Presentation on theme: "Some important questions"— Presentation transcript:
0 Chapter 12 The analysis of factor markets: labour David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,6th Edition, McGraw-Hill, 2000Power Point presentation by Peter Smith
1 Some important questions Why does a top professional footballer earn so much more than a professor?Why does an unskilled worker in the EU earn more than an unskilled worker in India?Why do market economies not manage to provide jobs for all their citizens who want to work?Why are different methods of production used in different countries?See the introduction to Chapter 12 in the main text.
2 The demand for labour Derived demand: Equalizing wage differential the demand for a factor of production is derived from the demand for the output produced by that factor.Equalizing wage differentialthe monetary compensation for the differential non-monetary characteristics of the same job in different industriesso workers have no incentive to move between industries.See the introduction to Chapter 12 in the main text.
3 Demand for factors in the long run The optimum mix of capital and labour depends on the relative prices of these factorsThis helps to explain why more labour-intensive means of production are used in some countries where labour is relatively abundant.A change in the price of one factor will have both output and substitution effectsA rise in the wage rate leads tosubstitution towards more capital-intensive techniquesbut also leads to lower total outputSee Section 12-1 in the main text.
4 The demand for labour in the short run The marginal value product of labour is therevenue obtained by selling the output producedby an extra workerMVPLEmploymentWage, MVPLUnder perfect competition, with diminishing marginal productivity:the firm maximizes profit when the marginal cost of employing an extra worker equals the MVPL...W0See Section 12-2 in the main text, and Figure 12-2.
5 The demand for labour in the short run …this occurs at Ewhere wage = MVPL.L*Employment is L*.MVPLEmploymentWage, MVPLW0Below L*, extra employmentadds more to revenue thanto labour costs.Above L*, the reverse is so.See Section 12-2 in the main text, and Figure 12-2.This decision is consistentwith the MR = SMC rule formaximizing profit underperfect competition.
6 Monopoly and monopsony power in the labour market A firm may have MONOPOLY power in its output marketfacing a downward-sloping demand curveso the marginal revenue (MRPL) received from expanding output is less than the MVPLas the firm must reduce price to sell more.A firm may face MONOPSONY power in its input marketfacing an upward-sloping supply curve for inputsso the marginal cost of labour rises with employmentSee Section 12-2 in the main text.
7 Monopoly and monopsony power (2) MVPLL1EmploymentUnder perfect competition,a firm sets MVPL = W0and employs L1 workersFacing a downward-sloping demand curvefor its product, the firmsets MRPL = W0and employs L3 workersMRPLL3See Section 12-2 in the main text, and Figure 12-3.
8 Monopoly and monopsony power (3) A monopsonist recognizesthat additional employmentbids up wages for existingworkers, so MCL shows themarginal cost of an extraworkerMCLW0MVPLL1EmploymentMRPLL3Facing a given goodsprice, the monopsonistsets MCL = MVPLand employsL2 workers.L2See Section 12-2 in the main text, and Figure 12-3.
9 Monopoly and monopsony power (3) For a monopsonist whoalso faces a downward-sloping demand curvefor the product, MCLis set equal to MRPL toemploy L4 workers.L4W0MVPLL1EmploymentMRPLL3MCLL2See Section 12-2 in the main text, and Figure 12-3.So monopoly andmonopsony powerboth tend to reducethe firm’s demandfor labour.
10 The supply of labour The LABOUR FORCE: Labour supply all individuals in work or seeking employmentLabour supplyfor an individual, the decision on how many hours to offer to work depends on the real wagean individual’s attitude towards leisure and income determines if more or less hours of work are supplied at a higher real wage rate.See Section 12-4 in the main text.
11 The individual’s supply curve of labour Hours of work suppliedReal wageSS1For the labour supplycurve SS1, an increasein the real wage induceshigher labour supply.SS2Whereas for SS2,there comes a pointwhere a higher wageinduces less hours ofwork to be supplied:labour supply isbackward-bending.See Section 12-4 in the main text, and Figure 12-5.
12 Labour supply in aggregate If we consider the economy as a whole, or an industrya higher real wage rate also encourages a higher participation rateso labour supply is likely to be upward-slopingSee Section 12-4 in the main text.
13 Labour market equilibrium for an industry The industry supply curve SLSL slopes uphigher wages are needed to attract workers into the industryFor a given output demand curve, industry demand for labour slopes downEquilibrium is W0, L0.Quantityof labourWageDLSLW0L0See Section 12-5 in the main text, and Figure 12-7.
14 A shift in product demand Beginning in equilibrium,Quantityof labourWageDLSLW0L0a fall in demand for theproduct also shifts thederived demand for labourto D'LD'LThe new equilibrium isat W1, L1.L1W1See Section 12-5 in the main text, and Figure 12-7.
15 A change in wages in another industry so industry supply shiftsto the left –S'LAgain starting in equilibrium,Quantityof labourWageDLSLW0L0An increase in wages inanother industry attractslabour,The new equilibrium isat W2, L2.L2W2See Section 12-5 in the main text, and Figure 12-7.
16 Transfer earnings and economic rent the minimum payments required to induce a factor of production to work in a particular job.Economic rentthe extra payment a factor receives over and above the transfer earnings needed to induce the factor to supply its services in that use.See Section 12-6 in the main text.
17 Transfer earnings and economic rent (2) In labour marketequilibrium at W0, L0,DIf workers were paid onlythe transfer earnings, theindustry would need onlypay AEL0 in wages.SSWageEW0But if all workers must bepaid the highest wageneeded to attract themarginal worker into theindustry (W0), then workersas a whole derive economicrent of 0AEW0.See Section 12-6 in the main text, and Figure 12-8.DAAL0Quantity
18 Cost minimization An ISOQUANT An ISOCOST curve shows the different minimum quantities of inputs required to produce a given level of outputAn ISOCOST curveshows the different input combinations with the same total cost, given relative factor prices.LabourL0ATo minimize the cost of producing a given output level, the firm chooses a tangency between an isoquant and an isocost linee.g. point A.A change in relative factor prices tends to lead to a change in factor proportions, e.g. an increase in wages relative to the return on capital will tend to lead to the adoption of more capital-intensive techniques.See the Appendix to Chapter 12 in the main text, and Figure 12-A2.I''I'IKACapital