Competitive Labor Markets Factor Markets Part II (Chapter 18)

All of Microeconomics in one slide: You Buy Something when: Firms produce another unit when: MB ≥ MC MR ≥ MC Firms purchase another input when: MRP ≥ MFC

Product Market & Factor Markets MR = MC ------------- ----------- MRP = MFC MFC MRP Market for OUTPUTS Market for INPUTS

Demand & Supply of Factors Supply curve MRP MFC MRP is the demand curve for input MP input X price output MFC is the supply curve for inputs Cost of input Most firms are competitive in the factor market (input market) So they are “wage takers” in the labor market. This means a firm has a horizontal supply curve (perfectly elastic) i.e. price is fixed

Derived Demand for Inputs Product Market Factor Market T-Shirt Market Labor Market D2 Price Wages/hr D S MRP2 MRP1 $15 -------------- E1 MFC $20 ------------- Q Qty Qty Demand For product Price of Product MRP MRP = MPL * P More Workers Hired Wage rate Unchanged!

Shifts in Labor Demand Demand Curve shifts right when: Demand for Product Productivity Technology, working conditions, etc... Price of other resources: Price ↓ of complementary resource Price ↓ of substitute resource MRP2 MRP “It Depends” Two different effects when the price of substitute falls: Substitution Effect- you hire less workers Output Effect- MC falls, so output increases => you hire more workers

Competitive Labor Market Worksheet

Worksheet Review T-Shirt Market Labor Market -------------- $10 $200 Product Market Factor Market T-Shirt Market Labor Market D2 Price Wages/day D S MRP2 MRP1 $10 -------------- E1 MFC $200 ------------- Q Qty Qty

Worksheet Review Low Skilled Workers One Firm -------------- $10 $10 Price Wages/day D S MRP1 $10 -------------- E1 MFC $10 ------------- Q Qty Qty