1 markets for factors of production factors of production -land -labour -physical capital -human...
TRANSCRIPT
1
Markets for Factors of ProductionMarkets for Factors of Production
Factors of Production
-Land
-Labour
-Physical Capital
-Human Capital
-Other
These factors are bought and sold in a factor market with supply and demand curves similar to the goods market
2
Markets for Factors of ProductionMarkets for Factors of Production
These markets are important because:
• money incomes are primarily determined by the prices set in these markets.
–distribution of income
• production costs determine which factors are used and in what quantities
–resource allocation
3
Government
ProductMarket
ResourceMarket
BusinessFirms
HouseholdsResourceOwners
ProductsProducts
Resources
Resou
rces
Products &Services
Products &Services
CIRCULAR FLOW
LAND LABORCAPITAL
$ Taxes$ Taxes
$ Costs$ Income
$ Spending $ Revenue
PRO
DUCT
S
$SPE
NDI N
G$S
PEND
I NG
RESO
URCE
S
4
(a) The Market for Apples (b) The Market for Apple PickersPr
ic e o
f Ap p
les
Wag
e of
App
le P
icker
s
W
00 0 LQ
P
Quantity ofApples
Quantity ofApple Pickers
Supply Supply
DemandDemand
The Versatility of Supply & Demand
5
• Factors other than Wage that affect Labour Demand – 1) Changes in demand for the product– 2) Changes in labour productivity (technology,
etc)– 3) Change in the price of other factors (land,
human capital, etc.)
Shifters of Labor DemandShifters of Labor Demand
6
Shifters of Labour SupplyShifters of Labour Supply• Examples of Factors
other than Wage which affect Labour Supply:
• 1) Income, wealth• 2) Lifestyle• 3) The wage of
competing jobs
• 4) Expectations–Future wages–Income–Job availability
• 5) Population (workforce)
Essentially, all factors affecting demand Essentially, all factors affecting demand have a parallel affecting have a parallel affecting
labour supplylabour supply
7
Labour Market:Labour Market:Perfect CompetitionPerfect Competition
• 1. many firms competing with one another in hiring a specific type of labour.
• 2. numerous qualified workers with identical skills independently supplying this type of labour service.
• 3. neither firms nor workers can exert control over the market wage rate.
• price takers.
8
Wag
e
Labour Input (workers per week)
Wag
e
Labour Market: Perfect CompetitionLabour Market: Perfect Competition
Labour Input (workers per week)
D
S
Industry LabourMarket
The Firm: on the demand side is a
price taker
w1SL
L1
w1
9
Labour Market: Perfect CompetitionLabour Market: Perfect Competition
• There are many households selling to many firms, and no one household or firm has any power to influence the price.
Demand for Labour Demand for Labour • Assume that the firm on the demand side of the
market is –buying (hiring) apple pickers in a perfectly
competitive labour market, and–selling apples in a perfectly competitive goods
market.
10
Labour Market: Perfect Competition: Labour Market: Perfect Competition: Demand for Labour.Demand for Labour.
• The firm, on the DemandDemand side of the market, is a “price taker”.
• It has to decide: –how many apple pickers to hire
• given the price of apples ( goods market)
• given the wage rate for apple pickers (factor market)
– in order to maximize profit
11
Marginal ReviewMarginal Review
Marginal Product of Labour• Additional production of last worker hired• MPL=Q /L
Marginal Revenue Product• Additional revenue of last worker hired• MRP=P x MPL• MRP= TR / L
12
The Competitive Firm Decides How Much The Competitive Firm Decides How Much Labour to Hire: Price of Apples=$10/bu. Labour to Hire: Price of Apples=$10/bu. Wage Rate=$500/weekWage Rate=$500/week
Labor (# of workers)
(L)0
1
2
3
4
5
Output
(Bushels/
Week)
(Q)
0
100
180
240
280
300
Marginal
Product of
Labour
(MPL=Q /L)
100
80
60
40
20
of Labour
(MRP=PxMPL)
$1000
800
600
400
200
TR Total
revenue
$1000
1800
2400
2800
3000
MRP marginal revenue product
MRP marginal revenue product
of Labour (TR / L)
$1000
800
600
400
200
13
The Demand for Labour: The Demand for Labour: The Profit Max Hiring DecisionThe Profit Max Hiring Decision
• In order to find the MR of the Profit Maximizing decision: The firm must consider :– 1. the production function - how the size of the work force
affects the amount produced by each worker, MPL
– 2. the contribution to revenue, MRPL, and to the profit equation that each worker makes
– MRP = TR / # of workers.– MRP = Product Price x MPL.
» When MP MRP .
14
Profit Maximizing Hiring DecisionProfit Maximizing Hiring Decision
• In order to find the MC of the profit maximizing decision; the firm must find– 3 The Marginal Factor Cost (MFC)
= wage rate in perfect competition = additional cost of hiring one more unit of labour in all types of
markets
• hire workers up to the point where:
MRP Wage (MFC)
(MR) (MC)
15
Demand for Labour:Demand for Labour:• The quantity of labour a firm will hire at any given
wage, cet. par.
To maximize profit the firm hires the quantity of labour where the
MRP = MFC (W in P.C.)
MRP schedule is the Demand for Labour, for a competitive profit maximizing firm
16
Labour Input (workers per week)
Wag
eProfit Max: MRP=W(MFC): Profit Max: MRP=W(MFC): The MRP is the Demand for LabourThe MRP is the Demand for Labour
D=MRP
0
•MRP = P x MPL
(the value of the worker’s output)•MFC = W (the cost of hiring a worker)•Optimal number of employeesoccurs where MFC = MRP
•Labour Demand is down sloping
Q2
W2 MFC
MFCW1
Q1
MFCW3
Q3Market demand for labour in perfect competition
17
““Shifters of Labour Demand”Shifters of Labour Demand”
• labour does not satisfy wants directly:
demand for resources is a demand for resources is a “Derived” Demand“Derived” Demand
and therefore depends on
1. How productive (MP) labour isNon labour inputs, technological progress,
labour quality, prices of other resources2.Price of the product3.Price of other inputs
18
Market Supply of LabourMarket Supply of Labour
• To attract workers, the wage rate paid must cover – the opportunity costs of alternative uses of time
spent,• in other labour markets, • in house-hold activities • in leisure.
• Higher wages attract people whose opportunity costs are not covered at lower wages: therefore the Supply of labour to any labour market is upward sloping.
19
Supply ShiftersSupply Shifters
• The supply of labour changes and the supply curve shifts if– The adult population changes
– Technology and capital in the home change
– Preferences change
20
Equilibrium Wage Rate:Equilibrium Wage Rate:Perfectly Competitive Labour MarketPerfectly Competitive Labour Market
Quantity of Labour
Wag
e R
ate
per
Wor
ker
per
Wee
k ($
)
D
S
00
498
Q1
Surplus
Shortage
The wage adjusts so Qn.D=Qn.SShifts of demand or supply will change the equilibrium wage and the MRPL by the same amount since they are always equal
The wage adjusts so Qn.D=Qn.SShifts of demand or supply will change the equilibrium wage and the MRPL by the same amount since they are always equal
21
Wag
e
Labour Input (workers per week)
Wag
e
Labour Market: Perfect CompetitionLabour Market: Perfect Competition
Labour Input (workers per week)
D
S
Industry LabourMarket
The Firm: on the demand side is a
price taker
w1SL
L1
w1
22
MonopsonyMonopsonyMonopsonyMonopsony
• A monopsonist faces the Market Supply of Labour To hire more labour, a higher wage must be paid: marginal cost of labour (MFC) curve is upward sloping.
A monopsony is a market in which there is a single buyer.
A monopsony is a market in which there is a single buyer.
To maximize profit the monopsonist hires until the marginal cost of labour , that is , the marginal factor cost , is equal to the marginal revenue product.
To maximize profit the monopsonist hires until the marginal cost of labour , that is , the marginal factor cost , is equal to the marginal revenue product.
23
Supply of labour: monopsony in the hire of labourSupply of labour: monopsony in the hire of labour Supply of labour: monopsony in the hire of labourSupply of labour: monopsony in the hire of labour (1)
Units of labor
0
1
2
3
4
5
6
(2)
Wage rate
$5
6
7
8
9
10
11
(3)
Total labor cost (wage bill)
$0
6
14
24
36
50
66
(4)
Marginal factor(labour) cost
TFactorC/QL
$6
8
10
12
14
16
•the cost of an extra worker : MFC the wage rate by the amount needed to bring the wage rate of all workers currently employed up to the new wage.
•the cost of an extra worker : MFC the wage rate by the amount needed to bring the wage rate of all workers currently employed up to the new wage.
24
Marginal Factor Cost :Marginal Factor Cost : Monopsonist: Profit Max Employment Monopsonist: Profit Max EmploymentMarginal Factor Cost :Marginal Factor Cost : Monopsonist: Profit Max Employment Monopsonist: Profit Max Employment
Labour Input (worker-weeks)
MF
C a
nd M
RP
per
Wor
ker-
Wee
k ($
)
S
MFC
MRP
We
Qe
Wm
Qm
E
Hire Qm whereMFC = MRP andpay Wm
Hire Qm whereMFC = MRP andpay Wm
MRP > WMRP > W
•Monopsony decreases the level of employment and the wage rate, compared to perfect competition
25
Monopsony ResultsMonopsony ResultsMonopsony ResultsMonopsony Results
• Provides rationale for regulation of monopsony’s
A monopsony reduces employment and wages when compared to PC
A monopsony reduces employment and wages when compared to PC
Monopsonistic exploitation – workers are paid a wage rate less than the monopsonist’s revenues
Monopsonistic exploitation – workers are paid a wage rate less than the monopsonist’s revenues
• Programs such as work camps, free housing, and after-education work contracts can benefit the producers more than the workers
26
Minimum Wage in MonopsonyMinimum Wage in Monopsony
• The supply now becomes perfectly elastic at the minimum wage
• MFC follows suit
• To maximize profit, MFC =MRP monopsony hires 75 hours at $7.50 an hour.
Labour (hours per day)
Wag
e ra
te (
dolla
rs p
er h
our)
50
5.00
7.50
10.00
0 75
MRP = D
MFCL
SS
Minimum wage
Increase in employment
• The minimum wage has increased the wage rate by $2.50 an hour and the amount of labour employed by 25 hours a day.
27
2) Unions: Monopoly on the Supply 2) Unions: Monopoly on the Supply Side of the Labour MarketSide of the Labour Market
• In some markets, workers collectively “sell” their labour through unions.
• Labour unions are worker/employee organizations
• Engage in collective bargaining to establish a contract which sets out
• Wages,fringe benefits, maximum work days, working conditions
Imperfect Competition
28
Unions: Goal, Increase WagesUnions: Goal, Increase Wages
• Suppose a union is formed in an otherwise competitive market,
the union is bargaining with a large number of employers.
• Assume the major goalgoal is to increase wagesincrease wages
• A variety of ways to achieve thisA variety of ways to achieve this
29
Unions: Increase WagesUnions: Increase Wages
• 1) Increase Increase Demand for Labor.Demand for Labor.– increase demand for
the product - union label.
– Decrease demand for alternatives
• Often self-fulfilling, as higher wages lead to higher quality
– increase productivity
Quantity of Labour per Time Period
Wag
e R
ate
per
Hou
r
Qe
We E
S
D
D`
W1
Q1
Wage increases and Wage increases and more labour is hiredmore labour is hired
30
Unions: Increase WagesUnions: Increase Wages
• 2) Restrict Labour Supply
• exclusive or craft union: – union that
comprises workers of a given skill.
– occupational licensing. S1
Number of Workers per Time Period
Wag
e R
ate
per
Hou
r ($
)
D2
D1
Q2
E315
Q1
14 E1
If union membership is limited to Q1, wages increase to $16 instead of $15 when demand increases
16 E2
S2
31
Unions: Increase Wages Unions: Increase Wages
• 2) Restrict Labour Supply.
• inclusive/ industrial union: – union that seeks as
members all unskilled, semi skilled & skilled workers in a given industry.
SL
D=MRP
Wag
e R
ate
per
Hou
r ($
)
Number of Workers per Time Period
Wc
Qc
Supply becomes horizontal at the union wage rate: MFC=Wu.
SuWu
Qu
MRP=MFC
32
Unions: Goal, Increase WagesUnions: Goal, Increase Wages
• Contracts for higher wages can be negotiated via the THREAT of reduced labour supply (ie: a strike)
• Control over the supply side of the labour market is required here
33
Unions: Employ workersUnions: Employ workers
• 2) A union may want to employ more workers than at equilibrium. This requires, however a reduction in wage from W1 to W2
S1
Number of Workers per Time Period
Wag
e R
ate
per
Hou
r ($
)
D2
Q2
E3W2
This union goal is less common due to the decrease in wages for employed workersW1 E2
Q1
34
3.) Bilateral Monopoly3.) Bilateral Monopoly• In communities with a single major
employer, there is typically also a union.
A bilateral monopoly exists when a union (monopoly seller) faces a monopsony buyer.
Wages are determined by bargaining.
35
3.) Bilateral Monopoly3.) Bilateral Monopoly
• The monopsony hires 50 hours and pays $5/hour.
• The union may agree to work 50 hours, but seeks the highest wage rate the employer can be forced to pay — $10/hour=MRPL
Labour (hours per day)
Wag
e ra
te (
dolla
rs p
er h
our)
50
5.00
7.50
10.00
0 75
MRP
MCL
S
36
3.) Bilateral Monopoly3.) Bilateral Monopoly
• It is unlikely the union will get $10/hour or that the firm can keep wages at $5.00/hr.
• The monopsony firm and union bargain over the wage rate
• It will settle between $5 and $10/hour (depending upon who is stronger).
Labour (hours per day)
Wag
e ra
te (
dolla
rs p
er h
our)
50
5.00
7.50
10.00
0 75
MRP
MCL
S
37
Wage DifferentialsWage Differentials
• Wages & earnings typically exhibit wide variations:– 1) Labour Market Imperfections
– workers are not always mobile– institutional restrictions – unions..– discrimination – hiring practices - another
model of labour market imperfection
• If all labour was homogeneous and all jobs were equally attractive, and all labour markets were perfectly competitive, then all wages would be the same……..
38
Wage DifferentialsWage Differentials
– 2) Compensating Differences
–jobs vary in attractiveness
– 3) Non-competing Occupational Groups
–workers aren’t homogeneous, they have different ability, different education and training.
39
Union BenefitsUnion Benefits
– 1) Allows for increased productivity, skill and efficiency
– 2) Reduce wage inequality
– 3) Reduce profits (transfer surplus to workers)
– 4) Provide a voice for workers
– 5) Increase workforce stability (and job security)
40
Union DrawbacksUnion Drawbacks
– 1) Job security can lead to reduced productivity. Free-riding = expecting others to work hard
Featherbedding = forcing employers to use more workers than needed
– 2) Increase wage inequality between union and non-union workers
– 3) Cause businesses with little economic profit to fold, resulting in unemployment
– 4) Generally causes unemployment– 5) Often prevents natural market mechanisms to
take place (ie: raises to hard workers, fire others)