Ch 14 Input markets - 14 INPUT MARKETS MARKETS FOR FACTOR...

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INPUT MARKETS 14
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MARKETS FOR FACTOR INPUTS 1. Perfectly competitive factor markets; 2. Input markets in which buyers of factors have monopsony power; 3. Input markets in which sellers of factors have monopoly power. Econ 100A Mortimer upstream downstream
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COMPETITIVE FACTOR MARKETS In a competitive factor market, a firm can buy any amount of labor it wants without affecting the price of labor (wage). Therefore, the firm faces a perfectly elastic supply curve. Econ 100A Mortimer Labor Market AE, ME, S w* w* w L Hiring by a Firm MV, D w L Additional benefit from hiring one more unit of labor = additional cost of the labor l * L* Market supply of labor Market demand for labor
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COMPETITIVE FACTOR MARKETS: FIRM’S DEMAND Only Labor Input Is Variable marginal revenue product Additional revenue resulting from the sale of output created by the use of one additional unit of an input. MRP L is the additional output obtained from the additional unit of this labor (∆Q/∆L), multiplied by the additional revenue from an extra unit of output (ΔR/ΔQ). MRP L = MP L MR 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. Econ 100A Mortimer In a competitive output market, MR=P (a competitive firm faces a horizontal demand curve); therefore, MRP L = MP L ·P
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COMPETITIVE FACTOR MARKETS: FIRM’S DEMAND Only Labor Input Is Variable Econ 100A Mortimer MRP L = MP L ·P MRP L = MP L ·MR L w Competitive output market : MRP L declines as L increase due to diminishing marginal returns to labor Monopolistic output market: MRP L declines as L increases due to 1) diminishing marginal returns to labor and 2) a downward sloping MR curve Recall: MR < P The firm hires L up to the level where w* = MRP L = MR·MP L MR = w*/MP L = MC (*review Ch. 7 slides p. 11) w* L Q MP L Comp: MR=P Monop: MR Comp: MRP L Monop: MRP L 10 500 25 10 9 250 225 11 520 20 10 8 200 160 12 535 15 10 7 150 105 13 545 10 10 6 100 60
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COMPETITIVE FACTOR MARKETS: FIRM’S DEMAND Demand for a Factor Input When Several Inputs Are Variable When both L and K are variable, a firm’s demand for L is affected by both MP
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This note was uploaded on 09/27/2009 for the course ECON 100 taught by Professor Staff during the Spring '08 term at University of California, Berkeley.

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Ch 14 Input markets - 14 INPUT MARKETS MARKETS FOR FACTOR...

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