CHA: PRICING OF INPUTS

INDEX Marginal Revenue Product Input pricing and employment Market structure 1: Monopolist-Perfect competitor Market structure 2: Monopolist-Monopsonists Economic rent and quasi rent Wage and income indifference Labor unions and collective bargaining Union Objectives Minimum wage loss Telecommuting Case study

INTRODUCTION

INPUT PRICING AND EMPLOYMENT

Where, MPK and MPL are marginal products of capital. The effective production requires that the ratio of marginal product to input prices be equal for all inputs. For example, if capital and labor are the only i/ps, the efficiency condition is MPK/r = MPL/w Where, MPK and MPL are marginal products of capital. r and w are the prices of those inputs. If one input, say capital, is held constant, it can be shown that the ratio of input price to marginal product is equal to marginal cost. Thus for labor w/ MPL=MC

The profit-maximizing firm must increase o/p, and therefore the employment of i/ps, to the point where MC=MR. Thus, in equilibrium, the ratio of i/p price to marginal product (i.e., MC) must equal MR. That is, w/MPL = MR Multiplying both sides of equation by MPL yields w = MR * MPL OR w = MRPL Which indicates that the profit-maximizing firms should hire an i/p until the price of the i/p equals MRP of that i/p. The MRP function is the firm’s i/p demand function.

Monopolist (Product market) Perfect competition (Input market) Market structure:- 1 Monopolist (Product market) Perfect competition (Input market)

Table:1 Total product, Marginal product ,and Marginal revenue product of labor for a Monopolist Rate of labor input Total product Marginal product Output price(Rs.) Total revenue (Rs.) Marginal revenue ( Rs.) Marginal revenue product (Rs.) ----- 1 10 5.00 50.00 2 19 9 4.50 85.50 3.94 35.50 3 26 7 4.00 104.00 2.64 18.50 4 30 3.75 112.50 2.13 8.50 5 32 3.60 115.20 1.35 2.70 6 33 3.50 115.50 0.30

Monopolist (Product market) Monopsonist (Input market) Market structure:- 2 Monopolist (Product market) Monopsonist (Input market)

Table:2 Labor supply, total expenditure, marginal expenditure on labor for a monopsonist Rate of labor input Labor price per unit (Rs.) Total expenditure on labor (Rs.) Marginal expenditure on labor(Rs.) ----- 1 5.50 2 8.00 16.00 10.50 3 11.50 34.50 18.50 4 15.00 60.00 25.50 5 92.50 32.50 6 22.00 132.00 39.50

Table:3 Marginal revenue product and marginal expenditure on labor Rate of labor input Marginal revenue product (Rs.) Labor price per unit(Rs.) Marginal expenditure on labor (Rs.) ----- 1 50.00 5.50 2 35.50 8.00 10.50 3 18.50 11.50 18/50 4 8.50 15.00 25.50 5 2.70 32.50 6 0.30 22.00 39.50

Earnings of factors of production can be divided into two elements Transfer Earnings 2. Economic Rent TRANSFER EARNINGS What a factor must earn to prevent it from moving to another use/occupation. Total Transfer earnings are the area under the supply curve to the left of Current factor employment.

ECONOMIC RENT Economic rent is anything over and above transfer earnings. Economic Rent = Total Earnings – Transfer Earnings Example: Mary jones manager of a high street store earns 15,00,000 annually. Transfer earnings are 11,25,000 annually. Economic rent is 3,75,000. as per formula. QUASI RENT Temporary economic rent arising from short-run supply inelasticity.

WAGE AND INCOME DIFFERENTIALS

Demand-side consideration. Supply-side consideration

Demand-side consideration productive workers more output more revenue of firm commands higher wage rates

Supply-side consideration Training requirements. Health risks. Working condition.