1. Markets for factor inputs
Unit 14
Markets for factor inputs

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

3. 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

4. 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

5. 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)

6. Demand for a factor input when only one is a variable
Holds for all competitive factor markets
Examine MRPL:
Perfectly competitive 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)

7. Demand for a factor input when only one is a variable

8. Demand for a factor input when only one is a variable

9. Demand for a factor input when only one is a variable

10. 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.

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

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

13. 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

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

15. Market supply of inputs

16. Equilibrium in a competitive factor market

17. Equilibrium in a competitive factor market

18. Equilibrium in a competitive factor market

19. 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

20. Monopsony power: Marginal and average expenditure

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

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

23. Monopoly power over wage rate

24. 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?

25. Unionized and nonunionized workers