Transcript Factor markets, Labor markets, Economic rent & General Equilibrium

Factor markets -Labor markets
& General Equilibrium
Dr. D. Foster – ECO 284
Factor Markets
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Look at perfectly competitive factor markets.
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Focus on labor market.
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Results applicable to other factor markets.
Consider in the context of competitive output
markets.
Omit the following:
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C26: Case 2 (481-482), Case 4 (485-487), Factors affecting the
elasticity of derived demand (483-484).
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C27: Unions (507-512).
Factor Markets

Look at perfectly competitive factor markets.

Focus on labor market.

Results applicable to other factor markets.

Consider in the context of competitive output
markets.
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Results: Wages are equal.
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Why do wages differ?
Factor Markets
Wage
S
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Role reversal:
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w*
Demand – comes from firms.
Supply – comes from us (labor).
D
L*
Labor
Demand = derived from the demand for
output produced by the factor.
What would be the profit maximizing rule?
Hire until the marginal benefit equals marginal cost:
Marginal Revenue Product = Marginal Factor Cost
Factor Markets
Marginal Revenue Product (MRP) is …
revenue generated by this unit of labor
$
= MPLx Pe
or = MPPLxPe
Actually, this is MPL·MR, not
the price MPL·Pe.
MRP
L
But, in a perfectly competitive
output market, the MR = P.
We will content ourselves with
this simple case.
Factor Markets
Marginal Factor Cost (MFC) = Wage Rate (w)
$
If a firm hires too few
workers, they are giving
up profitable production.
MFC
w*
MRP
L
ℓ*
If they hire too many, they
are losing profit on the
last unit(s) of labor.
Factor Markets
What would change the equilibrium level of
workers hired (l*)?
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A change in the equilibrium wage (w*)
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A change in the equilibrium output price (Pe)
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Due to a change in the Supply of labor.
Due to a change in the Demand for labor.
The price affects the profitability of each worker.
A change in the productivity of labor (MPL)
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Changes in skills, education, experience.
Changes in the amount of capital
Changes in the price of other (substitutable) factors.
Perfectly Competitive Labor Markets
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Everyone is a price taker.
There are no barriers to entry/exit.
Labor is mobile . . .
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in use.
in location.
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All labor is the same.
All job environments are the same.
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Result: In the LR, all wages are the same!
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Perfectly Competitive Labor Markets
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Why do wage rates differ?
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All labor is not the same.
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Skills differ – education differs – experience differs
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Labor is not mobile in use.
Labor is not perfectly mobile in location.
Job environments differ.
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Result: Even with P.C. wages will differ!
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Factor Markets – Work Problem
Labor Quantity
0
0
1
15
2
27
3
37
ii.
4
45
iii.
5
51
6
55
7
57
8
58
Derive and plot MRP & MFC:
i.
when P=$4 & w=$24
when P=$2 & w=$24
when P=$4 & w=$8
Find the optimal level of labor.
General Equilibrium
Putting Output & Factor Markets Together
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Factor market assumptions –
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competitive;
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wage differentials reflect job environments;
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labor is mobile;
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capital is abundant;
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when wages change, equilibrium is disrupted in SR;
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LR equilibrium restored when differences reflect
values placed on differing environments.
General Equilibrium
Putting Output & Factor Markets Together
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Output market assumptions –
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competitive;
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long-run constant costs;
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there are only two goods – coal and wheat;
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all income is spent;
Current (long run equilibrium) condition –
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Wages: wheat workers $5; coal miners $8.
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Prices: wheat is $3/bushel; coal is $10/ton.
Draw these market curves for our next class.
Factor markets -Labor markets
& General Equilibrium
Dr. D. Foster – ECO 284