Factor market


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Factor market

  1. 1. Factor Markets 1
  2. 2. FACTOR MARKET• Transfer earning – the minimumpayments necessary for a factor to remainat its present employment = supply price• Economic rent – the payments receivedby a factor over and above the minimumpayments necessary for a factor to remainat its present employment= the difference between the actual payments afactor receives and the minimum payments thefactor is willing to accept. 2
  3. 3. Market Supply of and Demand for Labour SWages ER TE D Quantity of Labor 3
  4. 4. In a PerfectlyCompetitive Market,what determines the level of Wages?The intersection of the demand for labor and the supply of labor 4
  5. 5. Market Supply and Demand SWages D Quantity of Labor 5
  6. 6. What does the Market Demand Curve for Labor show?~The different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus 6
  7. 7. What does the Market Supply Curve of Labor show?~The different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus 7
  8. 8. MARGINAL REVENUEPRODUCT THEORY• Marginal revenue product (MRP) isdetermined by a worker’scontribution to a firm’s total revenue.• In perfect competition: MRP = P x MP  P = price of the product  MP = worker’s marginal product (MP). 8
  9. 9. DEMAND FOR LABOUR~ The demand curve for labor is thecurve showing the quantities of labor afirm is willing to hire at different pricesof labor.~ The marginal revenue product (MRP)of labor curve is the firm’s demand curvefor labor.~ Summing individual demand for laborcurves gives the market demand curvefor labor. 9
  10. 10. $350 Demand Curve for Labor$280 M RP$210 =d em$140 an d$70 1 2 3 4 5Q 10
  11. 11. SHIFTS OF MRP/DEMAND CURVEFOR LABOUR-Derived demand means that a firmdemands labour because labour isproductive. Changes in consumerdemand for a product cause changes indemand for labour and for otherresources used to make the product.-MRP = P x MP (changes in the productprice and labour productivity will shiftMRP 11
  12. 12. Other factors that can shift MRP/DEMAND CURVE for labour•Unions•Prices of substitute goods•Demand for final products•Marginal product of labor 12
  13. 13. SUPPLY OF LABOUR-The supply curve of labour is the curveshowing the quantities of workers willing towork at different prices of labour (wage rates).-In a perfect competitive labour market,supply curve of labour is given by the marketwage rate (marginal factor cost, MFC)-The market supply curve of labor is derivedby adding the individual supply curves oflabor. 13
  14. 14. $350 Market Supply Curve of Labor Wage Rate per day$280 S$210$140$70 D Quantity of Labor 10 20 30 40 50 14
  15. 15. Factors can cause a change in the Supply for Labor• Unions• Demographic trends• Expectations of future income• Changes in immigrations laws• Education and training 15
  16. 16. MARGINAL REVENUE PRODUCTTHEORY• A firm will employ workers up to apoint where MRP=MFC.• If wage rate is $140, the firm willemploy 3 workers (refer next slide). 16
  17. 17. $350 Equilibrium of a PC firm$280$210 MFC$140 M RP$70 1 2 3 4 5Q 17
  18. 18. EARNINGS DIFFERENCES-Human capital – the accumulatedwealth people make in education,training, experience, and health in orderto make themselves more productive.-Collective bargaining – the processthrough which a union andmanagement negotiate a labourcontract.-Monopsony - a labor market in whicha single firm hires labor. 18
  19. 19. MONOPSONY• Monopsony is a labor market in which a singlefirm hires labour. E.g. mining company, singletextile mill, schools• Because the monopsonist faces the industrysupply curve of labor and each worker is paid thesame wage, changes in total wage cost exceedthe wage rate necessary to hire each additionalworker. As a result, the marginal factor cost(MFC) of labor curve (MWC) lies above thesupply curve of labor. 19
  20. 20. Monopsonist exploits workers• The monopsonist’s wage rate andquantity of labor are determined where theMFC equals MRP .• However, since a monopsonist must raisethe wage rate to hire additional workers,MFC>W• As a result, the worker’s MRP is greaterthan the wage paid  the monopsonistexploits the workers (pays lower W, hiresfewer workers) 20
  21. 21. A Monopsonist determines its Wage Rate MFC SDollars per hour $4 - Monopsony hires 2 $3 workers and pays $2 - PC hires 3 workers $2 and pays $2.70 $1 D (MRP) 1 2 3 4 Quantity of Labor 21