ECON 312/302: MICROECONOMICS II Lecture 6: W/C 7 th March 2016 FACTOR MARKETS 1 Dr Ebo Turkson. Chapter 15. Factor Markets Part 1

Transcription

1 ECON 312/302: MICROECONOMICS II Lecture 6: W/C 7 th March 2016 FACTOR MARKETS 1 Dr Ebo Turkson Chapter 15 Factor Markets Part 1 1

2 Topics Competitive Factor Market. Competitive factor and output markets Effect of Monopolies on Factor Markets. Competitive factor and monopolized output markets Monopolized factor and Competitive output markets Monopolist in successive markets 15-3 Copyright 2012 Pearson Education. All rights reserved. Topics Monopsony. the only buyer of a good in a given market. Welfare Effects A comparative Analysis 15-4 Copyright 2012 Pearson Education. All rights reserved. 2

3 Competitive Factor Market Factor markets are competitive when there are many small buyers and sellers. Here the firm is a price taker. i.e. the wage rate is given (w is given) Copyright 2012 Pearson Education. All rights reserved. Short-Run Factor Demand of a Firm A profit-maximizing firm s demand for a factor of production is downward sloping. In the short run, a firm has a fixed amount of capital: K and can vary the number of workers, L, it employs Copyright 2012 Pearson Education. All rights reserved. 3

4 Short-Run Factor Demand of a Firm (cont.) Marginal revenue product of labor (MRPL) - the extra revenue from hiring one more worker: MRP L = MR MP L To find this we know output q =f(l) and P=f(q) Thus R(L)=P.q=P[f(L)].f(L) MRP L =dr/dl=(dr/dq).(dq/dl)=mr x MP L 15-7 Copyright 2012 Pearson Education. All rights reserved. Short-Run Factor Demand of a Firm (cont.) The firm maximizes its profit by hiring workers until the marginal revenue product of the last worker exactly equals the marginal cost of employing that worker, which is the wage: MRP L = w 15-8 Copyright 2012 Pearson Education. All rights reserved. 4

5 Short-Run Factor Demand of a Firm (cont.) A competitive firm faces an infinitely elastic demand for its output at the market price, p, so: and MR = p MRP L = p MP L 15-9 Copyright 2012 Pearson Education. All rights reserved. Short-Run Factor Demand of a Firm (cont.) The competitive firm hires labor to the point at which: MRP L = p MP L = w (1) The wage line is the supply of labor the firm faces. It is horizontal (infinitely elastic) The marginal revenue product of labor curve, MRP L, is the firm s demand curve for labor Its downward sloping because although P is fixed MP L declines as more labour is employed Copyright 2012 Pearson Education. All rights reserved. 5

6 15-11 Copyright 2012 Pearson Education. All rights reserved. Table 15.1 Marginal Product of Labor, Marginal Revenue Product of Labor, and Marginal Cost Copyright 2012 Pearson Education. All rights reserved. 6

7 MC, p, $ per unit Figure 15.1 The Relationship Between Labor Market and Output Market Equilibria (a) Labor Profit-Maximizing Condition w, VMP L, $ per unit w = Labor supply curve MRP L, Labor demand curve (b) Output Profit-Maximizing Condition MC p L, Workers per hour q, Units of output per hour Copyright 2012 Pearson Education. All rights reserved. Profit Maximization Using Labor or Output The output profit-maximizing condition from Chapter 8, MC = p, is equivalent to the labor profit-maximizing condition in Equation By dividing Equation 1 by MP L, we find that: p w MP L MC Copyright 2012 Pearson Education. All rights reserved. 7

8 w, VMP L, $ per unit How Changes in w and P affect Factor Demand If w falls but the p remains the same, the SS of labour shifts down to S 2 The firm hires more workers and we move from a to b where employment increases from 4 to 6 If p falls but the w remains the same, the DD of labour shifts down to D 2 The firm hires reduces its demand for workers and we move from a to 2 where employment decreases from 4 to 2. At the same wage rate this involves a shift of the labour DD curve Copyright 2012 Pearson Education. All rights reserved. Figure 15.2 Shift of and Movement Along the Labor Demand Curve D 1 = $3 MP L w 1 = 12 D 2 = $2 MP L c a S 1 8 w 2 = 6 b S L, Workers per hour Copyright 2012 Pearson Education. All rights reserved. 8

9 Exercises 1. How does a competitive firm adjust its demand for labor when the government imposes a specific tax of τ on each unit of output? 2. In a competitive market, firms sell output at a price of 20. Marginal productivity per hour of the workers is described by the equation MP L = 40 - L. What is the firm s demand curve for labor? If the firm can hire labor from a competitive labor market at a wage of 5 per hour, how many workers should the firm hire? Copyright 2012 Pearson Education. All rights reserved. Exercises 3. A firm has a Cobb-Douglas production function given as q=l 0.6 K 0.2 Suppose that in the Short run, the mill s capital (K) is fixed at 32 units and that it can only increase output q by increasing the amount of labour (L) a. Determine the firms SR production function b. If the firms competitive output price is 50 find its labour demand curve c. What is the MRP L between the 31 st and 32 nd worker who is hired at the competitive price? Copyright 2012 Pearson Education. All rights reserved. 9

10 Long-Run Factor Demand In the long run, the firm may vary all of its inputs. The long-run labor demand curve takes account of changes in the firm s use of capital as the wage rises Copyright 2012 Pearson Education. All rights reserved. Figure 15.3 Labor Demand of a Thread Mill Copyright 2012 Pearson Education. All rights reserved. 10

11 Exercises 4. A firm has a Cobb-Douglas production function given as q=al α K β a. Solve for the factor demand functions b. If the firms competitive output price is p find the wage rate c. What is the share of the firms revenue paid to labour and capital? d. If α=0.6, β=0.2 and A=1 find the LR labour and capital demand curve equations Copyright 2012 Pearson Education. All rights reserved. Short-Run Factor Demand of a Firm (cont.) The firm maximizes its profit by hiring workers until the marginal revenue product of the last worker exactly equals the marginal cost of employing that worker, which is the wage: MRP L = w Copyright 2012 Pearson Education. All rights reserved. 11

12 Short-Run Factor Demand of a Firm (cont.) The competitive firm hires labor to the point at which: MRP L = p MP L = w (1) The wage line is the supply of labor the firm faces. It is horizontal (infinitely elastic) The marginal revenue product of labor curve, MRP L, is the firm s demand curve for labor Its downward sloping because although P is fixed MP L declines as more labour is employed Copyright 2012 Pearson Education. All rights reserved. Exercises 3. A firm has a Cobb-Douglas production function given as q=l 0.6 K 0.2 Suppose that in the Short run, the mill s capital (K) is fixed at 32 units and that it can only increase output q by increasing the amount of labour (L) a. Determine the firms SR production function b. If the firms competitive output price is 50 find its labour demand curve c. What is the MRP L between the 31 st and 32 nd worker who is hired at the competitive price? Copyright 2012 Pearson Education. All rights reserved. 12

13 Long-Run Factor Demand In the long run, the firm may vary all of its inputs. The long-run labor demand curve takes account of changes in the firm s use of capital as the wage rises Copyright 2012 Pearson Education. All rights reserved. Figure 15.3 Labor Demand of a Thread Mill Copyright 2012 Pearson Education. All rights reserved. 13

14 Exercises 4. A firm has a Cobb-Douglas production function given as q=al α K β a. Solve for the factor demand functions b. If the firms competitive output price is p find the wage rate c. What is the share of the firms revenue paid to labour and capital? d. If α=0.6, β=0.2 and A=1 find the LR labour and capital demand curve equations Copyright 2012 Pearson Education. All rights reserved. 14