Markets for factor inputs Unit 14 Markets for factor inputs

Outcomes Define and discuss competitive factor markets Define and discuss factor markets with monopsony power Define and discuss factor market with monopoly power

Competitive factor market Definition: A market with a large number of buyers and sellers Of factors of production Each is a price taker Need to analyze the demand for a factor by individual firms. Demand added = market demand

Demand for a factor input when only one is a variable Short run! FOP demand curve = Downward sloping FOP demand = Derived demand Demand for an input That depends on and is derived from Both the firm’s level of output, and The cost of inputs

Demand for a factor input when only one is a variable How to determine derived demand? Firm produces only with 2 inputs: K and L Hired at price r and wage w L variable Marginal revenue product of labour MRPL Additional revenue from sale of output created by one additional unit of an input MRPL = (MR)(MPL)

Demand for a factor input when only one is a variable Holds for all competitive factor markets Examine MRPL: Perfectly competitive output @ market price P MR = P Thus, MRPL = (MPL)(P) (Figure 14.1) But MRPL > w = hire more labour, if MRPL < w = lay off labour MRPL = w : Profit maximizing amount of labour (Figure 14.2)

Demand for a factor input when only one is a variable

Demand for a factor input when only one is a variable

Demand for a factor input when only one is a variable

Demand for a factor input when several inputs are variable Firms choose simultaneously quantities of two or more variable inputs. Hiring problem: Change in price for one will change demand for other.

The market demand curve For each industry, the demand for labour must be calculated and added together.

Supply of inputs to a firm Perfectly competitive = firm can purchase as much of input at a fixed market price

Supply of inputs to a firm Average expenditure firm: Supply curve representing the price per unit that a firm pays for a good Marginal expenditure firm: Curve describing the additional cost of purchasing one additional unit of a good ME = MRP ME = w

Market supply of inputs Market Supply curve for factor input usually upward sloping When the input is labour = backward bending supply of labour

Market supply of inputs

Equilibrium in a competitive factor market

Equilibrium in a competitive factor market

Equilibrium in a competitive factor market

Factor markets with monopsony power Focus on a pure monopsony: One buyer Buyer power such as Toyota and GM Bargaining power: Negotiate lower prices due to quantities bought. Power determined buy number of buyers and purchase itself

Monopsony power: Marginal and average expenditure

Purchasing decisions with monopsony power How much input to buy? Should buy where ME=MR and MRP=ME

Factor markets with monopoly power Seller power such as Eskom Focus on labour unions: Monopolist in the sale of labour services

Monopoly power over wage rate

Unionized and nonunionized workers Union uses monopoly power to increase member’s wages = fewer union workers employed Move to nonunion section Initially choose not to join union What happens in the nonunionized section?

Unionized and nonunionized workers