University of Hawai‘i at Mānoa Department of Economics ECON 130 (003): Principles of Economics (Micro) Gerard Russo Lectures.

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Presentation transcript:

University of Hawai‘i at Mānoa Department of Economics ECON 130 (003): Principles of Economics (Micro) Gerard Russo Lectures #27 & 28 Tuesday, April 20, 2004 and Thursday, April 22, 2004

ANNOUNCEMENTS LAST LECTURE Tuesday, May 4, 2004, 12:00-1:15 PM, BIL 152 Review Session Thursday, May 6, 4:30-5:30 PM, BIL 152 FINAL EXAMINATION Thursday, May 13, 2004, 12:00-2:00 PM, BIL 152

Lectures 27 & 28 Introduction to Factor (Input) Markets Competitive Output Market/Competitive Input Market Monopolistic Output Market/Competitive Input Market Competitive Output Market/Monopsonistic Input Market Monopolistic Output Market/Monopsonistic Input Market

Labor Markets Production Theory Total Product Average Product Marginal Product Labor Demand Marginal Revenue Product (MRP) Value of the Marginal Product (VMP)

Marginal Revenue Product (MRP) Marginal Revenue Product of Labor equals the Marginal Revenue times the Marginal Product of Labor MRP L = MR*MP L Units of Measure: $/L = ($/Q)*(Q/L)

Value of the Marginal Product (VMP) The Value of the Marginal Product of Labor equals the output Price times the Marginal Product of Labor VMP L = P*MP L Units of Measure: $/L = ($/Q)*(Q/L) For a competitive firm P=MR, therefore MR*MP=MRP=VMP=P*MP For a monopolistic firm P>MR, therefore P*MP=VMP>MRP=MR*MP

FACTOR COST Marginal Factor Cost (MFC) Average Factor Cost (AFC) Under a rule of one price (wage), the wage rate, W, equals the average factor cost, AFC W=AFC

$/L L MRP=VMP 0 DLDL Labor Market Competitive Input Market/Competitive Output Market $/L L 0 Competitive Firm SLSL W L* W=AFC=MFC=MRP=VMP

$/L L MRP L 0 DLDL Labor Market Competitive Input Market/Monopolistic Output Market $/L L 0 Monopolistic Firm SLSL W L* W=AFC=MFC=MRP<VMP VMP L

$/L L MRP L 0 DLDL Labor Market Competitive Input Market/Monopolistic Output Market Welfare Effects $/L L 0 Monopolistic Firm SLSL W LMLM VMP L LCLC Welfare Loss Due to Monopoly

$/L Q MRP L 0 D The welfare effects of monopoly can be viewed from either the output market or input market. $/Q L 0 Monopolistic Firm: Input Decision MC W LMLM VMP L LCLC Welfare Loss Due to Monopoly Monopolistic Firm: Output Decision MR QMQM QCQC Welfare Loss Due to Monopoly

$/L L 0 MRP L =VMP L MFC L Competitive Output Market/MONOPSONY S L : AFC L W=AFC<MFC=MRP=VMP W* L* Welfare Loss

$/L L 0 VMP L MFC L Monopolistic Output Market/MONOPSONY S L : AFC L W=AFC<MFC=MRP<VMP W* L* MRP L Welfare Loss