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COMPETITIVE FACTOR MARKETS:Marginal Revenue Product

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Microeconomics ­ECO402
VU
·
·  Lesson 42
COMPETITIVE FACTOR MARKETS
Characteristics
1) Large number of sellers of the factor of production
2) Large number of buyers of the factor of production
3) The buyers and sellers of the factor of production are price takers
Demand for a Factor Input When Only One Input Is Variable
­ Demand for factor inputs is a derived demand...
·  Derived from factor cost and output demand
­  Assume
·  Two inputs: Capital (K) and Labor (L)
·  Cost of K is r and the cost of labor is w
·  K is fixed and L is variable
­ Problem
·  How much labor to hire?
­  Measuring the Value of a Worker's Output
· Marginal Revenue Product of Labor (MRPL)
· MRPL = (MPL)(MR)
­  Assume perfect competition in the product market
· Then MR = P
­  Question
· What will happen to the value of MRPL when more workers are hired?
Marginal Revenue Product
Wages
($ per
Competitive Output Market (P = MR)
hour)
MRPL = MPLx P
Monopolistic
Output
MRPL = MPL x MR
Market
Hours of Work
­  Choosing the profit-maximizing amount of labor
· If MRPL > w (the marginal cost of hiring a worker): hire the worker
193
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Microeconomics ­ECO402
VU
· If MRPL < w: hire less labor
· If MRPL = w: profit maximizing amount of labor
Hiring by a Firm in the Labor Market (with Capital Fixed)
In a competitive labor market, a
firm faces a perfectly elastic supply of labor
Price
and can hire as many workers as it wants at w*.
of
Labor
The profit maximizing firm will
hire L* units of labor at the point
where the marginal revenue product
of labor is equal to the wage rate.
w
S
Why not hire fewer
or more workers than L*.
MRPL =
L
Quantity of Labor
Competitive Factor Markets
Demand for a Factor Input When Only One Input Is Variable
­  If the market supply of labor increased relative to demand (baby boomers or female
entry), a surplus of labor would exist and the wage rate would fall.
­  Question
· How would this impact the quantity demanded for labor?
A Shift in the Supply of Labor
Price of
Labor
S1
w1
w2
S2
MRPL = DL
Quantity of Labor
L1
L2
194
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Microeconomics ­ECO402
VU
Comparing Input and Output Markets
MRP  L = ( MP  L )( MR)
and at profit maximizing
number of workers MRP  L = w
(MP  L )( MR) = w
MR = w MP  L
w MP  L = MC of production
­ In both markets, input and output choices occur where MR = MC
·  MR from the sale of the output
·  MC from the purchase of the input
Demand for a Factor Input When Several Inputs Are Variable
­  Scenario
· Producing farm equipment with two variable inputs:
­ Labor
­ Assembly-line machinery
· Assume the wage rate falls
­  Question
· How will the decrease in the wage rate impact the demand for labor?
Firm's Demand Curve for Labor (with Variable Capital)
When two or more inputs are
Wages
variable, a firm's demand for one
($ per
input depends on the marginal
hour)
revenue product of both inputs.
When the wage rate is $20, A
represents one point on the firm's
demand for labor curve.
A
When the wage rate falls to $15, the
20
MRP curve shifts, generating a new
C
point C on the firm's demand for
labor curve. Thus A and C are
15
on the demand for labor curve, but
B
B is not.
D
10
MRPL
MRPL
5
0
40
80
120
160
Hours of Work
195
Table of Contents:
  1. ECONOMICS:Themes of Microeconomics, Theories and Models
  2. Economics: Another Perspective, Factors of Production
  3. REAL VERSUS NOMINAL PRICES:SUPPLY AND DEMAND, The Demand Curve
  4. Changes in Market Equilibrium:Market for College Education
  5. Elasticities of supply and demand:The Demand for Gasoline
  6. Consumer Behavior:Consumer Preferences, Indifference curves
  7. CONSUMER PREFERENCES:Budget Constraints, Consumer Choice
  8. Note it is repeated:Consumer Preferences, Revealed Preferences
  9. MARGINAL UTILITY AND CONSUMER CHOICE:COST-OF-LIVING INDEXES
  10. Review of Consumer Equilibrium:INDIVIDUAL DEMAND, An Inferior Good
  11. Income & Substitution Effects:Determining the Market Demand Curve
  12. The Aggregate Demand For Wheat:NETWORK EXTERNALITIES
  13. Describing Risk:Unequal Probability Outcomes
  14. PREFERENCES TOWARD RISK:Risk Premium, Indifference Curve
  15. PREFERENCES TOWARD RISK:Reducing Risk, The Demand for Risky Assets
  16. The Technology of Production:Production Function for Food
  17. Production with Two Variable Inputs:Returns to Scale
  18. Measuring Cost: Which Costs Matter?:Cost in the Short Run
  19. A Firm’s Short-Run Costs ($):The Effect of Effluent Fees on Firms’ Input Choices
  20. Cost in the Long Run:Long-Run Cost with Economies & Diseconomies of Scale
  21. Production with Two Outputs--Economies of Scope:Cubic Cost Function
  22. Perfectly Competitive Markets:Choosing Output in Short Run
  23. A Competitive Firm Incurring Losses:Industry Supply in Short Run
  24. Elasticity of Market Supply:Producer Surplus for a Market
  25. Elasticity of Market Supply:Long-Run Competitive Equilibrium
  26. Elasticity of Market Supply:The Industry’s Long-Run Supply Curve
  27. Elasticity of Market Supply:Welfare loss if price is held below market-clearing level
  28. Price Supports:Supply Restrictions, Import Quotas and Tariffs
  29. The Sugar Quota:The Impact of a Tax or Subsidy, Subsidy
  30. Perfect Competition:Total, Marginal, and Average Revenue
  31. Perfect Competition:Effect of Excise Tax on Monopolist
  32. Monopoly:Elasticity of Demand and Price Markup, Sources of Monopoly Power
  33. The Social Costs of Monopoly Power:Price Regulation, Monopsony
  34. Monopsony Power:Pricing With Market Power, Capturing Consumer Surplus
  35. Monopsony Power:THE ECONOMICS OF COUPONS AND REBATES
  36. Airline Fares:Elasticities of Demand for Air Travel, The Two-Part Tariff
  37. Bundling:Consumption Decisions When Products are Bundled
  38. Bundling:Mixed Versus Pure Bundling, Effects of Advertising
  39. MONOPOLISTIC COMPETITION:Monopolistic Competition in the Market for Colas and Coffee
  40. OLIGOPOLY:Duopoly Example, Price Competition
  41. Competition Versus Collusion:The Prisoners’ Dilemma, Implications of the Prisoners
  42. COMPETITIVE FACTOR MARKETS:Marginal Revenue Product
  43. Competitive Factor Markets:The Demand for Jet Fuel
  44. Equilibrium in a Competitive Factor Market:Labor Market Equilibrium
  45. Factor Markets with Monopoly Power:Monopoly Power of Sellers of Labor