Markets for factor of production


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Markets for factor of production

  1. 1. Markets forfactor ofproductionMicroeconomic FoundationAlaleh Mani2011
  2. 2. Factors of production and it’sprice1. Labor  wage2. Land  rental rate3. Capital  interest rate4. Entrepreneurship  normal profit
  3. 3. Demand and Supply in factorof production Market Exceptional Income ≈ Demand elasticity erived Demand
  4. 4. Marginal Revenue Product Change in Revenue ,MR, hiring one more labor. MP*MR=MPR Every Labor Every employed labor produce a MP make MPR revenue Every Product has a MR (reading 17- output and cost)
  5. 5. MRP is diminishingCompetition Market: MR=d=p= Cte MP diminishingMP*MR=MRP diminishing MPRest Market Structure:MR diminishingMP diminishingMP*MR=MRP diminishing
  6. 6. Labor Individual DemandCurve=MRP MPR=Demand??Firm wants to maximize its profit MRP/MP=wage rate/MPMRP=wage rate=d MR=MC in firm:MC=Wage rate/q(MP)MR*MP=MRPMR=MRP/MP
  7. 7. Change in individual Demandof labor(cfa 2007) 1. Price of output∆P  ∆ MR  ∆ MRP  ∆ D (increase in short run, decrease in long run) 2.Price of other factors (long run effect)∆P of Factor of production that substitute(+) or complement (-)the labor force  ∆ D 3.Technology and Capital that substitute(+) or complement (-)the labor force (long run effect)Technology and capital ∆ MP  ∆ MRP  ∆ D
  8. 8. Market Demand of Labor Summation of individual derived demand curve would depict market demand which is still derived from production demand
  9. 9. Elasticity of Demand for labor depends on: Responsiveness of labor demand to wage rate change reflect the labor income changes when supply change:1.Labor Intensity: labor intensive production isa one that use a lot of labor and a little capitalwhich has a elastic demand for labor If wages ↑  firm cost ↑  decrease the labor2.Elasticity of demand for good produced:If production demand is elastic  labor demand would be elasticIf wages ↑  MC ↑ Supply ↓ P ↑ demand of goods↓↓ (elastic)labor demand↓↓ decrease the labor3.Substituability of capital for Market (long run)Exp : robot is a good substitute for worker(elastic) but not for news reporter, teacher, bank officer (inelastic
  10. 10. Supply of Labor Leisure People time Labor supply Reservation wage= Minimum wage people are willing to work atIf wage > reservation wage  labor supply > leisure
  11. 11. Quantity of labor supplydepend on:1.Substitution effectwage rate= opportunity cost of leisureIf wage↑cost of leisure↑work substitute leisure  labor supply ↑2.Income EffectIf wage↑ income ↑ demand for leisure↑ labor supply ↓3.Backward bending of supply curve:at low wage rate substitute worksat higher wage rate income effect works
  12. 12. Backward Bending Supply curveReservation wage
  13. 13. Change in supply anddemand Population growth lead to labor supply rise Technology and capital create more job than destroy and save time for household to supply labor more on average Pace of labor supply < Pace of labor demand Exceptions about skilled worker: 1.Demand for their services decrease 2.The production of low skilled worker are sold in competition market and make low revenue for firms that lead them to demand for low skilled labor less.
  14. 14. Labor unionsA group of worker who have been organized to increase the wages and make the job condition better Crafts : Smallest Union, Same skill worker in different indus Union Industrial: Largest Union, different skill worker in same indu
  15. 15. Union Terms Collective Bargaining: a process of negotiation between employee and worker Strike: worker weapon to refuse prevailing condition Lockout: Employer main weapon to employ Binding Arbitrage: a third part or arbitrator makes the last decision
  16. 16. Union’s Objectives and Constrain Increase compensation Objectives Improve condition Constrain Expand Job opportunity Supply Side: nonunion and union members can not be recogn Demand Side: firms decrease labors after wage r
  17. 17. Union activity in Labor Market Restrict Supply of union member (U Increase the wage rate Stimulate the demand Inelastic supply of limited labor force Decrease job available
  18. 18. Union control the demand 1. make it less elastic less effective 2. increase the demand for unionized labor:  Increase the marginal product of UM:  OTJ training( apprenticeship)  Import restriction:  Lobby to restrict  Encourage people to buy local goods  Support minimum wage law  Substitute high skilled worker for low skilled  Immigration restriction  Decrease foreign supply  Increase demand for local good  Demand for labor derived from demand for goods
  19. 19. Monopsony in Labor MarketA Market with single buyer; Only one employer exist to hire at lowest wage rateMonopsony controlthe wage  MCL>S =MCL minimum wage a labor willing to wo = ATC of labor The more elastic the supply the less wageEquilibrium wage= =Demand
  20. 20. Bilateral Monopoly  If Union act like Monopoly and There is monopsony in labor Market, bilateral monopoly occur. Strike Monopoly union wageBargaining Monopsony Lockout wage
  21. 21. Monopsony and minimumwage (reading 15 market in action): Reminding: every minimum wage above equilibrium increase unemployment but here min wage increase employement Minimum wage Monopoly wag
  22. 22. Wages Equilibrium wage Monopsony wage Minimum wage Efficiency wage : a wage above equilibrium to attract productive worker and make shirker to work harder not to lose this good payment job
  23. 23. Capital Market Goods have value named price Capital has value named Investment that come from saving Physical capital is stock of (an object that is deplete or replenish):  tools  Instrument  Machines  Buildings  Inventory: 1. Raw material 2. Semi finished material 3. finished material To buy physical capital (investment),firms need financial resources (financial capital)which gained through capital Market.
  24. 24. Price of capital Quantity of Financial Capital
  25. 25. Demand for Capital People compare present expenditure with future income firms borrow financial capital  pay interest buy physical capital  produce MRPC •Marginal revenue Product of capital(future)=expenditure on capital (present) Firm maximize •Interest rate≈1/ borrowing and investment its profit •Firm decide to borrow money in given time Planned •Firm decide to buy physical capital (investment) Investment
  26. 26. Supply of Capital It derives from people decision on saving that affected from: 1. Income: influence on current(spend) and future(save) consumption 2. Expected future Income : if future income >current income  people save less spend more exp: young people if future income<current income  people save more spend less exp: old people 3. Interest rate : the bigger the interest rate the more the opportunity cost of spending the more the interest of saving
  27. 27. Fluctuation in interest rate Population and technology increase the demand and supply of capital not equally but continually. As the effect timing of population growth and technology on demand and supply is different the interest rate fluctuate over time but amount of capital always grow
  28. 28. Natural resource Market INDIRECT  Nonrenewable natural resource supply: INFLUENCE Gas, coal, oil, hydrocarbon fuels ON PRICE1. Stock : Quantity existence in given time.2. KNOWN STOCK : AMOUNT OF DISCOVERED RESOURCES3. FLOW SUPPLY: AMOUNT OF RESOURCE SUPPLIED USE FOR PRODUCTION =Perfectly elastic  Direct Influence on PriceExp: Saudi Arabia choose to sell or keep the inventory of oil:P≤E(p)/(1+r) Saudi Arabia sells oil otherwise keeps it  Renewable(replenished by nature) natural resource supply: Rain, river, lakes, wind, sunshine, land
  29. 29. Price and hotelling principal Hotteling principal: Nonrenewable natural resource Price rise at the rate of interest rate Actual price=PV(E(Pf)) The reason why actual price does not follow the hotteling principal is :Unexpected change of technology that leads to discover more of resources .or use resources more efficient price falls continually
  30. 30. Economic rent, tax, opportunity cost  Economic rent=producer surplus for factor of production If s=inelastic all income=Economic rent=tax burden by suppl Like land that have not other opportunity costwage Producer surplus If s=elastic all income=opportunity cost=tax burden by Like low skilled worker that have not rent Quantity of factor of production