input market and rent ch 10&11

8/3/2019 Input Market and Rent Ch 10&11

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Markets for FactorInputs,

Labour Market

Economic RentChapter 10 & 11


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Competitive Factor Markets

Characteristics

1) Large number of sellers of the factor

of production

2) Large number of buyers of the factorof production

3) The buyers and sellers of the factorof production are price takers


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Demand for a Factor Input When OnlyOne Input Is Variable

Demand for factor inputs is a deriveddemand

derived from factor cost and outputdemand


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Assume

Two inputs: Capital (K) and Labor (L)

Cost of K is rand the cost of labor is w

Kis fixed and L is variable

Demand for a Factor Input WhenOnly One Input Is Variable


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Problem

How much labor to hire



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Measuring the Value of a Workers

Output Marginal Revenue Product of Labor

(MRPL)

MRPL = Change in total revenueChange in resource quantity



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Assume perfect competition in the

product market Then MR = P



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What will happen to the value of MRPL whenmore workers are hired?

Choosing the profit-maximizing amount oflabor

If MRPL > w(the marginal cost of hiring a worker):

hire the worker If MRPL < w:hire less labor

If MRPL = w: profit maximizing amount of labor



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w* SL

In a competitive labor market, a

firm faces a perfectly elastic supply of laborand can hire as many workers as it wants at w*.

Hiring by a Firm in theLabor Market (with Capital Fixed)

Quantity of Labor

Price ofLabor

MRPL = DL

L*

The profit maximizing firm willhire L*units of labor at the point

where the marginal revenue product

of labor is equal to the wage rate.


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If the market supply of labor increased

relative to demand, a surplus of laborwould exist and the wage rate wouldfall.

Question

How would this impact the quantitydemanded for labor?



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A Shift in the Supply of Labor

Quantity of Labor

Price ofLabor

w1S1

MRPL = DL

L1

w2

L2

S2


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Comparing Input and Output Markets

In both markets, input and output choices

occur where MR = MCMR from the sale of the output

MC from the purchase of the input


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Scenario

Producing farm equipment with twovariable inputs:

Labor

Assembly-line machinery

Assume the wage rate falls, How will thedecrease in the wage rate impact thedemand for labor?

Demand for a Factor Input WhenSeveral Inputs Are Variable

Fi D d C f L b


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MRPL1 MRPL2

When two or more inputs are

variable, a firms demand for one inputdepends on the marginal revenue

product of both inputs.

Firms Demand Curve for Labor(with Variable Capital)

Hours of Work

Wages($ perhour)

0

5

10

15

20

40 80 120 160

When the wage rate is $20, Arepresents one point on the firms

demand for labor curve.

When the wage rate falls to $15, theMRP curve shifts, generating a new

point C on the firms demand forlabor curve. Thus A and C are

on the demand for labor curve, butB is not.

DL

A

B

C


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Assume that all firms respond to a lowerwage

All firms would hire more workers.

Market supply would increase.

The market price will fall.

The quantity demanded for labor by thefirm will be smaller.


Industry Demand for Labor


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The Supply of Inputs to a Firm

Determining how much of an input to

purchaseAssume a perfectly competitive factor

market

The market supply for physical inputs isupward sloping.

A Fi I t S l i


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SMarket Supplyof fabric

A Firms Input Supply in aCompetitive Factor Market

Yards ofFabric (thousands)

Yards ofFabric (thousands)

Price($ peryard)

Price($ peryard)

D

Market Demandfor fabric

100

ME = AE10 10

Supply ofFabric Facing Firm

50

Demandfor Fabric

MRP

Observations1) The firm is a price taker at $10.2) S = AE = ME = $103) ME = MRP @ 50 units


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SL =AE

DL =MRPL

Labor Market Equilibrium

Number of Workers

WageCompetitive Output Market

wC

LC

A

A competitive factormarket is inequilibrium when theprice of the input

equates the quantitydemanded to thequantity supplied.


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Economic Rent

For a factor market, economic rent is thedifference between the payments made to

a factor of production and the minimumamount that must be spent to obtain theuse of that factor.

Rent is what a factor may be earning in itspresent employment over what it couldearn in its next best employment.

Economic Rent


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Total expenditure (wage) paidis 0w* x AL*Economic Rent

Economic rent is ABW*

B

Economic Rent

Number of Workers

Wage

SL =AE

DL =MRPL

w*

L*

A

0

The economic rent associated with the

employment of labor is the excess of wagespaid above the minimum amount needed

to hire workers.


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EconomicRent

s1Economic

Rent

s2

Land Rent

Number of Acres

Price($ peracre)

Supply of Land

D2

D1


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The concept of quasi-rent emerged with Marshall (1996),through the argument according to which some short-termgains would be ephemeral (lasting for short time).

All long-term resources would be variable; a rapiddissemination of technology would lead to an ephemeraleconomic income.

It is the income which some agents of production earn whendemand has suddenly increased and supply can not beincreased in response to it in the short run.

Concept: quasi-rentConcept: quasi-rent


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quasi-rent

Quasi rent may also arise due to a temporary scarcityof of a particular kind of skill which can only beincreased if enough time is given.

Quasi rent may also be defined as the excess of total

revenue earned in the short run over the the totalvariable cost.

Quasi Rent= Total Revenue Total variable cost.

It disappears in the long run because supply ofcapital goods become perfectly elastic.

input market and rent ch 10&11

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