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

2. 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

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

4. 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

5. 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!

6. 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

7. Competitive Labor Market Worksheet

8. 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

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