1. KRUGMAN'S MICROECONOMICS for AP* The Market for Labor Margaret Ray and David Anderson Micro: Econ: 35 71 Module

2. What you will learn in this Module : The way in which a worker’s decision about time preference gives rise to labor supply. How to find equilibrium in the perfectly competitive labor market. How equilibrium in the labor market is determined if either the product, or the factor, market is not perfectly competitive.

3. The Supply of labor Work versus leisure Wages and labor supply

4. The Supply of labor Substitution effect Income effect Hours of work (week) IE>SE, downward sloping SE>IE, upward sloping Labor supply Hourly wage So as the wage rises, the substitution effect says “work more” while the income effect says “work less”. If the individual’s labor supply curve is upward sloping, it must be the case that the substitution effect is stronger than the income effect. If the income effect is stronger, particularly at very high wages, the labor supply curve is downward sloping, or “backward bending”.

5. Shifts of the Labor Supply Curve Changes in preferences and social norms Changes in population Changes in opportunities Changes in wealth

6. Equilibrium in the Labor Market Up to this point we have assumed that both the product and labor markets are perfectly competitive There are differences when either the product market or labor market is not perfectly competitive Quantity of Labor (workers) Market Labor Demand Market Labor Supply Wage W* E*

7. Imperfect Competition in the Product Market Recall that MR < P with imperfect competition. That means the value of the marginal product = MP x MR. With imperfect competition the value of the marginal product is called marginal revenue product (MRP). MRP = MP x MR Quantity of Labor (workers) Wage W* Em MRPL VMPL Ec

8. Imperfect Competition in the Labor Market A monoposony is a single buyer of a factor of production. With imperfect competition in a factor market, MFC > W Quantity of Labor (workers) Wage 3 MFCL Labor Supply $12 $10

9. Equilibrium with Imperfect Competition Monopsony power allows firms to pay a wage below MRP Quantity of Labor (workers) Wage E* MFCL Labor Supply W* MRPL MRP

10. Figure 71.1 The Individual Labor Supply Curve Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

11. Figure 71.2 Equilibrium in the Labor Market Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

12. Table 71.1 Marginal Revenue Product of Labor with Imperfect Competition in the Product Market Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

13. Figure 71.3 Firm Labor Demand with Imperfect Competition Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

14. Figure 71.4 Firm Labor Supply in a Perfectly Competitive Labor Market Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

15. Table 71.2 Marginal Factor Cost of Labor with Imperfect Competition in the Labor Market Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

16. Figure 71.5 Supply of Labor and Marginal Factor Cost in an Imperfectly Competitive Market Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

17. Figure 71.6 Equilibrium in the Labor Market with Imperfect Competition Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers