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Unit 14

Unit 14. Markets for factor inputs. Outcomes. Define and discuss competitive factor markets Define and discuss factor markets with monopsony power Define and discuss factor market with monopoly power. Competitive factor market. Definition: A market with a large number of buyers and sellers

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Unit 14

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  1. Unit 14 Markets for factor inputs

  2. Outcomes • Define and discuss competitive factor markets • Define and discuss factor markets with monopsony power • Define and discuss factor market with monopoly power

  3. Competitive factor market • Definition: • A market with a large number of buyers and sellers • Of factors of production • Each is a price taker • Need to analyze the demand for a factor by individual firms. • Demand added = market demand

  4. Demand for a factor input when only one is a variable • Short run! • FOP demand curve = Downward sloping • FOP demand = 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

  5. Demand for a factor input when only one is a variable • How to determine derived demand? • Firm produces only with 2 inputs: K and L • Hired at price r and wage w • L variable • Marginal revenue product of labour MRPL • Additional revenue from sale of output created by one additional unit of an input MRPL = (MR)(MPL)

  6. Demand for a factor input when only one is a variable • Holds for all competitive factor markets • Examine MRPL: • Perfectly competitive output @ market price P • MR = P • Thus, MRPL = (MPL)(P) (Figure 14.1) • But MRPL > w = hire more labour, if MRPL < w = lay off labour • MRPL = w : Profit maximizing amount of labour (Figure 14.2)

  7. Demand for a factor input when only one is a variable

  8. Demand for a factor input when only one is a variable

  9. Demand for a factor input when only one is a variable

  10. Demand for a factor input when several inputs are variable • Firms choose simultaneously quantities of two or more variable inputs. • Hiring problem: Change in price for one will change demand for other.

  11. The market demand curve • For each industry, the demand for labour must be calculated and added together.

  12. Supply of inputs to a firm • Perfectly competitive = firm can purchase as much of input at a fixed market price

  13. Supply of inputs to a firm • Average expenditure firm: • Supply curve representing the price per unit that a firm pays for a good • Marginal expenditure firm: • Curve describing the additional cost of purchasing one additional unit of a good ME = MRP ME = w

  14. Market supply of inputs • Market Supply curve for factor input usually upward sloping • When the input is labour = backward bending supply of labour

  15. Market supply of inputs

  16. Equilibrium in a competitive factor market

  17. Equilibrium in a competitive factor market

  18. Equilibrium in a competitive factor market

  19. Factor markets with monopsony power • Focus on a pure monopsony: One buyer • Buyer power such as Toyota and GM • Bargaining power: • Negotiate lower prices due to quantities bought. • Power determined buy number of buyers and purchase itself

  20. Monopsony power: Marginal and average expenditure

  21. Purchasing decisions with monopsony power • How much input to buy? • Should buy where ME=MR and MRP=ME

  22. Factor markets with monopoly power • Seller power such as Eskom • Focus on labour unions: Monopolist in the sale of labour services

  23. Monopoly power over wage rate

  24. Unionized and nonunionized workers • Union uses monopoly power to increase member’s wages = fewer union workers employed • Move to nonunion section • Initially choose not to join union • What happens in the nonunionized section?

  25. Unionized and nonunionized workers

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