure firm: – Curve describing the additional cost of purchasing one additional unit of a good ME = MRP ME = w 13

Market supply of inputs • Market Supply curve for factor input usually upward sloping • When the input is labour = backward bending supply of labour 14

Market supply of inputs 15

Equilibrium in a competitive factor market 16

Equilibrium in a competitive factor market 17

Equilibrium in a competitive factor market 18

Factor markets with monopsony power • Focus on a pure monopsony: One buyer • Buyer power such as Toyota and GM • Bargaining power: – Negotiate lower prices due to quantities bought. – Power determined buy number of buyers and purchase itself 19

Monopsony power: Marginal and average expenditure 20

Purchasing decisions with monopsony power • How much input to buy? • Should buy where ME=MR and MRP=ME 21

Factor markets with monopoly power • Seller power such as Eskom • Focus on labour unions: Monopolist in the sale of labour services 22

Monopoly power over wage rate 23

Unionized and nonunionized workers • Union uses monopoly power to increase member’s wages = fewer union workers employed – Move to nonunion section – Initially choose not to join union • What happens in the nonunionized section? 24

Unionized and nonunionized workers 25