2. Factors Market $ Land (rent) $ Labor (wages), $ Capital (interest) $ Entrepreneurship (profit)

3. Factors Firms use the factors to produce the goods and services. Central question of Economics is the question of scarcity. How much or many of a factor is very dependent on the demand for a product or service Shifts of demand in the product market industry will effect the demand for the factor being used Take what we have studied with production theory and market structures apply to labor market

4. Industry : Labor Market simply Supply and Demand Demand for the Factor is derived demand All the firms need for labor Based on the demand for their product Indirect relationship between Q and wage Supply of workers or The factor is the actual Number of workers seeking work. Direct relationship between Q and wage

5. Purely Competitive labor market Supply simply is number of workers available Can shift if wages in another increase change Derived Demand for labor: can shift if the price of the product changes or price of other factors change Machine or man which costs more Changes in labor productivity Tires up in the product market Shifts demand for product Demand for the factor (labor)/ non-price or wage determinant Is the result of the elasticity of the product, ease of substitution the amount of time the firm has to change production methods and materials

6. Labor industry Market clears at equilibrium with no shortages or surplus. If wage above equilibrium more workers than firms want= surplus If wage below equilibrium, firm willing to hire more but workers do not want to work Wage determined at equilibrium and quantity at equilibrium Min. wage a price floor above Causes lay offs, surplus of workers and unemployment

7. Now the firm hiring workers Four assumptions effect the behavior of the firm and they do use marginal analysis to set the wage and number Many workers With identical skills: unskilled Total knowledge by firm and workers of what the equilibrium wage should be Easy exit and entry of workers

8. Results Firm is a wage taker Therefore wage is horizontal and is MFC---reason wage is constant, perfectly elastic MFC equals the supply of labor for the firm since it perceives it can get all the workers it needs at the market equilibrium wage

9. Labor Input (workers per week) The firm D S Labor Input (workers per week) W1W1 S L = MFC Industry labor market W1W1 L1L1

10. Results Firm is a wage taker With no hiring power Firm knows it does not need to hire above the equilibrium Firm knows if it hires below equilibrium the workers will go work in another industry or for someone else

11. Productivity Therefore using marginal analysis the number of workers hired need to equal the productivity of the workers to the firm and their contribution to revenue MPP= output of the workers MR= the contribution of hiring one more worker and output Therefore it’s the price of the product also in purely competitive market structure MPP X MR = MRP or the firms demand for labor

12. Summary Wage taker No market power Firm will hire where MFC=MRP Remember that MRP=MPP x MR MFC is the firm’s supply of workers MRP is the firm’s demand for workers based on their productivity

13. MFC < MRP MFC > MRP MRP = MFC Optimal number of workers Labor Input (workers per week) MRP $498 1 12 S L = MFC Wage and MRP per worker ($)

14. Make connections: Efficient use of resources Should be where the Cost MFC ratio to mpp X mr (MRP) is equal for the use of all resources or factors Every firm wants to use its factors in a profit maximizing combination were MR=MC Least cost combination: true efficiency And for the factors were the ratio of Cost minimization MPP of labor price of labor = MPP of captial price of capital MPP of land price of land = mrp/wage=mrp=rent=mrp/interest=mrp/profit

15. Purely competitive Factors market Labor Input (workers per week) The firm D S Labor Input (workers per week) W1W1 S L = MFC Industry labor market W1W1 L1L1

16. Now line it up with purely competitive product market Initial market conditions S D Quantity of Wheat (industry) Quantity of Wheat (firm) d = MR PePe QeQe Break-even MC ATC qeqe

17. Now what if nonprice determinants effect the product market Higher price creates economic profit S1S1 D1D1 Quantity of Wheat (industry) Quantity of Wheat (firm) P1P1 Q1Q1 q1q1 MC ATC q2q2 D2D2 Q1Q1 P2P2 European crop failure increases U.S. Demand

18. Is the product market related to the factors market Shifts of demand will effect DD and cause DD to shift right or left influencing wage and the firm’s MFC Changes in the productivity of labor, wages will effect the supply curve up in the product market resulting in higher or lower prices. This then effects the factors market DD Remember to shift MRP if mpp or mr effected

19. New profits in the product market S1S1 D1D1 Quantity of Wheat (industry) Quantity of Wheat (firm) P1P1 Q1Q1 q1q1 MC ATC D2D2 S2S2 Economic profit attracts new firms Price fall to break-even

20. MRP = MFC Figure 27-1, Panel (a)

21. How to find MRP Total PhysicalMarginalMarginal ProductPhysical Product Revenue Product Labor Input (TPP)(MPP)(MRP) (MR = $6) 6882 71,000 81,111 91,215 101,312 111,402 121,485 131,561 118$708 111$666 104$624 97$582 90$540 83$498 76$456

22. What if the firm has power Monopoly=1 firm with unique product Monopsony is a firm that hires with power It could control wage ==wage setter It would hire fewer workers at lower wages Assumptions would be different Fewer workers With unskills –can be replaced Firm knows it has power to pay less Workers have a difficult time finding work with someone else

23. Monopsony The firm has hiring power Many workers but one or several firms that have power Therefore industry derived demand curve(downward sloping) is the Firm’s The firms MRP or demand line is a function of their power The Wage line will move up from supply-- just the opposite of MR derived from Demand in the product market.

24. Wage Setter with power MRP is DD For the firm Supply of all workers MFC moves upward Firm must pay more to hire more workers PC wage Firm goes to Mrp=mfc and Looks down to The lowest Wage he can pay

25. DWL unemployment welfare MFC dwl Hiring Decision Goes to MRP=MFC Looks down Pays less and hires Fewer workers Firm has the power

26. Monopsony and min wage MFC