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Competitive Factor Markets:The Demand for Jet Fuel

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Microeconomics ­ECO402
VU
Lesson 43
Competitive Factor Markets
Industry Demand for Labor
­  Assume that all firms respond to a lower wage
·
All firms would hire more workers.
·
Market supply would increase.
·
The market price will fall.
·
The quantity demanded for labor by the firm will be smaller.
The Industry Demand for Labor
Wage
Firm
Industry
Wage
($ per
Horizontal sum if
($ per
hour)
product price
hour)
unchanged
15
15
10
10
Industry
MRPL
DL
MRPL
Demand
5
5
DL
Curve
0
100 12
L0
L
L
50
150
Labor
Labor0
(worker-hours)
(worker-hours)
Question
­ How would a change to a non-competitive market impact the derivation of the market
demand for labor?
The Demand for Jet Fuel
Observations
­ Jet fuel is a factor (input) cost
­ Cost of jet fuel
·  1971--Jet fuel cost equaled 12.4% of total operating cost
·  1980--Jet fuel cost equaled 30.0% of total operating cost
·  1990's--Jet fuel cost equaled 15.0% of total operating cost
­ The demand for jet fuel impacts the airlines and refineries alike
­ The short-run price elasticity of demand for jet-fuel is very inelastic
Question
­ How would the long-run price elasticity of demand compare to the short-run?
196
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Microeconomics ­ECO402
VU
The Short- and Long-Run
Price
MRPSR
MRPLR
Quantity of Jet Fuel
The Supply of Inputs to a Firm
­ Determining how much of an input to purchase
·  Assume a perfectly competitive factor market
A Firm's Input Supply in a Competitive Factor Market
Observations
Price
Price
1) The firm is a price taker at $10.
($ per
($ per
2) S = AE = ME = $10
yard)
yard)
3) ME = MRP @ 50 units
Market Supply
S
of fabric
Supply of
Fabric Facing
Market
Demand 10
10
ME = AE
MRP
D
Demand
for Fabric
Yards of
Yards of
100
50
Fabric (thousands)
Fabric (thousands)
The Market Supply of Inputs
­ The market supply for physical inputs is upward sloping
·  Examples:
jet fuel, fabric, steel
­ The market supply for labor may be upward sloping and backward bending
The Supply of Labor
­ The choice to supply labor is based on utility maximization
­ Leisure competes with labor for utility
­ Wage rate measures the price of leisure
­ Higher wage rate causes the price of leisure to increase
197
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Microeconomics ­ECO402
VU
­ Higher wages encourage workers to substitute work for leisure (i.e. the substitution
effect)
­
Higher wages allow the worker to purchase more goods, including leisure which reduces
work hours (i.e. the income effect)
­
If the income effect exceeds the substitution effect the supply curve is backward bending
Backward-Bending Supply of Labor
Supply of Labor
Wage
($ per
hour)
Income Effect >
Substitution Effect
Income Effect <
Substitution Effect
Hours of Work per Day
Substitution and Income Effects of a Wage Increase
Worker chooses point A:
Income 480
($ per
·16 hours leisure, 8 hour work
day)
w = $20
Suppose wages increase to $20
Increase wage to $20 worker
P
chooses:
240
w = $10
20 hour leisure, 4 hours work
C
income = $80
B
A
Q
0
8
12
20
24
Hours of Leisure
16ubstitution effect
S
Income
effect
198
Table of Contents:
  1. ECONOMICS:Themes of Microeconomics, Theories and Models
  2. Economics: Another Perspective, Factors of Production
  3. REAL VERSUS NOMINAL PRICES:SUPPLY AND DEMAND, The Demand Curve
  4. Changes in Market Equilibrium:Market for College Education
  5. Elasticities of supply and demand:The Demand for Gasoline
  6. Consumer Behavior:Consumer Preferences, Indifference curves
  7. CONSUMER PREFERENCES:Budget Constraints, Consumer Choice
  8. Note it is repeated:Consumer Preferences, Revealed Preferences
  9. MARGINAL UTILITY AND CONSUMER CHOICE:COST-OF-LIVING INDEXES
  10. Review of Consumer Equilibrium:INDIVIDUAL DEMAND, An Inferior Good
  11. Income & Substitution Effects:Determining the Market Demand Curve
  12. The Aggregate Demand For Wheat:NETWORK EXTERNALITIES
  13. Describing Risk:Unequal Probability Outcomes
  14. PREFERENCES TOWARD RISK:Risk Premium, Indifference Curve
  15. PREFERENCES TOWARD RISK:Reducing Risk, The Demand for Risky Assets
  16. The Technology of Production:Production Function for Food
  17. Production with Two Variable Inputs:Returns to Scale
  18. Measuring Cost: Which Costs Matter?:Cost in the Short Run
  19. A Firm’s Short-Run Costs ($):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