Markets for Factors of Production -Land -Labour -Physical

Markets for Factors of Production -Land -Labour -Physical Capital -Human Capital -Other These factors are bought and sold in a factor market with supply and demand curves similar to the goods market 1

Markets for Factors of Production These markets are important because: • money incomes are primarily determined by the prices set in these markets. –distribution of income • production costs determine which factors are used and in what quantities –resource allocation 2

CIRCULAR FLOW Products & Services Business Firms Resource Market $ Taxes $ Costs o es urc $ Income ts es $ Taxes od uc R Re so es urc $ Revenue Government RESOURCES Househol ds Resource Owners Products & Services PRODUCTS $ Spending $SPENDING ro P Produ ct Market $SPENDING d s ct u Pr LAND LABOR CAPITAL 3

P Supply Wage of Apple Pickers Market for Apples. The Market for Apple Picke (b) Price of Apples (a) The Supply W Demand 0 Q Quantity of Apples Demand 0 L Quantity of The Versatility of Supply & Demand Apple Pickers 4

Shifters of Labor Demand • Factors other than Wage that affect Labour Demand – 1) Changes in demand for the product – 2) Changes in labour productivity (technology, etc) – 3) Change in the price of other factors (land, human capital, etc. ) 5

Shifters of Labour Supply • Examples of Factors other than Wage which affect Labour Supply: • 1) Income, wealth • 2) Lifestyle • 3) The wage of competing jobs • 4) Expectations –Future wages –Income –Job availability • 5) Population (workforce) Essentially, all factors affecting demand have a parallel affecting labour supply 6

Labour Market: Perfect Competition • 1. many firms competing with one another in hiring a specific type of labour. • 2. numerous qualified workers with identical skills independently supplying this type of labour service. • 3. neither firms nor workers can exert control over the market wage rate. • price takers. 7

Labour Market: Perfect Competition Industry Labour Market The Firm: on the demand side is a price taker Wage S w 1 SL D L 1 Labour Input (workers per week) 8 Labour Input (workers per week)

Labour Market: Perfect Competition • There are many households selling to many firms, and no one household or firm has any power to influence the price. Demand for Labour • Assume that the firm on the demand side of the market is – buying (hiring) apple pickers in a perfectly competitive labour market, and – selling apples in a perfectly competitive goods market. 9

Labour Market: Perfect Competition: Demand for Labour. • The firm, on the Demand side of the market, is a “price taker”. • It has to decide: – how many apple pickers to hire • given the price of apples ( goods market) • given the wage rate for apple pickers (factor market) – in order to maximize profit 10

Marginal Review Marginal Product of Labour • Additional production of last worker hired • MPL= Q / L Marginal Revenue Product • Additional revenue of last worker hired • MRP=P x MPL • MRP= TR / L 11

The Competitive Firm Decides How Much Labour to Hire: Price of Apples=$10/bu. Wage Rate=$500/week Output (Bushels/ Marginal Labor (# of Week) workers) Product of (Q) (L) Labour 0 0 (MPL= Q / L) 1 100 MRP marginal revenue product $1000 800 2400 600 2800 400 3000 100 of Labour ( TR / L) 1800 (MRP=Px. M PL) TR Total revenue $1000 of Labour 200 $1000 2 180 80 800 3 240 60 600 4 280 40 400 5 300 20 200 12

The Demand for Labour: The Profit Max Hiring Decision • In order to find the MR of the Profit Maximizing decision: The firm must consider : – 1. the production function - how the size of the work force affects the amount produced by each worker, MPL – 2. the contribution to revenue, MRPL, and to the profit equation that each worker makes – MRP = TR / # of workers. – MRP = Product Price x MPL. » When MP MRP . 13

Profit Maximizing Hiring Decision • In order to find the MC of the profit maximizing decision; the firm must find – 3 The Marginal Factor Cost (MFC) = wage rate in perfect competition = additional cost of hiring one more unit of labour in all types of markets • hire workers up to the point where: v. MRP (MR) Wage (MFC) (MC) 14

Demand for Labour: • The quantity of labour a firm will hire at any given wage, cet. par. To maximize profit the firm hires the quantity of labour where the MRP = MFC (W in P. C. ) MRP schedule is the Demand for Labour, for a competitive profit maximizing firm 15

Profit Max: MRP=W(MFC): The MRP is the Demand for Labour Wage W 1 MFC W 2 MFC W 3 MFC • MRP = P x MPL (the value of the worker’s output) • MFC = W (the cost of hiring a worker) • Optimal number of employees occurs where MFC = MRP • Labour Demand is down sloping D=MRP 0 Q 1 Q 2 Q 3 Labour Input (workers per week) Market demand for labour in perfect competition 16

“Shifters of Labour Demand” • labour does not satisfy wants directly: demand for resources is a “Derived” Demand therefore depends on 1. How productive (MP) labour is Non labour inputs, technological progress, labour quality, prices of other resources 2. Price of the product 3. Price of other inputs 17

Market Supply of Labour • To attract workers, the wage rate paid must cover – the opportunity costs of alternative uses of time spent, • in other labour markets, • in house-hold activities • in leisure. • Higher wages attract people whose opportunity costs are not covered at lower wages: therefore the Supply of labour to any labour market is upward sloping. 18

Supply Shifters • The supply of labour changes and the supply curve shifts if – The adult population changes – Technology and capital in the home change – Preferences change 19

Wage Rate per Worker per Week ($) Equilibrium Wage Rate: Perfectly Competitive Labour Market S Surplus 498 v. The wage adjusts so Qn. D=Qn. S v. Shifts of demand or supply will change the equilibrium wage and the MRPL by the same amount since they are always equal Shortage D 0 Q 1 Quantity of Labour 20

Labour Market: Perfect Competition Industry Labour Market The Firm: on the demand side is a price taker Wage S w 1 SL D L 1 Labour Input (workers per week) 21 Labour Input (workers per week)

Monopsony A monopsony is a market in which there is a single buyer. • A monopsonist faces the Market Supply of Labour To hire more labour, a higher wage must be paid: marginal cost of labour (MFC) curve is upward sloping. To maximize profit the monopsonist hires until the marginal cost of labour , that is , the marginal factor cost , is equal to the marginal revenue product. 22

Supply of labour: monopsony in the hire of labour (2) (1) (3) (4) Units of Wage Total labor cost Marginal labor rate (wage bill) factor(labour) cost 0 $5 $0 TFactor. C/ QL $6 1 6 6 8 2 7 14 10 3 8 24 12 4 9 36 • the cost of an extra worker : MFC the wage rate by the amount needed to bring the wage rate of all workers currently employed up to the new wage. 14 5 10 50 16 6 11 66 23

MFC and MRP per Worker-Week ($) Marginal Factor Cost : Monopsonist: Profit Max Employment MFC MRP > W S E We Wm MRP Qm Qe Labour Input (worker-weeks) • Monopsony decreases the level of employment and the wage rate, compared to perfect competition Hire Qm where MFC = MRP and pay Wm 24

Monopsony Results A monopsony reduces employment and wages when compared to PC • Provides rationale for regulation of monopsony’s Monopsonistic exploitation – workers are paid a wage rate less than the monopsonist’s revenues • Programs such as work camps, free housing, and after-education work contracts can benefit the producers more than the workers 25

Minimum Wage in Monopsony • MFC follows suit • To maximize profit, MFC =MRP monopsony hires 75 hours at $7. 50 an hour. • The minimum wage has increased the wage rate by $2. 50 an hour and the amount of labour employed by 25 hours a day. Wage rate (dollars per hour) • The supply now becomes perfectly elastic at the minimum wage MFCL S 10. 00 7. 50 Minimum wage 5. 00 Increase in employment 0 MRP = D 50 75 26 Labour (hours per day)

Imperfect Competition 2) Unions: Monopoly on the Supply Side of the Labour Market • In some markets, workers collectively “sell” their labour through unions. • Labour unions are worker/employee organizations • Engage in collective bargaining to establish a contract which sets out • Wages, fringe benefits, maximum work days, working conditions 27

Unions: Goal, Increase Wages • Suppose a union is formed in an otherwise competitive market, the union is bargaining with a large number of employers. • Assume the major goal is to increase wages • A variety of ways to achieve this 28

Unions: Increase Wages Wage increases and more labour is hired • 1) Increase Demand for Labor. • Often self-fulfilling, as higher wages lead to higher quality – increase productivity Wage Rate per Hour – increase demand for the product - union label. – Decrease demand for alternatives S W 1 We E D` D Qe Q 1 Quantity of Labour per Time Period 29

Unions: Increase Wages S 2 Labour Supply • exclusive or craft union: – union that comprises workers of a given skill. – occupational licensing. Wage Rate per Hour ($) • 2) Restrict E 2 16 If union membership is limited to Q 1, wages increase to $16 instead of $15 when demand increases E 3 15 E 1 14 D 2 S 1 D 1 Q 2 Number of Workers per Time Period 30

Unions: Increase Wages – union that seeks as members all unskilled, semi skilled & skilled workers in a given industry. MRP=MF C Wage Rate per Hour ($) • 2) Restrict Labour Supply. • inclusive/ industrial union: Supply becomes horizontal at the union wage rate: MFC=Wu. Su Wu SL Wc D= MRP Qu Qc 31 Number of Workers per Time Period

Unions: Goal, Increase Wages • Contracts for higher wages can be negotiated via the THREAT of reduced labour supply (ie: a strike) • Control over the supply side of the labour market is required here 32

Unions: Employ workers want to employ more workers than at equilibrium. This requires, however a reduction in wage from W 1 to W 2 Wage Rate per Hour ($) • 2) A union may E 2 W 1 This union goal is less common due to the decrease in wages for employed workers E 3 W 2 D 2 S 1 Q 2 Number of Workers per Time Period 33

3. ) Bilateral Monopoly • In communities with a single major employer, there is typically also a union. A bilateral monopoly exists when a union (monopoly seller) faces a monopsony buyer. Wages are determined by bargaining. 34

3. ) Bilateral Monopoly MCL • The union may agree to work 50 hours, but seeks the highest wage rate the employer can be forced to pay — $10/hour=MRPL S Wage rate (dollars per hour) • The monopsony hires 50 hours and pays $5/hour. 10. 00 7. 50 5. 00 MRP 0 50 75 35 Labour (hours per day)

3. ) Bilateral Monopoly • The monopsony firm and union bargain over the wage rate • It will settle between $5 and $10/hour (depending upon who is stronger). MCL Wage rate (dollars per hour) • It is unlikely the union will get $10/hour or that the firm can keep wages at $5. 00/hr. S 10. 00 7. 50 5. 00 MRP 0 50 75 Labour (hours per day) 36

Wage Differentials • If all labour was homogeneous and all jobs were equally attractive, and all labour markets were perfectly competitive, then all wages would be the same……. . • Wages & earnings typically exhibit wide variations: – 1) Labour Market Imperfections – workers are not always mobile – institutional restrictions – unions. . – discrimination – hiring practices model of labour market imperfection another 37

Wage Differentials – 2) Compensating Differences –jobs vary in attractiveness – 3) Non-competing Occupational Groups –workers aren’t homogeneous, they have different ability, different education and training. 38

Union Benefits – 1) Allows for increased productivity, skill and efficiency – 2) Reduce wage inequality – 3) Reduce profits (transfer surplus to workers) – 4) Provide a voice for workers – 5) Increase workforce stability (and job security) 39

Union Drawbacks – 1) Job security can lead to reduced productivity. Free-riding = expecting others to work hard Featherbedding = forcing employers to use more workers than needed – 2) Increase wage inequality between union and non-union workers – 3) Cause businesses with little economic profit to fold, resulting in unemployment – 4) Generally causes unemployment – 5) Often prevents natural market mechanisms to take place (ie: raises to hard workers, fire others) 40