Transcript Document

Part 7
Further Topics
© 2006 Thomson Learning/South-Western
Chapter 15
Pricing in Input
Markets
© 2006 Thomson Learning/South-Western
Profit-Maximizing Behavior and
the Hiring of Inputs


3
A profit-maximizing firm will hire additional
units of any input up to the point at which
the additional revenue from hiring one
more unit is exactly equal to the cost of
hiring that unit.
Let MEK and MEL denote the marginal
expense of hiring capital and labor,
respectively.
Profit-Maximizing Behavior and
the Hiring of Inputs


Let MRK and MRL be the extra revenue that
hiring more units of capital and labor allows the
firm to bring in.
Profit maximizing behavior requires:
ME K  MRK
ME L  MRL .
4
15.1
Price-Taking Behavior

If the firm is a price taker in the capital and labor
market then it can always hire an extra unit of
capital at the prevailing rate (v) and an extra unit
of labor at the wage rate (w).
v  ME K  MRK
w  ME L  MRL .
5
15.2
Marginal Revenue Product



Marginal product is how much output the
additional input can produce.
Marginal revenue (MR) is the extra revenue
obtained from selling an additional unit of output.
Thus, the profit maximizing rules are:
v  ME K  MRK  MPK  MR
w  ME L  MRL  MPL  MR.
6
15.3
A Special Case--Marginal Value
Product


If the firm is also a price taking in the goods
market, marginal revenue equals the price (P) at
which the output sells.
The profit maximizing conditions become
v  MPK  P
w  MPL  P
7
15.3
Marginal Value Product

The marginal value product (MVP) of capital
and labor, respectively, are special cases of
marginal revenue product in which the firm is a
price taker for its output.
v  MVPK
w  MVPL
8
15.5
Responses to Changes in Input
Prices: Single Variable input Case



9
Assume the firm has fixed capital and can
only vary its labor input in the short run.
Labor will exhibit diminishing marginal
physical productivity so labor’s MVP will
decline as more labor is hired.
In Figure 15-1, the profit maximizing firm
will hire L1 labor hours when the wage rate
is w1.
FIGURE 15-1: Change in Labor Input
When Wage Falls: Single Variable Case
MVP
Wage
w1
w2
MVPL
0
10
L1
L2
Labor hours
Responses to Changes in Input
Prices: Single Variable input Case

If the wage rate falls to w2 the firm hires
increased labor to L2.


11
If the firm continued to hire L1 it would not
be maximizing profit since labor would be
capable of producing more in additional
revenue than hiring additional labor would
cost.
With one variable input, diminishing
marginal productivity results in a
downward sloping demand curve.
TABLE 15-1: Hamburger Heaven’s ProfitMaximizing Hiring Decision
Labor
Input
per Hour
Hamburgers
Produced
per Hour
Marginal
Product
(Hamburger)
Marginal
Value Product
($1.00 per
Hamburger)
1
2
3
4
5
6
7
8
9
10
20.0
28.3
34.6
40.0
44.7
49.0
52.9
56.6
60.0
63.2
20.0
8.3
6.3
5.4
4.7
4.3
3.9
3.7
3.4
3.2
$20.00
8.30
6.30
5.40
4.70
4.30
3.90
3.70
3.40
3.20
12
The Substitution Effect



13
The substitution effect, in the theory of
production, is the substitution of one input for
another while holding output constant in
response to a change in the input’s price.
In Figure 15-2(a), a fall in w will cause the firm to
change from input combination A to B to equate
RTS to the new w/v.
Diminishing RTS leads to more labor hired.
FIGURE 15-2: Substitution and Output
Effects of A Decrease in Price of Labor
Price
Capital
per week
MC
K1
A
P
K2
B
0
L1
q1
L2
Labor hours
per week
(a) Input Choice
14
0
q1
Output
per week
(b) Output Decision
The Output Effect



15
The output effect is the effect of an input
price change on the amount of the input
that the firm hires that results from a
change in the firm;s output level.
In Figure 15-2(b), the lower w causes the
marginal cost curve to shift to MC’.
The profit maximizing output raises to q2
resulting in more labor hired.
FIGURE 15-2: Substitution and Output
Effects of A Decrease in Price of Labor
Price
Capital
per week
MC
MC’
K1
A
C
K2
q2
B
0
L1
q1
L2
Labor hours
per week
(a) Input Choice
16
P
0
q1 q2
Output
per week
(b) Output Decision
Responsiveness of Input Demand
to Price Changes

Ease of Substitution


17
The size of the substitution effect will depend
upon how easy it is to substitute other factors
of production for labor.
The size of the substitution effect will also
depend upon the length of time as it becomes
easier to find substitutes in a longer period of
time.
Costs and the Output Effect

The size of the output effect will depend upon



18
How large the increase in marginal costs brought
about by the wage rate increase is, and
How much quantity demanded will be reduced by
a rising price.
The first depend upon how important labor is in
production while the latter depends upon the price
elasticity of demand for the final product.
Input Supply

Resources come from three major sources:




19
Labor is provided by individuals.
Capital equipment is produced which other firms
can buy outright or rent.
Natural resources are extracted from land and can
be used outright or sold to other firms.
As shown in earlier chapters, capital and
natural resources have upward sloping
supply curves.
Labor Supply and Wages



20
Wages represent the opportunity cost of
not working at a paying job for individuals.
For purposes of this analysis, wages
should be interpreted to include all forms
of compensation.
Individuals will balance the monetary
rewards from working against the psychic
benefits of other, nonpaid activities.
Labor Supply and Wages

Labor supply curves will differ based upon
individual preferences.


It is likely that an increase in the wage will
result in more labor supplied to the market.

21
Noneconomic factors such as pleasant working
conditions will affect the location of the supply
curve.
Graphically, the market labor supply curve is likely
to be positively sloped.
Equilibrium Input Price
Determination



22
In Figure 15-3, the market demand for
labor is labeled D, and the market supply
of labor is labeled S.
The equilibrium wage and quantity is
where quantity demanded equals quantity
supplied, [w*, L*].
Other things equal, this equilibrium will
tend to persist from period to period.
FIGURE 15-3: Equilibrium in an Input
Market
Wage
S
w*
D
0
23
L*
Labor hours
per week
Shifts in Demand and Supply


24
Any factor that shifts the firms’ underlying
production function will shift its input
demand curve.
Demand for an input is derived from the
demand for the output, changes in the
prices of the output will shift input demand
curves
Shifts in Demand and Supply


25
In Figure 15-3, the demand curve shifts to
D’ which reduces equilibrium wages from
w* to w’ and equilibrium employment from
L* to L’.
The various factors that shift input demand
and supply curves are summarized in
Table 15-2.
FIGURE 15-3: Equilibrium in an Input
Market
Wage
S
w*
w’
D
D’
0
26
L’
L*
Labor hours
per week
TABLE 15-2: Factors That Shift Input
Demand and Supply Curves
Demand
Demand Shifts Outward
Rise in output price
Increase in marginal
productivity
Demand Shifts Inward
Fall in output price
Decrease in marginal
productivity
27
Labor Supply
Capital Supply
Supply Shifts Outward
Decreased preference
Fall in input costs of
for Leisure
equipment makers
Increased desirability
Technical progress in
of job
making equipment
Supply Shifts Inward
Increased preference
Rise in input costs of
for Leisure
equipment makers
Decreased desirability
of job
An Overview of Labor Market
Science is built up with facts, as a house is with stones. But a collection of facts
is no more a science than a heap of stones is a house.
-Jules Henri Poincar’e-


28
Labor Force: All those over 15 years of
age who are either employed, actively
seeking work, or awaiting recall from a
layoff. (The age may vary in different
countries. For example, it is 16 years of
age for the U.S.)
Labor Force Participation Rate: The
ratio of the labor force to those of age over
15.
An Overview of Labor Market


29
Unemployment: Those in the labor force
who are not employed (for pay).
Unemployment Rate: The ratio of those
unemployed to those in the labor force.
This is the most widely cited measure of
labor market condition.
An Overview of Labor Market

Wage Rate: The price of labor per working
hour.
Wage rate × Units of time worked = Earnings.
Earnings + Fringe benefit = Compensation.
Compensation + Unearned income (interest,
dividends, transfer payments etc.) = Income
30
Employed
FIGURE 15-4
Labor Force
(Employed plus
Unemployed)
Population
(Age 15 and
over)
New Entrants
Reentrants
Dropouts
Retirements
Not in Labor
Force
31
Layoffs
Quits
New Hire
Recalls
Unemployed
(Not employed, but
looking for work or
awaiting recall)
FIGURE 15-5: Demand for Labor
Product demand
Wages, amount of K
Choice of technologies
Determines number of workers
employed
Wages
Wage Changes: (1) Scale Effect
(2) Substitution Effect
A demand curve for labor tells us how
the desired level of employment varies
with changes in the price of labor when
the other factors affecting demand are
held constant.
32
D
# of workers
FIGURE 15-6: Market Supply
Market Supply: The supply of labor to a particular market is
positively related to the wage rate prevailing in that market
holding other wages constant.
Wages
Wages
S2
S
S1
# of workers
33
# of workers
FIGURE 15-7: Supply to Firms
Supply to Firms:
The supply to a firm would
be a horizontal line since
each firm is a price taker in
the competitive labor market .
Wages
W*
# of workers
34
FIGURE 15-8: Determination of the Wages
Wages
Supply
W2
W1：demand exceeds supply
W*
W2：supply exceeds demand
W*：Market-Clearing Wage
W1
Demand
# of workers
35
FIGURE 15-9: Wage rates are determined by
the market and announced to individual firm.
Wages
Wages
Supply
W*
Market
36
SA
W*
Demand
DA
# of workers
# of workers
A Typical Firm
表15-3: 重要人力指標
項目別
總計
男性
女性
年
度
經濟
成長
率(%)
勞動力
(千人)
就業者
(千人)
失業者
(千人)
勞動力
參與率
(%)
勞動力
(千人)
就業者
(千人)
失業者
(千人)
勞動力
參與率
(%)
勞動力
(千人)
就業者
(千人)
失業者
(千人)
勞動力
參與率
(%)
70
6.24
6764
6672
92
57.82
4503
4448
55
76.78
2261
2224
37
38.76
71
3.47
6959
6811
149
57.93
4605
4509
96
76.47
2354
2301
53
39.30
72
8.32
7266
7070
197
59.26
4687
4561
126
76.36
2580
2509
71
42.12
73
10.71
7491
7308
183
59.72
4778
4661
116
76.11
2713
2647
67
43.30
74
5.02
7651
7428
222
59.49
4860
4719
141
75.47
2790
2709
81
43.46
75
11.49
7945
7733
212
60.37
4957
4821
136
75.15
2988
2912
75
45.51
76
12.66
8183
8022
161
60.93
5065
4966
100
75.24
3118
3057
61
46.54
77
8.04
8247
8107
139
60.21
5130
5043
87
74.83
3116
3064
52
45.56
78
8.45
8390
8258
132
60.12
5231
5149
82
74.84
3159
3110
49
45.35
資料來源：行政院主計處
37
表15-3: 重要人力指標(續)
項目別
總計
男性
女性
年
度
經濟
成長
率(%)
勞動力
(千人)
就業者
(千人)
失業者
(千人)
勞動力
參與率
(%)
勞動力
(千人)
就業者
(千人)
失業者
(千人)
勞動力
參與率
(%)
勞動力
(千人)
就業者
(千人)
失業者
(千人)
勞動力
參與率
(%)
79
5.70
8423
8283
140
59.24
5263
5175
88
73.96
3160
3108
52
44.50
80
7.58
8569
8439
130
59.11
5355
5274
80
73.80
3214
3165
49
44.39
81
7.85
8765
8632
132
59.34
5460
5380
81
73.78
3304
3252
52
44.83
82
6.90
8874
8745
128
58.82
5497
5422
75
72.67
3377
3323
54
44.89
83
7.39
9081
8939
142
58.96
5595
5511
84
72.44
3485
3428
58
45.40
84
6.49
9210
9045
165
58.71
5659
5558
101
72.03
3551
3487
64
45.34
85
6.30
9310
9068
242
58.44
5662
5508
154
71.13
3648
3560
88
45.76
86
6.59
9432
9176
256
58.33
5731
5562
169
71.09
3701
3613
88
45.64
87
4.55
9546
9289
257
58.04
5780
5610
169
70.58
3767
3679
88
45.60
資料來源：行政院主計處
38
表15-3: 重要人力指標(續)
項目別
總計
男性
女性
年
度
經濟
成長
率(%)
勞動力
(千人)
就業者
(千人)
失業者
(千人)
勞動力
參與率
(%)
勞動力
(千人)
就業者
(千人)
失業者
(千人)
勞動力
參與率
(%)
勞動力
(千人)
就業者
(千人)
失業者
(千人)
勞動力
參與率
(%)
88
5.75
9668
9385
283
57.93
5812
5624
188
69.93
3856
3761
95
46.03
89
5.77
9784
9491
293
57.68
5867
5670
197
69.42
3917
3821
95
46.02
90
-2.17
9832
9383
450
57.23
5855
5553
302
68.47
3977
3830
148
46.1
91
4.25
9969
9454
515
57.34
5896
5547
348
68.22
4074
3907
167
46.59
92
3.43
10076
9573
503
57.34
5904
5579
326
67.69
4172
3994
177
47.14
93
6.07
10240
9786
454
57.66
5968
5680
288
67.78
4272
4106
166
47.71
94
4.03
10371
9942
429
57.78
6012
5753
259
67.63
4359
4190
169
48.12
95
4.62
10522
10111
411
57.92
6056
5810
246
67.35
4467
4301
166
48.69
資料來源：行政院主計處
39
圖15-10: 70-95年台灣地區趨勢圖
11000
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95
勞動力（千人）
40
就業者（千人）
失業者（千人）
年
圖15-11:勞動參與率
%
勞動力參與率
80
70
60
50
40
30
年
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95
勞動力參與率(%)
女性勞動力參與率(%)
41
男性勞動力參與率(%)
表15-4: 歷年五月台灣地區有偶婦女勞動
參與率
項目
年
70
71
72
73
74
75
76
77
78
79
80
81
82
42
總平均
57.82
57.93
59.26
59.72
59.49
60.37
60.93
60.21
60.12
59.24
59.11
59.34
58.82
女性
平均
38.76
39.30
42.12
43.30
43.46
45.51
46.54
45.56
45.35
44.50
44.39
44.83
44.89
有偶婦女
平均
31.42
31.51
35.53
38.74
39.84
41.82
43.74
42.66
43.65
42.49
44.00
43.23
44.39
子女均在６歲
以上有偶婦女
32.75
32.29
35.70
38.55
39.63
41.85
43.18
41.82
42.35
41.04
42.66
42.49
43.78
有未滿6歲子女
有偶婦女
28.26
28.99
33.40
37.34
39.07
40.55
42.95
42.29
44.64
43.69
44.36
42.30
42.99
尚無子女
有偶婦女
39.30
41.12
48.89
50.88
48.95
50.62
56.75
56.55
54.79
55.21
60.50
58.24
59.71
表15-4: 歷年五月台灣地區有偶婦女勞動
參與率(續)
項目
年
83
84
85
86
87
88
89
90
91
92
93
94
95
43
總平均
58.96
58.71
58.44
58.33
58.04
57.93
57.68
57.23
57.34
57.34
57.66
57.78
57.92
女性
平均
45.40
45.34
45.76
45.64
45.60
46.03
46.02
46.1
46.59
47.14
47.71
48.12
48.69
有偶婦女
平均
45.41
45.75
47.11
46.98
46.50
46.82
46.34
46.48
47.30
47.34
47.84
47.88
48.38
子女均在６歲
以上有偶婦女
44.03
44.45
45.70
45.48
44.20
44.87
43.54
43.23
44.39
44.69
44.92
44.54
44.67
有未滿6歲子女
有偶婦女
45.73
45.75
48.15
48.16
49.60
49.24
51.39
52.99
53.57
53.46
54.15
55.64
58.14
尚無子女
有偶婦女
64.16
65.01
62.66
62.42
65.58
64.99
65.97
66.76
63.94
64.30
69.37
71.21
71.31
圖15-12:歷年子女年齡別有偶婦女勞動力
參與率
80
70
60
50
40
30
20
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95
總平均
有偶婦女平均
有未滿6歲子女有偶婦女
44
女性平均
子女均在６歲以上有偶婦女
無子女有偶婦女
Monopsony



45
If the firm is not a price taker in the input
market, it may have to offer a higher wage
to attract more employees.
A monopsony is the condition in which
one firm is the only hirer in a particular
input market.
If the firm is a monopsony, it faces the
entire market supply curve for the input.
Marginal Expense

The marginal expense of an input is the
cost of hiring one more unit of an input.


46
The firm has to offer a higher wage to the
hired worker and to the workers already
employed.
The marginal expense of labor (MEL) will
exceed the price of the input if the firm faces
an upward-sloping supply curve for the input.
A Numerical Illustration



47
Suppose the Yellowstone Park Company
is the only hirer of bear wardens.
The number of people willing to take this
job (L) is given by
1
15.6
L w
2
This relationship is shown in Table 15-3
TABLE 15-5: Labor Costs of Hiring Bear
Wardens in Yellowstone Park
Hourly
Wage
$2
4
6
8
10
12
14
48
Workers
Supplied
per Hour
1
2
3
4
5
6
7
Total Labor
Cost per
Hour
$2
8
18
32
50
72
98
Marginal
Expense
$2
6
10
14
18
22
26
A Numerical Illustration


49
Total labor costs (w·L) is shown in the third
column and the marginal expense of hiring
each warden is shown in the fourth
column.
Since the new warden and the existing
wardens receive the wage increase, the
marginal expense exceeds the wage rate.
A Numerical Illustration

Figure 15-4 shows the supply curve (S) for
wardens.


50
If Yellowstone wishes to hire three wardens it
must pay $6 per hour with total outlays of $18
(point A on the graph).
The wage must be increased to $8 to get a
fourth warden (point B) which results in total
outlays of $32.
FIGURE 15-13: Marginal Expense of
Hiring Bear Wardens
Hourly
wage
S
B
$8
A
6
0
51
3
4
Bear wardens
per hour
A Numerical Illustration

The marginal expense of the fourth
warden, $14 is reflected in the graph.



52
The hourly wage ($8) is shown in gray.
The extra outlay to the three previous workers
($8 per hour versus $6 per hour previously) is
shown in color.
Total outlays exceed the amount for three
wardens by the sum of these two areas.
FIGURE 15-13: Marginal Expense of
Hiring Bear Wardens
Hourly
wage
S
B
$8
A
6
0
53
3
4
Bear wardens
per hour
Monopsonists and Resource Allocation:
A Graphical Demonstration



54
The demand curve in Figure 15-5 is D.
Since marginal expense (MEL) exceeds
the wage, the marginal expense curve is
above the supply curve (S).
L1 is the profit maximizing choice while the
marginal value product is MVP1 and the
wage is w1.
FIGURE 15-14: Pricing in a
Monopsonistic Labor Market
ME
Wage
S
MVP1
w1
0
55
D
L1
Labor hours
per week
A Graphical Demonstration


56
L1 is less than L*, the amount hired with
perfect competition.
As with a monopoly, the “demand curve”
for a monopolist actually consists of the
single point given by L1, w1.
FIGURE 15-14: Pricing in a
Monopsonistic Labor Market
ME
Wage
S
MVP1
w*
w1
0
57
D
L1
L*
Labor hours
per week
Monopsonists and Resource
Allocation



58
Since the monopsonist restrict its input
use, it pays an input less than its marginal
value product (w1 < MVP1).
Total output could be increased by
drawing more labor into the market.
The more inelastic the labor supply, the
more the monopsonists can benefit from
this profit opportunity.
Bilateral Monopoly



59
A bilateral monopoly is a market in which both
suppliers and demanders have monopoly power.
In Figure 15-6, “supply” and “demand” intersect
at P*, Q*, but this is not equilibrium since neither
player is a price taker.
The monopoly supplier will operate on its
marginal revenue curve (MR) and prefer pricequantity combination P1, Q1.
Bilateral Monopoly


60
The monopoly supplier will operate on its
marginal revenue curve (MR) and prefer
price-quantity combination P1, Q1.
The monopsonistic will operate on its
marginal expense curve (ME) and prefer
combination P2, Q2.
Bilateral Monopoly



61
The monopoly supplier will operate on its
marginal revenue curve (MR) and prefer
price-quantity combination P1, Q1.
The monopsonistic will operate on its
marginal expense curve (ME) and prefer
combination P2, Q2.
The final outcome, after bargaining, will lie
between these two combinations.
FIGURE 15-15: Bilateral Monopoly
ME
Input
price
S
P1
P*
P2
D
MR
0
62
Q2 Q1
Q*
Quantity per
period