Microeconomics The input market Institute of Economic Theories - University of Miskolc Microeconomics The input market Mónika Kis-Orloczki Assistant lecturer

Definitions Input=resources/factors of production: Goods or services that are used by the companies to produce certain products. Factors of production: A, L, K, E According to their origin can be: Primary resources: don’t evolve from economical reasons but they can be used in the economy (L, A) Secondary resources: evolve from economical reasons (K, E)

Resources or factors of production In the output market (market of products) the consumer=demand, the companies=supply In the input market the company=demand for the resources of the housholds (labour) and pays for it (wages) Output market Company Resources or factors of production Households S D Products and services S D K, L, A, E

Demand of the resources The demand of the resources depends on the quantity of the output of the company. Derivative demand: the company seeks for inputs to fulfill the consumers’ requirements in the output market to make his own profit in short run, but to ensure at least the normal profit in long run.

Optimal input employment Output market It is worth increasing the production until the cost of the increase in the output reaches the revenue of the subsequent output: MC=MR Input market Worth increasing the employed quantity of inputs until the cost of the subsequent input reaches the revenue of the subsequent input: MFC=MRP  first criteria of the optimal input allocation-general condition

Marginal Factorial Cost (MFC): shows the changes in the total cost if the amount of an input is changing by one unit. Marginal Revenue Product (MRP): shows the changes in the company’s total revenue if the amount of an input is changing by one unit. Value Marginal Product (VMPL): shows the market value of a variable input’s (Labour) marginal product.

Optimal input allocation in competitive market (both output and input market) In competitive market: MR=P How many inputs the company will use? Quantity at which the price of the input equals with the value marginal product of the input  PL=VMPL The price of one subsequent input increases the total cost by the price of the input  PL=MFCL Selling an extra product increases the revenue by the price of the product: MR=P MRP=MPL*MR=MPL*Px PL=MFCL=MRPL=VMPL

Individual input demand curve Shows the connection between the price and the demanded quantity of the input. The optimal input employment is where the input price equals with the VMP As P is constant the MPL determines the shape of the curve MRPL=VMPL shows the demand of a profit-maximising company for the input at different input prices  PL= MRPL=VMPL is the inverse demand curve of the input Defined only in the decreasing part of the curve

APL L MPL PL MRP=VMP L

Demand of the monopoly in a competitive labour market Output market: monopoly, input market: competitive Profit max: MFC=MRP In the INPUT market competitive, so price-taker the increase in the input increases the costs by the price of the input PL=MFCL, the labour supply is constant In the OUTPUT market monopoly, MR<PMRP<VMP Input demand curve: DV=MRPL PL=MRPL<VMPL exploitation of monopoly PL=MFCL=MRPL<VMPL

Input market Output market L* Exploitation of the monopoly SV P PL VMPL MRPL=DV D MR Q L* q0

Monopsony PL<MFCL=MRPL=VMPL One buyer and many sellers  input market: monopoly, output market: competitive In the OUTPUT market: MR=P  MRPL=VMPL Profit max: MFCL=MRPL In the INPUT market: monopolycan inluence the P SL input supply increasing curve A monopsony has no input demand curve as there is no clear connection between the input price and the demanded quantity PL<MFCL=MRPL=VMPL

OUTPUT MARKET INPUT MARKET Competitive Monopoly MONOPOLY Competitive PL=MFCL=MRPL=VMPL PL=MFCL=MRPL<VMPL INPUT MARKET MONOPSONY Monopoly PL<MFCL=MRPL=VMPL PL<MFCL=MRPL<VMPL

The personal labour supply Labour market: the owner of the labour is the seller and the company is the buyer The personal labour supply depends on: The income needs to get consumption goods (income constraint) The needs of leisure time Who is not working: 24 hours leisure time Employee: Leisure is decreased by the working hours working hour is the sacrificed leisure and the wage: which is the labour price, is the price of sacrificed leisure time. Factors of living quality

Individual labour supply curve shows the willingness of the owner of the labour to work at different wages The higher wage means the more precious of leisure time. Doesn’t start from origo as there is a minimum wage for which is worth sacrificing the leisure time Exists a level a wages (high) where the leisure becomes more prescious and that’s why the labour supply decreases the labour supply curve is bending back

Market labour supply: horizontal sum of the individual supplies, the more people willing to sell there labour, the flatter the market supply curve is. In case of perfect competition in long run, the labour supply is linear, evolves a wage level at which the company can find any numer of people who is willing to work