Micro14 - Chapter 14 Markets For Factor Inputs Markets for...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 14 Markets For Factor Inputs Markets for factor inputs follow the same principles of market analysis as markets for goods and services. Types of Markets for Factor Inputs: Perfectly competitive input and output markets. Markets in which sellers of factors have monopoly power. Example: Labor unions in labor market. Markets in which buyers of factors have monopsony power. Example: Monopsony of the only mining company in a town over the miners in the town. Bilateral Monopoly: Markets in which both buyers and sellers of factor inputs have monopoly power. Example: The only mining company in town hiring unionized miners.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chapter 14 Markets For Factor Inputs Perfectly Competitive Input and Output Markets: Large number of sellers and buyers of a factor of production with none having a power to affect prices. Demand for a Factor Input When Only One Input is Variable: Factor demands are derived demand . They are derived from the firms’ profit maximizing problem and they depend on the firms’ level of output and the cost of inputs. From the optimizing principles of the firms, a firm will hire one more unit of labor if marginal revenue product of labor ( MRPL ) is greater the wages ( w ). MRPL = MR.MPL where, MR is the marginal revenue and MPL is the marginal physical product of labor. Note that, MRPL = VMPL (Value of Marginal Product of Labor).
Background image of page 2
Chapter 14 Markets For Factor Inputs Perfectly Competitive Input and Output Markets : In perfectly competitive input and output markets MRPL = P.MPL This is because, in perfectly competitive output markets P = MR. In monopoly output markets P > MR. This makes MRPL in perfectly competitive (output)market to be larger than MRPL in monopoly (output)market, MR.MPL < P.MPL (see graph below). The graph shows that, at any wage rate, labor demanded is higher in competitive  output market than in the monopoly output market.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chapter 14 Markets For Factor Inputs MRPL curve is a decreasing function because MPL falls as hours of work increases ( the law of diminishing return ). Supply of Labor : In a competitive labor market, a firm faces a perfectly elastic supply of labor (SL) at a given wage rate w*. Hiring of labor by a firm in perfectly competitive market will not affect the market wage w*.
Background image of page 4
Chapter 14 Markets For Factor Inputs A Decrease in Wage: A decrease in wage increases quantity of Labor demanded by firms.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chapter 14 Markets For Factor Inputs Demand For Factor Input When Several Inputs are Variable: From the firms’ constrained optimizing conditions : MPL/w = MPK/r Where, MPL and MPK are marginal product of labor and marginal product of capital, respectively, w is the wage and r is the “rental cost” of capital. When two or more inputs are variable, a firm’s demand for labor depends on
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/17/2011 for the course ECON 100B taught by Professor Bacolod during the Winter '05 term at UC Irvine.

Page1 / 30

Micro14 - Chapter 14 Markets For Factor Inputs Markets for...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online