3 Turn from the product market to the factor (input or resource) market Roles of supply and demand are reversed: firms demand the factors, people supply them, as in the labor market Factor demand is a derived demand, that is, derived from the demand for the product being produced.
4 As in product market, different kinds of factor markets Begin with a perfectly competitive factor market, price of the factor is determined by supply and demand for the factor What is the profit maximizing quantity of a factor that a firm should use?
5 Here, we assume a competitive labor market Many buyers and sellers of labor Homogenous labor Perfect information and mobility
6 You already know a lot about the labor market Use marginal analysis, hire labor to the point where the added cost equals the added revenue
33 Difference between Market supply of labor and one individual’s labor supply An individual’s labor supply curve might not always slope upward Depends on the substitution and income effects of a wage change
34 Labor-Leisure trade off Think of leisure as a product, we “buy” it by giving up labor, thus the price of leisure = wage given up Thus higher wages raise the price of leisure, 2 possible effects to this
35 Substitution effect: higher wages raise the price of leisure, thus buy less leisure, work more Income effect: higher wages raise income, thus demand more leisure ( a normal good), therefore work less Shape of the Supply curve depends on strength of these 2, possible backward bending labor supply curve
36 Wage Labor W1 L1 UP TO W1, SUBSTITUTION EFFECT OUTWEIGHS INCOME EFFECT, WORK MORE DUE TO HIGHER WAGE ABOVE W1, INCOME EFFECT OUTWEIGHS SUBSTITUTION EFFECT, WORK LESS DUE TO HIGHER WAGE
39 D S W3 Q3 W1 Surplus W2 Shortage 39 WAGES IN A FREE MARKET
40 Wage rate differentials Suppose wages for the same type of labor are higher in the north than the south, what tends to happen in the long run?
41 Labor tends to migrate north, decreasing labor supply in the south and increasing it in the north Firms tend to migrate south, increasing labor demand in the south, decreasing it in the north Net effect is to reduce the wage differential
49 Elasticity of Demand for Labor ( or other factors of production)--depends on what? Elasticity of product demand, more elastic the demand for the product, the more elastic the demand for factors Importance in total cost, greater share of total cost a factor is, more elastic the demand Ease of substitution--easier to substitute for a factor, more elastic its demand it Time period, more elastic demand the longer the time period
51 What is Marginal Physical Product? What is Marginal Revenue Product? What is Marginal Labor Cost? What is the Law of Diminishing Returns?What is the Law of Diminishing Returns? Why is the Demand Curve for Labor negative?Why is the Demand Curve for Labor negative? Why is the Supply Curve for Labor upward sloping?Why is the Supply Curve for Labor upward sloping?