Competitive vs. Market Power Firms in the Factor Market

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Presentation transcript:

Competitive vs. Market Power Firms in the Factor Market Chapter 18 - Part 3

Market Supply Curve of Labor Market supply curve for labor is upward sloping represents trade-off between Work & Leisure upward-sloping means an ↑ in wages induces more people to work What will Get me to work? Entire Labor Market

Entire Labor Market Increase in Demand for Workers Increase in Supply of Workers

Competitive FACTOR Markets LABOR MARKET Entire Factory Industry 1- Individual Firm Low Skilled Workers Low Skilled Workers Wage SL Wage A single Firm can hire all their workers at market wage rate DL DL= MRPL $10 Q1 E1 -------------- ------------- $10 SL = MFC Q1 ------------------- Qty Qty

Market Power Firms Competitive Firm Market Power Firms Perfect Competition Monopolistic Competition Monopoly Oligopoly Highest Quantity Lowest Quantity Most market power firms are competitive in the FACTOR MARKET Market Power industries produce _______ than Competitive Industries So they need _______ INPUTS!

Competitive vs. Market Power Firm MR = P for a competitive firm MR < P for a firm with market power MRP = [MPL * Price] only for competitive firms in output market! Therefore: MRPC > MRPM MRPC = MPL * P (or MR) MRPM = MPL * MR P MRPC MRPM Wage Rate End Result: Market power firms hire less workers but pay same wage! (Monopoly, Oligopoly, Monopolistic Competition P1 --------------- QM QC Qty

Competitive vs. Market Power Competitive firm (output market) (Price = MR) Hire labor where MRPL = wage rate (MFCL) They are wage takers (factor market) They are price takers (product market) so P = MR MRP = MR * MPL Market Power firm (output market) (P > MR) They are wage takers Not price takers (product market) so P > MR MRP = MR * MPL (means: MRP ≠ P * MPL) Market power industries hire less of all factors (including workers)

Worksheet #3: Competitive vs. Market Power Firms