econ 312/302: microeconomics ii lecture 7: w/c 14th …factor market demand • a factor market...

ECON 312/302: MICROECONOMICS II

Lecture 7: W/C 14th March 2016

FACTOR MARKETS 2

Dr Ebo Turkson

15 - 2 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

• Monopsony.

the only buyer of a good in a given market.


Short-Run Factor Demand of a Firm

(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


Short-Run Factor Demand of a Firm

(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.


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


Exercises

4. A firm has a Cobb-Douglas production function

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

Chapter 15

Factor Markets

Part 2


Factor Market Demand

• A factor market demand curve is the sum

of the factor demand curves of the various

firms that use the input.

To derive the labor market demand curve, we

first

• determine the labor demand curve for each output

market and then

• sum across output markets to obtain the factor

market demand curve.


The Marginal Revenue Product Approach

• As the factor’s price falls, each firm, taking

the original market price as given, uses

more of the factor to produce more output.

As the market price falls, each firm reduces

its output and hence its demand for the input.

• A fall in an input price causes less of an increase

in factor demand than would occur if the market

price remained constant


Figure 15.4 Firm and Market

Demand for Labor


Market Structure and Factor Demands

• As we saw in Chapters 11 and 12,

MR = p(1 + 1/ε)

Thus, the firm’s marginal revenue product of labor

function is

LL MPpMRP

11


Figure 15.6 How Thread Mill Labor

Demand Varies with Market Structure


A Model of Market Power in Input and

Output Markets

• The inverse demand, p(Q), for the final

good is

p = 80 − Q.


A Model of Market Power in Input and

Output Markets (cont.)

• The marginal product of labor is 1

because one extra worker produces one

more unit of output. Thus,

MRPL = p . MPL = p,

The labor demand function is the same as

the output demand function,

w = 80 − L.


Figure 15.7 Effect of Output Market

Structure on Labor Market Equilibrium


Competitive Factor Market and

Monopolized Output Market

• The monopoly’s marginal revenue curve is twice as steep as the linear output demand curve it faces (Chapter 11):

MRQ = 80 − 2Q

The monopoly maximizes its profit where:

MRQ = 80 − 2Q = 20 = MC

And because the monopoly’s marginal product of labor is 1, its demand curve for labor equals its marginal revenue curve:

MRPL = MRQ × MPL = MRQ


Competitive Factor Market and

Monopolized Output Market (cont.)

• We obtain its labor demand function by

replacing Q with L and MRQ with w in its

marginal revenue function:

w = 80 − 2L

• A monopoly hurts final consumers and

drives some sellers of the factor

(workers) out of this market.


Monopolized Factor Market and

Competitive Output Market

• Now suppose that the output market is

competitive and that there is a labor monopoly.

One possibility is that the workers form a union that

acts as a monopoly.

• Because the competitive output market’s labor

demand curve is the same as the output

demand curve, the MR curve facing the labour

monopolist is the same as the MR of the output

monopolist; MRL = 80 − 2L

MRPL =MRL .MPL= = 80 − 2L.


Monopolized Factor Market and

Competitive Output Market

• If the MC=20, equilibrium in the labour market is

MRL =MC

80 − 2L=20.

L*=30

W = 80 – L = 50

Q*=30 since MPL=1

P = 80 – Q = 50

Here the output firm breaks even because

W=P


Monopoly in Successive Markets

• If the labor and output markets are both

monopolized, consumers get hit with a

double monopoly markup.



(cont.)

• The output monopoly’s marginal revenue

curve, MRQ = 80 − 2Q, is the same as its

labor demand curve, w = 80 − 2L.

• Because the labor demand curve is linear,

the labor monopoly’s marginal revenue

curve is twice as steeply sloped,

MRL = 80 − 4L



(cont.)

• If MRL = 80 − 4L

• Since MRL=MC

80 − 4L=20

L*=15

W = 80 – 2L = 50

Q*=15 since MPL=1

P = 80 – Q = 65


Figure 15.8 Double Monopoly Markup


Solved Problem 15.2

• How are consumers affected and how do

profits change in the example if the labor

monopoly buys the monopoly producer,

which is called vertical integration?


Monopsony

• A monopsony refers to a market condition

where there is only one buyer or

consumer. In this case one buyer of

labour input or one employer.

Here the firm in question is a sole buyer on

the input market but remains a monopolist or

PC firm on the output market

• A monopsony chooses a price-quantity

combination from the industry supply

curve that maximizes its profit.


Monopsony Profit Maximization

• Suppose that a firm is the sole employer

in town.

Marginal expenditure – the additional cost of

hiring one more worker.

The ME of Labour curve is steeper than the

labour SS curve.



•



• The Monopsonist hires a quantity of labour

that ensures that the ME of hiring each

additional worker equals the MB of hiring

that additional worker

MB is the price at which each additional output

produced by the additional worker is sold and

this coincides with the firms demand for labour


Monopsony Profit Maximization (cont.)

• Any buyer buys labor services up to the

point at which the marginal benefit/value

of the last unit of a factor equals the firm’s

marginal expenditure.

• Monopsony power - the ability of a single

buyer to pay less than the competitive

price profitably.


Figure 15.9 Monopsony and Perfect

Competitor Output Market


Monopsony Profit Maximization (cont.)

• The markup of the marginal expenditure

(which equals the value to the monopsony)

over the wage is inversely proportional to the

elasticity of supply at the optimum

1ME w

w


Monopsony and Monopolist on

Output market

W, P, ME ME

Pm=MEm A LS

P=ME B

C

W D

Wm E

LD (Same as Output Demand) =MB

Workers per day

Lm L MR


Welfare Effects of Monopsony

• By creating a wedge between the value to

the monopsony and the value to the

suppliers, the monopsony causes a

welfare loss in comparison to a

competitive market.


Figure 15.10 Welfare Effects of

Monopsony


Solved Problem 15.3

• How does the equilibrium in a labor

market with a monopsony employer

change if a minimum wage is set at the

competitive level?


Solved Problem 15.3

econ 312/302: microeconomics ii lecture 7: w/c 14th …factor market demand • a factor market...

Documents