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Competitive Labor Markets

Competitive Labor Markets. Factor Markets Part II (Chapter 18). D 2. D. MRP 1. MRP 2. Demand for product. Price of Product. MRP MRP = MP L * P. Derived Demand for Inputs. Product Market 1 Firm in Factor Market. T-Shirt Market.

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Competitive Labor Markets

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  1. Competitive Labor Markets Factor Markets Part II (Chapter 18)

  2. D2 D MRP1 MRP2 Demand for product Price of Product MRP MRP = MPL * P Derived Demand for Inputs Product Market 1 Firm in Factor Market T-Shirt Market Low Skilled Workers Wages/hr Price S -------------- $10 MFC E1 $200 ------------- Q Qty Qty End Result: ↑ Workers hired Wage rate Unchanged! MRP = Value of what additional worker produces MRP = MP (input) X Price (output)

  3. D1 MRP1 Individual Firms are Wage Takers 1 Company Factor Market Entire Factor Market 1 LAW FIRM Entry level Lawyers (All LAW FIRMS) Entry level Lawyers Wages Wage Rate S -------------- $160,000 E1 MFC1 E1 $160,000 ------------- ---------- Q1 Qty Qty Q1 When one firm hires more workers => wage rate is unchanged When all firms hire more workers => wage rate rises

  4. Supply curve for 1 firm MFC MRP Supply Curve for Inputs • Marginal Factor Cost (MFC) is the supply curve for inputs • In labor market MFC= Wage Rate • Also called MRC (marginal resource cost) • Regardless if firms is a monopoly, oligopoly, perfect or monopolistic competition => MFC is horizontal • Most firms are competitivein the factor market (input market) • the firm has no effect on market price for inputs • All 4 market structures are “wage takers” in the labor market. • Individual Firms have a horizontal supply curve

  5. MRP2 Shifts in Demand for Labor MRP shifts right when: • Demand for Product ↑ • Productivity Rises (MP ↑) • Technology, working conditions, etc... • Price falls of complementary resource • Example: Workers & Machines that work together MRPL If Machine price ↓ => Demand for workers ↑

  6. Substitute Resource A substitute input replaces another input: i.e. when machines can replaceworkers When price of substitute input ↓ => MRPL shift is indeterminate(could ↓ ,↑ or be same) machinesworkers Labor Market ? MRPL MRP shift is dependent on two opposing effects. • Substitution Effect-implies you would hire less workers (MRPL ↓ ) • Logic: machines prices fall => hire less workers 2) Output Effect- implies you hire more workers (MRPL ↑ ) • Logic: machine prices fall => MC falls => so output increases => hire more workers • End result: dominant force determines MRP shift

  7. Competitive Labor Market Worksheet

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