CHAPTER 14 - PHALL-82241 PINDYCK CHAPTER 14 page 6 of 22 FIGURE 14.1 Marginal Revenue Product Wage(dollars per hour Competitive Output Market MRPL

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Unformatted text preview: PHALL-82241 PINDYCK CHAPTER 14 page 6 of 22 FIGURE 14.1 Marginal Revenue Product Wage (dollars per hour) Competitive Output Market MRPL � MPL · P Monopolistic Output Market MRPL � MPL · MR Hours of work In a competitive factor market in which the producer is a price taker, the buyer’s demand for an input is given by the marginal revenue product curve. The MRP curve falls because the marginal product of labor falls as hours of work increase. When the producer of the product has monopoly power, the demand for the input is also given by the MRP curve. In this case, however, the MRP curve falls because both the marginal product of labor and marginal revenue fall. Fig 14-01.EPS PHALL-82241 PINDYCK CHAPTER 14 FIGURE 14.2 Hiring by a Firm in the Labor Market (with Fixed Capital) Price of labor w* SL MRPL � DL L* Quantity of labor In a competitive labor market, a firm faces a perfectly elastic supply of labor SL and can hire as many workers as it wants at a wage rate w*. The firm’s demand for labor DL is given by its marginal revenue product of labor MRPL. The profit-maximizing firm will hire L* units of labor at the point where the marginal revenue product of labor is equal to the wage rate. Fig 14-02.EPS page 7 of 22 PHALL-82241 PINDYCK CHAPTER 14 FIGURE 14.3 A Shift in the Supply of Labor Price of labor w1 S1 w2 S2 MRPL = DL L1 L2 Quantity of labor When the supply of labor facing the firms is S1, the firm hires L1 units of labor at wage w1. But when the market wage rate decreases and the supply of labor shifts to S2, the firm maximizes its profit by moving along the demand for labor curve until the new wage rate w2 is equal to the marginal revenue product of labor. As a result, L2 units of labor are hired. Fig 14-03.EPS page 8 of 22 PHALL-82241 PINDYCK CHAPTER 14 page 9 of 22 FIGURE 14.4 Firm’s Demand Curve for Labor (with Variable Capital) Wage (dollars per hour) 20 A C 15 B DL 10 MRPL1 5 40 80 120 MRPL2 160 When two or more inputs are variable, a firm’s demand for one input depends on the marginal revenue product of both inputs. When the wage rate is $20, A represents one point on the firm’s demand for labor curve. When the wage rate falls to $15, the marginal product of capital rises, encouraging the firm to rent more machinery and hire more labor. As a result, the MRP curve shifts from MRPL1 to MRPL2, generating a new point C on the firm’s demand for labor curve. Thus A and C are on the demand for labor curve, but B is not. Fig 14-04.EPS Hours of work PHALL-82241 PINDYCK CHAPTER 14 page 10 of 22 FIGURE 14.5 The Industry Demand for Labor Wage (dollars per hour) 15 Wage (dollars per hour) 15 Horizontal Sum If Product Price Unchanged 10 10 MRPL2 MRPL1 Industry Demand Curve 5 5 50 100 (a) 120 150 Labor (worker-hours) L0 L1 L2 (b) Labor (worker-hours) The demand curve for labor of a competitive firm, MRPL1 in (a), takes the product price as given. But as the wage rate falls from $15 to $10 per hour, the product price also falls. Thus the firm’s demand curve shifts downward to MRPL2. As a result, the industry demand curve, shown in (b), is more inelastic than the demand curve that would be obtained if the product price were assumed to be unchanged. Fig 14-05.EPS PHALL-82241 PINDYCK CHAPTER 14 FIGURE 14.6 The Short- and Long-Run Demand for Jet Fuel Price MRPSR MRPLR Quantity of jet fuel The short-run demand for jet fuel MRPSR is more inelastic than the long-run demand MRPLR. In the short run, airlines cannot reduce fuel consumption much when fuel prices increase. In the long run, however, they can switch to longer, more fuelefficient routes and put more fuel-efficient planes into service. Fig 14-06.EPS page 11 of 22 PHALL-82241 PINDYCK CHAPTER 14 page 12 of 22 FIGURE 14.7 A Firm’s Input Supply in a Competitive Factor Market Price (dollars per yard) Market Supply of Fabric Price (dollars per yard) S Supply of Fabric Facing Firm Market Demand for Fabric 10 D 100 (a) 10 ME = AE Demand for Fabric Yards of fabric MRP 50 (b) Yards of fabric In a competitive factor market, a firm can buy any amount of the input it wants without affecting the price. Therefore, the firm faces a perfectly elastic supply curve for that input. As a result, the quantity of the input purchased by the producer of the product is determined by the intersection of the input demand and supply curves. In (a), the industry quantity demanded and quantity supplied of fabric are equated at a price of $10 per yard. In (b), the firm faces a horizontal marginal expenditure curve at a price of $10 per yard of fabric and chooses to buy 50 yards. Fig 14-07.EPS PHALL-82241 PINDYCK CHAPTER 14 FIGURE 14.8 Backward-Bending Supply of Labor Wage (dollars per hour) Supply of Labor Hours of work per day When the wage rate increases, the hours of work supplied increase initially but can eventually decrease as individuals choose to enjoy more leisure and to work less. The backward-bending portion of the labor supply curve arises when the income effect of the higher wage (which encourages more leisure) is greater than the substitution effect (which encourages more work). Fig 14-08.EPS page 13 of 22 PHALL-82241 PINDYCK CHAPTER 14 page 14 of 22 FIGURE 14.9 Substitution and Income Effects of a Wage Increase 720 R w � $30 Income (dollars per day) 240 P w � $10 B C A Q 12 16 19 24 Hours of leisure Substitution Effect Income Effect When the wage rate increases from $10 to $30 per hour, the worker’s budget line shifts from PQ to RQ. In response, the worker moves from A to B while decreasing work hours from 8 to 5. The reduction in hours worked arises because the income effect outweighs the substitution effect. In this case, the supply of labor curve is backward bending. Fig 14-09.EPS PHALL-82241 PINDYCK CHAPTER 14 page 15 of 22 FIGURE 14.10 Labor Market Equilibrium Competitive Output Market Monopolistic Output Market Wage Wage SL SL vM wM wC B A P · MPL DL = MRPL LC (a) Number of workers DL = MRPL Number of workers LM (b) In a competitive labor market in which the output market is competitive, the equilibrium wage wc is given by the intersection of the demand for labor (marginal revenue product) curve and the supply of labor curve. This is point A in part (a) of the figure. Part (b) shows that when the producer has monopoly power, the marginal value of a worker vM is greater than the wage wM. Thus too few workers are employed. (Point B determines the quantity of labor that the firm hires and the wage rate paid.) Fig 14-10.EPS PHALL-82241 PINDYCK CHAPTER 14 FIGURE 14.11 Economic Rent Wage SL Economic Rent A w* B DL � MRPL 0 L* Number of workers The economic rent associated with the employment of labor is the excess of wages paid above the minimum amount needed to hire workers. The equilibrium wage is given by A, at the intersection of the labor supply and labor demand curves. Because the supply curve is upward sloping, some workers would have accepted jobs for a wage less than w*. The green-shaded area ABw* is the economic rent received by all workers. Fig 14-11.EPS page 16 of 22 PHALL-82241 PINDYCK CHAPTER 14 page 17 of 22 FIGURE 14.12 Land Rent Price (dollars per acre) Supply of Land s2 s1 D2 D1 Number of acres When the supply of land is perfectly inelastic, the market price of land is determined at the point of intersection with the demand curve. The entire value of the land is then an economic rent. When demand is given by D1, the economic rent per acre is given by s1, and when demand increases to D2, rent per acre increases to s2. Fig 14-12.EPS PHALL-82241 PINDYCK CHAPTER 14 FIGURE 14.13 The Shortage of Skilled Military Personnel Wage SL w* w0 Shortage DL = MRPL Number of skilled workers When the wage w* is paid to military personnel, the labor market is in equilibrium. When the wage is kept below w*, at w0, there is a shortage of personnel because the quantity of labor demanded is greater than the quantity supplied. Fig 14-13.EPS page 18 of 22 PHALL-82241 PINDYCK CHAPTER 14 page 19 of 22 FIGURE 14.14 Marginal and Average Expenditure Price (per unit of input) 20 Marginal Expenditure (ME) 15 wC w* � 13 C SL � Average Expenditure (AE) 10 D � MRPL � MV 5 1 2 3 4 L* 5 6 Units of input LC When the buyer of an input has monopsony power, the marginal expenditure curve lies above the average expenditure curve because the decision to buy an extra unit raises the price that must be paid for all units, not just for the last one. The number of units of input purchased is given by L*, at the intersection of the marginal revenue product and marginal expenditure curves. The corresponding wage rate w* is lower than the competitive wage wc. Fig 14-14.EPS PHALL-82241 PINDYCK CHAPTER 14 page 20 of 22 FIGURE 14.15 Monopoly Power of Sellers of Labor Wage per worker w1 w2 SL A w* DL MR L1 L2 L* Number of workers When a labor union is a monopolist, it chooses among points on the buyer’s demand for labor curve DL. The seller can maximize the number of workers hired, at L*, by agreeing that workers will work at wage w*. The quantity of labor L1 that maximizes the rent earned by employees is determined by the intersection of the marginal revenue and supply of labor curves; union members will receive a wage rate of w1. Finally, if the union wishes to maximize total wages paid to workers, it should allow L2 union members to be employed at a wage rate of w2. At that point, the marginal revenue to the union will be zero. Fig 14-15.EPS PHALL-82241 PINDYCK CHAPTER 14 FIGURE 14.16 Wage Discrimination in Unionized and Nonunionized Sectors SL Wage per worker wU w* w NU DU ∆L U DNU ∆L NU DL Number of workers When a monopolistic union raises the wage in the unionized sector of the economy from w* to wU, employment in that sector falls, as shown by the movement along the demand curve DU. For the total supply of labor, given by SL, to remain unchanged, the wage in the nonunionized sector must fall from w* to wNU, as shown by the movement along the demand curve DNU. Fig 14-16.EPS page 21 of 22 PHALL-82241 PINDYCK CHAPTER 14 FIGURE 14.17 Union Workers as a Percentage of Total Percent 24 22 20 18 16 14 12 Year 10 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 The percentage of workers that are unionized has been declining steadily over the past 25 years. Source: Bureau of Labor Statistics. Fig 14-17.EPS page 22 of 22 ...
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This note was uploaded on 09/28/2011 for the course ECON 105 taught by Professor Prof.eco during the Spring '11 term at Indian School of Business.

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