1. MICROECONOMICS: Theory & Applications Chapter 16 Employment and Pricing of Inputs
By Edgar K. Browning & Mark A. Zupan
John Wiley & Sons, Inc.
9th Edition, copyright 2006
PowerPoint prepared by Della L. Sue, Marist College

2. Learning Objectives
Explore the factors influencing the demand for an input by an individual competitive firm.
Derive the market demand curve for an input by aggregating the demand curves of the various firms interested in hiring the input.
Investigate the general shape of an input supply curve.
(Continued)
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3. Learning Objectives (continued)
Show how an input’s price and employment level is determined in a multi-industry market.
Examine input demand and employment by an output market monopoly.
Define what is meant by monopsony in input markets.
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4. The Firm’s Demand Curve: One Variable Input
Marginal value product (MVP) – the extra revenue a competitive firm receives by selling the additional output generated when employment of an input is increased by one unit
MVP curve = firm’s demand curve for a given input when all other inputs are fixed
Wage rate = MVPL=MPL*P
Figure 16.1
(Continued)
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5. The Firm’s Demand Curve: One Variable Input (continued)
Assumption: The firm is a profit maximizer in a competitive market
Conclusions:
The marginal value product curve identifies the most profitable employment level for the input at each alternative cost.
The marginal value product curve slopes downward.
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6. The Firm’s Demand Curve: All Inputs Variable
In general, a change in an input’s price leads a firm to also alter its employment of other inputs.
Long-run demand curve
Assume that other inputs’ prices are unchanged.
Final product’s price is constant.
Figure 16.2
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7. The Firm’s Demand Curve: An Alternative Approach [Figure 16.3]
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8. Effects of an Input Price Change
Substitution effect of an input price change – the change in input employment when output is held constant and one input is substituted for another in response to an input price change
Output effect of an input price change – the change in input employment when output is altered in response to a change in the price of an input.
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9. A Competitive Industry’s Demand Curve for an Input
When all firms simultaneously increase output, they can sell more total industry output only at a lower price.]
Figure 16.4
Derived demand – an industry’s input demand curve, derived from consumers’ demand for the final product produced by that input
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10. The Elasticity of an Industry’s Demand Curve for an Input: Factors
The greater the elasticity of demand for the product produced by the industry, the more elastic the input demand.
An industry’s input demand is more elastic when it is easier to substitute one input for another in production.
An industry’s demand for an input is more elastic when the supply of other inputs is more elastic.
The longer the time allowed for adjustment, the more elastic an industry’s demand for an input becomes.
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11. The Market Demand Curve for an Input
The market demand curve for an input is determined by (horizontally) aggregating the various industry demand curves for the input.
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12. The Supply of Inputs
The general shape of an input supply curve depends critically on the market for which the supply curve is drawn.
Figure 16.5
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13. Industry Determination of Price and Employment of Inputs [Figure 16.6}
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14. Process of Input Price Equalization across Industries [Figure 16.7]
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15. Input Price Determination in a Multi-Industry Market [Figure 16.8]
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16. Input Demand and Employment by an Output Market Monopoly
Marginal revenue product – the product of an input’s marginal product and the marginal revenue that can be derived from selling that marginal product
Figure 16.9
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17. Monopsony in Input Markets
Monopsony – an input market in which a firm is the sole purchaser of an input
Marginal input cost – the cost of using an additional unit of an input
Average input cost – the total cost of an input divided by the unites of that input used by a firm
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18. An Input Market Monopsony
In comparison with competitive input market conditions, employment and the wage rate is lower under monopsony.
The wage is lower in a monopsony because the firm faces an upward-sloping input supply curve.
Figure 16.10
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