1. Competitive Labor Markets
Factor Markets Part II
(Chapter 18)

2. Derived Demand for Inputs
Product Market Firm in Factor Market
T-Shirt Market
Low Skilled Workers D2
Price
Wages/hr D S
MRP2
MRP1
$10 E1
MFC
$200 Q
Qty
Qty
MRP
MRP = MPL * P
End Result:
↑ Workers hired
Wage rate Unchanged!
Demand
for product
Price of
Product
MRP = Value of what additional worker produces
MRP = MP (input) X Price (output)

3. When one firm hires more workers => wage rate is unchanged
Individual Firms are Wage Takers
Entire Factor Market
MRP1
MFC1
1 LAW FIRM
Entry level Lawyers
Wages
Qty
$160,000 Q1 E1
1 Company Factor Market
(All LAW FIRMS)
Entry level Lawyers
Wage
Rate D1 S
$160,000 E1
When one firm hires more workers => wage rate is unchanged Q1
Qty
When all firms hire more workers
=> wage rate rises

4. Supply Curve for Inputs
Marginal Factor Cost (MFC) is the supply curve for inputs
In labor market MFC = Wage Rate
Also called MRC (marginal resource cost)
Supply curve for 1 firm
MRP
MFC
Regardless if firms is a monopoly, oligopoly, perfect or monopolistic competition => MFC is horizontal
Most firms are competitive in the factor market (input market)
the firm has no effect on market price for inputs
All 4 market structures are “wage takers” in the labor market.
Individual Firms have a horizontal supply curve

5. Shifts in Demand for Labor
MRP shifts right when:
Demand for Product ↑
Productivity Rises (MP ↑)
Technology, working conditions, etc...
Price falls of complementary resource
Example: Workers & Machines that work together
MRP2
MRPL
If Machine price ↓ => Demand for workers ↑

6. Substitute Resource
A substitute input replaces another input: i.e. when machines can replace workers
When price of substitute input ↓ => MRPL shift is indeterminate (could ↓ ,↑ or be same)
machines workers
Labor Market ?
MRPL
MRP shift is dependent on two opposing effects.
Substitution Effect- implies you would hire less workers (MRPL ↓ )
Logic: machines prices fall => hire less workers
2) Output Effect- implies you hire more workers (MRPL ↑ )
Logic: machine prices fall => MC falls => so output increases => hire more workers
End result: dominant force determines MRP shift

7. Competitive Labor Market Worksheet