ECON 312/302: MICROECONOMICS II Lecture 6: W/C 7th FACTOR ... · 1 ECON 312/302: MICROECONOMICS II...

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ECON 312/302: MICROECONOMICS II

Lecture 6: W/C 7th March 2016

FACTOR MARKETS 1

Dr Ebo Turkson

Chapter 15

Factor Markets

Part 1

2

15 - 3 Copyright © 2012 Pearson Education. All rights reserved.

Topics

• Competitive Factor Market.

Competitive factor and output markets

• Effect of Monopolies on Factor Markets.

Competitive factor and monopolized output

markets

Monopolized factor and Competitive output

markets

Monopolist in successive markets


Topics

• Monopsony.

the only buyer of a good in a given market.

• Welfare Effects

A comparative Analysis

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Competitive Factor Market

• Factor markets are competitive when

there are many small buyers and sellers.

• Here the firm is a price taker. i.e. the

wage rate is given (w is given).


Short-Run Factor Demand of a Firm

• A profit-maximizing firm’s demand for a

factor of production is downward sloping.

• In the short run, a firm has a fixed amount

of capital:

K

and can vary the number of workers, L, it

employs.

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(cont.)

• Marginal revenue product of labor

(MRPL) - the extra revenue from hiring

one more worker:

MRPL = MR ∙ MPL

To find this we know output q =f(L) and P=f(q)

Thus

R(L)=P.q=P[f(L)].f(L)

MRPL =dR/dL=(dR/dq).(dq/dL)=MR x MPL



(cont.)

• The firm maximizes its profit by hiring

workers until the marginal revenue

product of the last worker exactly equals

the marginal cost of employing that

worker, which is the wage:

MRPL = w

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(cont.)

• A competitive firm faces an infinitely

elastic demand for its output at the market

price, p, so:

MR = p

and

MRPL = p ∙ MPL



(cont.)

• The competitive firm hires labor to the point at

which:

MRPL = p ∙ MPL = w (1)

• The wage line is the supply of labor the firm faces.

It is horizontal (infinitely elastic)

• The marginal revenue product of labor curve,

MRPL, is the firm’s demand curve for labor

Its downward sloping because although P is fixed MPL

declines as more labour is employed.

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Table 15.1 Marginal Product of Labor, Marginal

Revenue Product of Labor, and Marginal Cost

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Figure 15.1 The Relationship Between

Labor Market and Output Market Equilibriaw

,V

MP

L, $ p

er

unit

Labor supplycurve

MRPL, Labor

demand curve

L, Workers per hour

620 3 4 5

(a) Labor Profit-Maximizing Condition

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w = 12

9

18

15

MC

,p, $ p

er

unit

MC

p

27130 18 22 25

2

3

2.4

6

4

q, Units of output per hour

(b) Output Profit-Maximizing Condition


Profit Maximization Using Labor or Output

• The output profit-maximizing condition from

Chapter 8, MC = p, is equivalent to the labor

profit-maximizing condition in Equation 15.1.

• By dividing Equation 1 by MPL , we find that:

MCMP

wp

L

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How Changes in w and P affect Factor

Demand

• If w falls but the p remains the same, the SS of

labour shifts down to S2

The firm hires more workers and we move from a to b

where employment increases from 4 to 6

• If p falls but the w remains the same, the DD of

labour shifts down to D2

The firm hires reduces its demand for workers and we

move from a to 2 where employment decreases from 4

to 2.

At the same wage rate this involves a shift of the labour

DD curve.


Figure 15.2 Shift of and Movement

Along the Labor Demand Curve

w,V

MP

L, $ p

er

unit

542 6

D2 = $2 ´ MPL

D1 = $3 ´ MPL

L, Workers per hour

0

8

w1

= 12

w2

= 6

S1

S2

a

b

c

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Exercises

1. How does a competitive firm adjust its demand

for labor when the government imposes a specific

tax of τ on each unit of output?

2. In a competitive market, firms sell output at a

price of ₵ 20. Marginal productivity per hour of

the workers is described by the equation MPL =

40 - L. What is the firm’s demand curve for labor?

If the firm can hire labor from a competitive labor

market at a wage of ₵5 per hour, how many

workers should the firm hire?


Exercises

3. A firm has a Cobb-Douglas production function

given as

q=L0.6K0.2

Suppose that in the Short run, the mill’s capital (K)

is fixed at 32 units and that it can only increase

output q by increasing the amount of labour (L)

a. Determine the firms’ SR production function

b. If the firms’ competitive output price is ₵50 find its

labour demand curve

c. What is the MRPL between the 31st and 32nd

worker who is hired at the competitive price?

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Long-Run Factor Demand

• In the long run, the firm may vary all of its

inputs.

The long-run labor demand curve takes account of

changes in the firm’s use of capital as the wage

rises.


Figure 15.3 Labor Demand of a

Thread Mill

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Exercises


given as

q=ALαKβ

a. Solve for the factor demand functions

b. If the firms’ competitive output price is p find the

wage rate

c. What is the share of the firms revenue paid to

labour and capital?

d. If α=0.6, β=0.2 and A=1 find the LR labour and

capital demand curve equations



(cont.)

• The firm maximizes its profit by hiring

workers until the marginal revenue

product of the last worker exactly equals

the marginal cost of employing that

worker, which is the wage:

MRPL = w

12



(cont.)

• The competitive firm hires labor to the point at

which:

MRPL = p ∙ MPL = w (1)

• The wage line is the supply of labor the firm faces.

It is horizontal (infinitely elastic)

• The marginal revenue product of labor curve,

MRPL, is the firm’s demand curve for labor

Its downward sloping because although P is fixed MPL

declines as more labour is employed.


Exercises


given as

q=L0.6K0.2

Suppose that in the Short run, the mill’s capital (K)

is fixed at 32 units and that it can only increase

output q by increasing the amount of labour (L)

a. Determine the firms’ SR production function

b. If the firms’ competitive output price is ₵50 find its

labour demand curve

c. What is the MRPL between the 31st and 32nd

worker who is hired at the competitive price?

13


Long-Run Factor Demand

• In the long run, the firm may vary all of its

inputs.

The long-run labor demand curve takes account of

changes in the firm’s use of capital as the wage

rises.


Figure 15.3 Labor Demand of a

Thread Mill

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Exercises


given as

q=ALαKβ

a. Solve for the factor demand functions

b. If the firms’ competitive output price is p find the

wage rate

c. What is the share of the firms revenue paid to

labour and capital?

d. If α=0.6, β=0.2 and A=1 find the LR labour and

capital demand curve equations

ECON 312/302: MICROECONOMICS II Lecture 6: W/C 7th FACTOR ... · 1 ECON 312/302: MICROECONOMICS II...

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