1. In a competitive labor market, the equilibrium wage and quantity of labor are determined by the intersection of the demand and supply curves for labor. 2. Unions attempt to raise wages by increasing demand or decreasing supply of labor through collective bargaining, featherbedding, and other means. 3. A monopsony employer pays lower wages and hires fewer workers than in a competitive market because it faces an upward-sloping labor supply curve and sets wages where marginal factor cost equals marginal revenue product rather than the competitive equilibrium.

1. Labor Markets
In a Perfectly
Competitive Market,
what determines the
level of Wages?
1

2. The intersection of the
demand for labor and
the supply of labor
2

3. 3
Market Supply and Demand

4. What does the Demand
4
Curve for Labor show?
The different quantities of
labor employers are
willing to hire at different

5. wage rates in a given time
period, ceteris paribus
5

6. 6
Production Function
1 2 3 4 5 6
60
50
40
30
20
10
Quantity of Labor
Total Output

7. 7
What is Marginal
Revenue Product?
The increase in total
revenue to a firm
resulting from hiring an
additional unit of labor or
other variable resource

8. Marginal Product Curve
8 51 2 3 4 6
12
10
8
6
4
2
Quantity of Labor
Law of
Diminishing
Returns

9. 9
What is the Demand
Curve for Labor equal
to?
It is equal to the marginal
revenue product of labor

10. Demand Curve for Labor
$350

11. Decrease in
Wage Rate
Increase in Quantity
of labor an employer
will hire
11

12. How do we measure MRP
12
in Perfect Competition? A
perfectly competitive firm’s
marginal revenue product is
equal to the marginal product
of its labor times the price of its
product

13. What is Derived
Demand?
13
The demand for labor and
other factors of production
that depends on the
consumer demand for final

14. goods and services the
factors produce
14
What does the Supply
Curve for Labor show?
The different quantities of
labor workers are willing
to offer employers at

15. different wage rates in a
given time period, ceteris
paribus
15

16. $210
$140
$70
Supply Curve of Labor$350
$280
S
D
Quantity of Labor
10 20 30 40 50
16

17. Increase in
Wage Rate
Increase in Quantity of
labor willing to work
17

18. What is Human Capital?
The accumulation of
education, training,
experience, and health
that enables a worker
18

19. to enter an occupation
and be productive
19

20. $210
$140
$70
Competitive Labor Market$350
$280
S
D
E
Quantity of Labor
10 20 30 40 50
20

21. $210
$140
$70
1 2 3 4
Competitive Labor Market$350
$280
5
S
D
E
Quantity of Labor
21

22. Does the Perfectly
Competitive model apply
to workers in unions?
22

23. No
23
What are examples
of Unions?
•Teamsters

24. •United Auto Workers
24
•National Education Assoc.
•American Federation of
Government Employees
How do Unions attempt
to raise wages?

25. •Increase demand for labor
•Decrease supply for labor
•Power
What is Featherbedding?
25

26. Unions force firms to hire
more workers than are
required or to impose work
rules that reduce output
per worker
26

27. What else can Unions
do to increase the
demand for labor?
Decrease competition
from other nations
27

28. $280
$210
$70
Unions cause an increase
in the demand for labor$350
S
E1
$140
E2
Quantity of Labor D
D2
1
10 20 30 40 50
28

29. 29
featherbeds
Increase in the
demand for labor
Union
Increase in wages
and employment

30. $350
$280
$210
$140
Unions cause a decrease
in the supply for labor$420
S2
D1
E1
E2
Quantity of Labor
10 20 30 40 50
S1
30

31. How else can Unions
raise wages?
Collective bargaining
31

32. What is
Collective Bargaining?
32
The process of negotiations
between the union and
management over wages
and working conditions

33. $280
$210
$140
$70
Collective Bargaining causes
a Wage Rate increase$350
D
Unemployment
S
Quantity of Labor
10 20 30 40 50
33

34. What factors can
cause a change in
the
Demand for Labor?
34
• Unions

35. • Prices of substitute goods
• Demand for final products
• Marginal product of labor
35

36. What factors can
cause a change in the
Supply for Labor?
36
• Unions
• Demographic trends
• Expectations of future income

37. • Changes in immigrations
laws
• Education and training
What has happened to
Union Membership
since WWII?
37

38. Union power has declined
In which sectors has
union membership
increased since 1989?
38

39. Public sector and services
How does union
membership in the
U.S. compare to
39

40. other countries?
40
Union membership is far
below that of other
industrialized countries
What is a Monopsony?
A labor market in which a
single firm hires labor

41. 41

42. 87%
40%
37%
32%
24%
29%
15%
U.S. Japan CanadaU.K. Germany Italy Sweden
42

43. What is Marginal Factor
43
Cost (MFC)?
The additional total cost
resulting from a oneunit
increase in the quantity
of labor

44. What conclusion can be
44
drawn from a
Monopsonistic Market?
Because the monopsonist
can hire additional workers
only by raising the wage

45. rate for all workers, the
MFC > W
45

46. 46
A Monopsonist determines its Wage Rate

47. How are wages compared
47
between the two markets?
A monopsony hires fewer
workers and pays a lower wage
than a firm in a competitive
labor market
Key Concepts

48. Key Concepts
48
• In a Perfectly Competitive Market, what
deter
• What is Marginal Revenue Product?
• What is the Demand Curve for Labor equal
to • How do we measure MRP in Perfect
Competit
• What does the Supply Curve for Labor show?

49. Key Concepts cont.
49
• How do Unions attempt to raise wages?
• What is Featherbedding?
• What is Collective Bargaining?
• What factors can cause a change in the Dema
• What factors can cause a change in the Suppl
Key Concepts cont.

50. • What has happened to Union Membership
sinc • How does union membership in the U.S.
comp
• What is a Monopsony?
• What is Marginal Factor Cost (MFC)?
• How are wages compared between the two
markets?
50

51. Summary
51

52. Marginal revenue product (MRP)
is determined by a worker’s
contribution to a firm’s total revenue.
Algebraically, the MRP equals the
price of the product times the
worker’s marginal product (MP).
The demand curve for labor is
the curve showing the quantities of
52

53. labor a firm is willing to hire at
different prices of labor. The
marginal revenue product (MRP) of
labor curve is the firm’s demand
curve for labor. Summing individual
demand for labor curves gives the
market demand curve for labor.
53

54. 1 2 3 4
Demand Curve for Labor$350
$280
$210
$140
$70
5Q

55. Derived demand means that a
firm demands labor because labor is
productive. Changes in consumer
demand for a product cause changes
in demand for labor and for other
resources used to make the product.
55

56. The supply curve of labor is the
curve showing the quantities of
workers willing to work at different
prices of labor. The market supply
curve of labor is derived by adding
the individual supply curves of labor.
56

57. $210
$140
$70
Supply Curve of Labor$350
$280
S
D
Quantity of Labor
10 20 30 4507 50

58. Human capital is the
accumulated people make in
education, training, experience, and
health in order to make themselves
more productive. One explanation
for earnings differences is
differences in human capital.
58

59. p
m
c
Collective bargaining is the
rocess through which a union and
anagement negotiate a labor
ontract.
59

60. 70
The monopsonist’s wage rate and
quantity of labor are determined where
the MFC equals MRP . Since at this
point the worker’s MRP is greater than
the wage paid, the monopsonist
exploits the workers.

61. $4
$3
$2
71
D (MRP)
S
$1
Quantity of Labor
MFC
A Monopsonist determines its Wage Rate
$5