1. Markets for Factors of Production
-Land
-Labour
-Physical Capital
-Human Capital
-Other
These factors are bought and sold in a factor market with supply and demand curves similar to the goods market

2. Markets for Factors of Production
These markets are important because:
money incomes are primarily determined by the prices set in these markets.
distribution of income
production costs determine which factors are used and in what quantities
resource allocation

3. Products Product Market Products $ Spending $ Revenue Government
CIRCULAR FLOW
Products
Product
Market
Products
$ Spending
$ Revenue
PRODUCTS
$SPENDING
Products &
Services
Products &
Services
Households
Resource
Owners
Government
Business
Firms
$ Taxes
$ Taxes
$SPENDING
RESOURCES
$ Income
Resource
Market
$ Costs
Resources
Resources
LAND
LABOR
CAPITAL

4. The Versatility of Supply & Demand
(a) The Market for Apples
(b) The Market for Apple Pickers
Price of Apples
Supply
Supply
Wage of Apple Pickers  P  W
Demand
Demand L Q
Quantity of
Apples
Quantity of
Apple Pickers
The Versatility of Supply & Demand

5. Shifters of Labor Demand
Factors other than Wage that affect Labour Demand
1) Changes in demand for the product
2) Changes in labour productivity (technology, etc)
3) Change in the price of other factors (land, human capital, etc.)

6. Shifters of Labour Supply
4) Expectations
Future wages
Income
Job availability
5) Population (workforce)
Examples of Factors other than Wage which affect Labour Supply:
1) Income, wealth
2) Lifestyle
3) The wage of competing jobs
Essentially, all factors affecting demand have a parallel affecting labour supply

7. Labour Market: Perfect Competition
1. many firms competing with one another in hiring a specific type of labour.
2. numerous qualified workers with identical skills independently supplying this type of labour service.
3. neither firms nor workers can exert control over the market wage rate.
price takers.

8. Labour Market: Perfect Competition
Industry Labour
Market
The Firm: on the demand side is a price taker S D
Wage
Wage L1 w1 w1 SL
Labour Input (workers per week)
Labour Input (workers per week)

9. Labour Market: Perfect Competition
There are many households selling to many firms, and no one household or firm has any power to influence the price.
Demand for Labour
Assume that the firm on the demand side of the market is
buying (hiring) apple pickers in a perfectly competitive labour market, and
selling apples in a perfectly competitive goods market.

10. Labour Market: Perfect Competition: Demand for Labour.
The firm, on the Demand side of the market, is a “price taker”.
It has to decide:
how many apple pickers to hire
given the price of apples ( goods market)
given the wage rate for apple pickers (factor market)
in order to maximize profit

11. Marginal Review Marginal Product of Labour Marginal Revenue Product
Additional production of last worker hired
MPL=Q /L
Marginal Revenue Product
Additional revenue of last worker hired
MRP=P x MPL
MRP= TR /  L

12. MRP marginal revenue product MRP marginal revenue product
The Competitive Firm Decides How Much Labour to Hire: Price of Apples=$10/bu. Wage Rate=$500/week
MRP marginal revenue product
MRP marginal revenue product
Output
(Bushels/
Week)
(Q)
100
180
240
280
300
Marginal
Product of
Labour
(MPL=Q /L)
100 80 60 40 20
Labor (# of workers)
(L) 1 2 3 4 5
of Labour
(MRP=PxMPL)
$1000
800
600
400
200 TR
Total
revenue
$1000
1800
2400
2800
3000
of Labour
(TR /  L)
$1000
800
600
400
200

13. The Demand for Labour: The Profit Max Hiring Decision
In order to find the MR of the Profit Maximizing decision: The firm must consider :
1. the production function - how the size of the work force affects the amount produced by each worker, MPL
2. the contribution to revenue, MRPL, and to the profit equation that each worker makes
MRP = TR /  # of workers.
MRP = Product Price x MPL.
When MP   MRP  .

14. Profit Maximizing Hiring Decision
In order to find the MC of the profit maximizing decision; the firm must find
3 The Marginal Factor Cost (MFC)
= wage rate in perfect competition
= additional cost of hiring one more unit of labour in all types of markets
hire workers up to the point where:
MRP  Wage (MFC)
(MR) (MC)

15. Demand for Labour: MRP schedule is the MRP = MFC (W in P.C.)
The quantity of labour a firm will hire at any given wage, cet. par.
To maximize profit the firm hires the quantity of labour where the
MRP = MFC (W in P.C.)
MRP schedule is the
Demand for Labour,
for a competitive profit
maximizing firm

16. Profit Max: MRP=W(MFC): The MRP is the Demand for Labour
D=MRP
MFC W1 Q1
MRP = P x MPL
(the value of the worker’s output)
MFC = W
(the cost of hiring a worker)
Optimal number of employees
occurs where MFC = MRP
Labour Demand is down sloping Q2 W2
MFC
Wage
MFC W3 Q3
Market demand for labour in perfect competition
Labour Input (workers per week)

17. “Shifters of Labour Demand”
labour does not satisfy wants directly:
demand for resources is a “Derived” Demand
and therefore depends on
1. How productive (MP) labour is
Non labour inputs, technological progress, labour quality, prices of other resources
Price of the product
Price of other inputs

18. Market Supply of Labour
To attract workers, the wage rate paid must cover
the opportunity costs of alternative uses of time spent,
in other labour markets,
in house-hold activities
in leisure.
Higher wages attract people whose opportunity costs are not covered at lower wages: therefore the Supply of labour to any labour market is upward sloping.

19. The supply of labour changes and the supply curve shifts if
Supply Shifters
The supply of labour changes and the supply curve shifts if
The adult population changes
Technology and capital in the home change
Preferences change

20. Equilibrium Wage Rate: Perfectly Competitive Labour Market
Quantity of Labour
Wage Rate per Worker per Week ($) D S
498 Q1
Surplus
Shortage
The wage adjusts so Qn.D=Qn.S
Shifts of demand or supply will change the equilibrium wage and the MRPL by the same amount since they are always equal

21. Labour Market: Perfect Competition
Industry Labour
Market
The Firm: on the demand side is a price taker S D
Wage
Wage L1 w1 w1 SL
Labour Input (workers per week)
Labour Input (workers per week)

22. Monopsony A monopsony is a market in which there is a single buyer.
A monopsonist faces the Market Supply of Labour \ To hire more labour, a higher wage must be paid: \marginal cost of labour (MFC) curve is upward sloping.
To maximize profit the monopsonist hires until the marginal cost of labour , that is , the marginal factor cost , is equal to the marginal revenue product. 38

23. Supply of labour: monopsony in the hire of labour
(1)
Units of labor 1 2 3 4 5 6
(2)
Wage rate $5 6 7 8 9 10 11
(3)
Total labor cost (wage bill) $0 6 14 24 36 50 66
(4)
Marginal factor(labour) cost
TFactorC/QL $6 8 10 12 14 16
the cost of an extra worker : MFC  the wage rate by the amount needed to bring the wage rate of all workers currently employed up to the new wage.

24. Marginal Factor Cost : Monopsonist: Profit Max Employment
Monopsony decreases the level of employment and the wage rate, compared to perfect competition
MFC
MRP
MRP > W S E
MFC and MRP per Worker-Week ($) We Qe Wm
Hire Qm where
MFC = MRP and
pay Wm Qm
Labour Input (worker-weeks)

25. Monopsony Results
A monopsony reduces employment and wages when compared to PC
Provides rationale for regulation of monopsony’s
Monopsonistic exploitation – workers are paid a wage rate less than the monopsonist’s revenues
Programs such as work camps, free housing, and after-education work contracts can benefit the producers more than the workers 38

26. Minimum Wage in Monopsony
The supply now becomes perfectly elastic at the minimum wage
MFC follows suit
To maximize profit, MFC =MRP monopsony hires 75 hours at $7.50 an hour.
MFCL S
Wage rate (dollars per hour)
10.00
7.50
Minimum wage
Increase in
employment
The minimum wage has increased the wage rate by $2.50 an hour and the amount of labour employed by 25 hours a day.
5.00
MRP = D 50 75
Labour (hours per day) 45

27. 2) Unions: Monopoly on the Supply Side of the Labour Market
Imperfect Competition
2) Unions: Monopoly on the Supply Side of the Labour Market
In some markets, workers collectively “sell” their labour through unions.
Labour unions are worker/employee organizations
Engage in collective bargaining to establish a contract which sets out
Wages,fringe benefits, maximum work days, working conditions

28. Unions: Goal, Increase Wages
Suppose a union is formed in an otherwise competitive market,
 the union is bargaining with a large number of employers.
Assume the major goal is to increase wages
A variety of ways to achieve this

29. Unions: Increase Wages
Wage increases and
more labour is hired
1) Increase Demand for Labor.
increase demand for the product - union label.
Decrease demand for alternatives
Often self-fulfilling, as higher wages lead to higher quality
increase productivity D` W1 Q1 S
Wage Rate per Hour Qe We E D
Quantity of Labour per Time Period

30. Unions: Increase Wages
If union membership is limited to Q1, wages increase to $16 instead of $15 when demand increases
2) Restrict Labour Supply
exclusive or craft union:
union that comprises workers of a given skill.
occupational licensing. 16 E2 S2 S1 D2 Q2 E3 15
Wage Rate per Hour ($) D1 Q1 14 E1
Number of Workers per Time Period

31. Unions: Increase Wages
Supply becomes horizontal at the union wage rate: MFC=Wu.
2) Restrict Labour Supply.
inclusive/ industrial union:
union that seeks as members all unskilled, semi skilled & skilled workers in a given industry.
MRP=MFC D=
MRP
Wage Rate per Hour ($)
Number of Workers per Time Period Wc Qc Su Wu SL Qu

32. Unions: Goal, Increase Wages
Contracts for higher wages can be negotiated via the THREAT of reduced labour supply (ie: a strike)
Control over the supply side of the labour market is required here

33. Unions: Employ workers
2) A union may want to employ more workers than at equilibrium. This requires, however a reduction in wage from W1 to W2
This union goal is less common due to the decrease in wages for employed workers S1 D2 E2 W1 W2 E3
Wage Rate per Hour ($) Q1 Q2
Number of Workers per Time Period

34. 3.) Bilateral Monopoly
In communities with a single major employer, there is typically also a union.
A bilateral monopoly exists when a union (monopoly seller) faces a monopsony buyer.
Wages are determined by bargaining. 40

35. 3.) Bilateral Monopoly The monopsony hires 50 hours and pays $5/hour.
MCL
The monopsony hires 50 hours and pays $5/hour.
The union may agree to work 50 hours, but seeks the highest wage rate the employer can be forced to pay — $10/hour=MRPL S
10.00
7.50
Wage rate (dollars per hour)
5.00
MRP 50 75
Labour (hours per day) 41

36. 3.) Bilateral Monopoly
It is unlikely the union will get $10/hour or that the firm can keep wages at $5.00/hr.
The monopsony firm and union bargain over the wage rate
It will settle between $5 and $10/hour (depending upon who is stronger).
MCL S
Wage rate (dollars per hour)
10.00
7.50
5.00
MRP 50 75
Labour (hours per day) 42

37. Wage Differentials
If all labour was homogeneous and all jobs were equally attractive, and all labour markets were perfectly competitive, then all wages would be the same……..
Wages & earnings typically exhibit wide variations:
1) Labour Market Imperfections
workers are not always mobile
institutional restrictions – unions..
discrimination – hiring practices another model of labour market imperfection

38. Wage Differentials jobs vary in attractiveness
2) Compensating Differences
jobs vary in attractiveness
3) Non-competing Occupational Groups
workers aren’t homogeneous, they have different ability, different education and training.

39. Union Benefits
1) Allows for increased productivity, skill and efficiency
2) Reduce wage inequality
3) Reduce profits (transfer surplus to workers)
4) Provide a voice for workers
5) Increase workforce stability (and job security)

40. Union Drawbacks
1) Job security can lead to reduced productivity. Free-riding = expecting others to work hard
Featherbedding = forcing employers to use more workers than needed
2) Increase wage inequality between union and non-union workers
3) Cause businesses with little economic profit to fold, resulting in unemployment
4) Generally causes unemployment
5) Often prevents natural market mechanisms to take place (ie: raises to hard workers, fire others)