Transcript Bajada, Economic Principles 3e

Chapter 12
Economic resources
and the labour market
Copyright © 2012 McGraw-Hill Australia Pty Ltd
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12- 1
Learning objectives
1. Discuss the significance of resource pricing.
2. Introduce marginal productivity theory as a way of
explaining the amounts of resources that firms use.
3. Examine the way the employment of resources may
vary when there are many buyers of the resource
and different forms of competition in the product
market.
4. Explain the demand for a resource, what determines
changes to resource demand and what factors
determine the elasticity of resource demand.
Copyright © 2012 McGraw-Hill Australia Pty Ltd
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Learning objectives (cont.)
5. See how wage rates are determined in particular
labour markets.
6. Examine wage-price (incomes) policies as a means
of dealing with stagflation.
7. Survey the development of Australia’s unique
industrial relations system.
8. Discuss changes in Australia’s industrial relations
system in the 1990s and beyond.
Copyright © 2012 McGraw-Hill Australia Pty Ltd
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Significance and complexity of
resource pricing
• Resources are a major determinant of money
incomes.
• Resource pricing allocates resources among
various industries and firms.
• Cost minimisation—a firm must produce the
profit-maximising output with the most efficient
(least costly) combination of resources.
• There are many ethical and public policy issues
in the resource market.
Copyright © 2012 McGraw-Hill Australia Pty Ltd
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Complexities of resource pricing
• Resource demand-and-supply determines pricing
and employment.
• However, exact nature depends on:
–
–
–
–
type of resource
type of market
policies and practices of government
complications added by firms and unions.
Copyright © 2012 McGraw-Hill Australia Pty Ltd
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Marginal productivity theory
• The least cost rule: the cost of any output is
minimised when the marginal product per dollar’s
worth of each resource used is the same.
• The cost minimising position occurs when:
MP of labour
Price of labour
MP of materials
=
Price of materials
Copyright © 2012 McGraw-Hill Australia Pty Ltd
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Marginal productivity theory (cont.)
• Optimal employment of resources: MRP = MRC
– To maximise profits, a firm should hire additional
units of any given resource as long as each
successive unit adds more to the firm’s total
revenue than it does to its total costs.
• Marginal revenue product (MRP)
– The increase in total revenue resulting from the
use of one additional unit of input.
Copyright © 2012 McGraw-Hill Australia Pty Ltd
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Marginal productivity theory (cont.)
• Marginal resource cost (MRC)
– The increase in total resource cost resulting from the
use of one additional unit of input.
• MRP = MRC rule
– Explains the way demand for economic resource is
formulated.
– Does not explain the exact derivation of demand curve.
Copyright © 2012 McGraw-Hill Australia Pty Ltd
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Demand for a resource
Depends on two types of markets
• Product market in which the firm sells and
produces goods
• Resource market
– Many buyers?
– Few buyers?
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Marginal definitions
• Marginal product (MP)
– Additional output resulting from the use of one
additional unit of a resource, ceteris paribus.
• Marginal revenue product (MRP)
– The increase in total revenue resulting from the use of
one additional unit of input.
• MRP = MP × P when product market is competitive
Copyright © 2012 McGraw-Hill Australia Pty Ltd
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Resource demand under perfect
competition
Assume perfect competition in resource market.
• Derived demand for resource
– Productivity of resource in producing the good
– Market value of the good
• MRP schedule constitutes the firm’s demand for
labour.
Copyright © 2012 McGraw-Hill Australia Pty Ltd
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MRP as a demand schedule
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Resource price (wage rate)
Demand for resource: perfect
competition
DR
15
MRP curve
12
9
6
3
0
DR
1
2
3
4
5
6
7
8
9
Quantity of resource demanded
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Q
12- 13
Resource demand under imperfect
competition
• Perfect competition in the resource market
• Product demand curve is down-sloping.
– Firm must accept lower price in order to increase
sales.
• Comparison with perfect competition:
– MRP = MP × MR
– MRP curve is less elastic than perfect competition.
– Imperfectly competitive firms are less responsive to
wage cuts in terms of workers employed.
Copyright © 2012 McGraw-Hill Australia Pty Ltd
PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada
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12- 14
Demand for resource: imperfect
competition
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Market demand for a resource
• Derived by horizontally summing the individual
demand or MRP curves for all firms hiring that
resource on assumption that product price is
constant
• Constant product price unlikely as industry output
expands
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Changes in resource demand
• Changes in product price
• Changes in productivity
– Quantities of other inputs used
– Technological progress
– Labour quality
Prices of other resources
• Substitute resources
– Substitution effect
– Output effect
• Complementary resources
Copyright © 2012 McGraw-Hill Australia Pty Ltd
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Elasticity of resource demand
• Resource price elasticity of demand determined by:
– rate of MP decline
– ease of resource substitutability
– price elasticity of product demand
 greater price elasticity of product demand, greater
elasticity of resource demand
– resource cost–total cost ratio:
 The larger the contribution of a resource’s price to total
costs, the greater the resource elasticity.
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Wages in particular labour
markets
• Wages are the price paid per unit of time for the
services of labour.
– Nominal wages—money received per time unit of
labour service
– Real wages—amount of goods and services that can
be purchased with a money wage during some period
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Purely competitive labour market
• Many firms competing for labour
• Many qualified workers with identical skills acting
as independent suppliers of labour
• Firms (demanders) and workers (suppliers) are
price takers (‘wage takers’) as none can totally
control wage rate
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Wage rate ($)
Competitive market for labour
S
D
∑dd
Wc=$6
S
D
Qc
Q
Quantity of labour
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Wage rate ($)
Single competitive firm
d
Wc=$6
MRC
MRP curve
d
Qc
Q
Quantity of labour
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Market policies
Two kinds of market policies
• Employment and training policy, which is:
– intended to reduce or eliminate imbalances and
bottlenecks in the labour market.
• Pro-competition policy which:
– attempts to reduce the market power of unions and
large corporations.
Copyright © 2012 McGraw-Hill Australia Pty Ltd
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Wage-price (incomes) policies
•
•
Income policies are designed to constrain both
nominal incomes and prices paid in order to
influence real income.
Two types of incomes policies
– Wage price guideposts (voluntary)
– Wage price controls (mandatory)
Copyright © 2012 McGraw-Hill Australia Pty Ltd
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History of wage fixation in
Australia
• Cost-of-living adjustments
– Capacity to pay
• Indexation and the economy
– Indexation
– Indexation revived: the Accord.
• The two-tier system
• Increase in industrial disputes
– The Industrial Relations Commission
– Arbitration process
Copyright © 2012 McGraw-Hill Australia Pty Ltd
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Industrial disputes: 1957–2009
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The 1990s and beyond
•
•
•
•
•
•
•
The enterprise bargaining principle
Accord Mark VII
Industrial Relations Amendment Act 1992
Industrial Relations Reform Act 1993
National wages and the Accord Mark VIII
Enterprise Flexibility Agreements Test Case 1995
The Workplace Relations Amendment (Work
Choices) Bill 2005
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Workplace Relations Act 1996
• Wage fixation shifted towards decentralisation
• Greater emphasis on enterprise bargaining
culminated in reforms known as ‘Work Choices’
(2005).
–
–
–
–
‘Allowable’ award matters
Minimum employment standards
Maximum ordinary hours
Exemption from unfair dismissal laws for firms with
less than 100 employees
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12- 28
Fair Work Act (2009)
• Restored ‘fairness’ lost by introduction of ‘Work
Choices’
– New unfair dismissal laws
– New regulatory body: Fair Work Australia and Fair
Work Ombudsman
– New bargaining framework
– Union right of entry to all workplaces
– New rules requiring transfer of existing employment
agreements
• January 2010 additional provisions introduced:
modern award inclusions and 10 National
Employment Standards
Copyright © 2012 McGraw-Hill Australia Pty Ltd
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12- 29
Next chapter
The international
monetary system
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12- 30