Institute of Economic Theories - University of Miskolc
Microeconomics
The input market
Mónika Kis-Orloczki
Assistant lecturer
Definitions
• Input=resources/factors of production: Goods
or services that are used by the companies to
produce certain products.
• Factors of production: A, L, K, E
• According to their origin can be:
– Primary resources: don’t evolve from economical
reasons but they can be used in the economy (L, A)
– Secondary resources: evolve from economical
reasons (K, E)
• In the output market (market of products) the
consumer=demand, the companies=supply
• In the input market the company=demand for
the resources of the housholds (labour) and
pays for it (wages)
Output market
S
D
Products and
services
Households
Company
S
Resources or factors
of production
K, L, A, E
D
Demand of the resources
• The demand of the resources depends on the
quantity of the output of the company.
• Derivative demand: the company seeks for
inputs to fulfill the consumers’ requirements in the
output market to make his own profit in short run,
but to ensure at least the normal profit in long
run.
Optimal input employment
• Output market
• It is worth increasing the production until the
cost of the increase in the output reaches the
revenue of the subsequent output: MC=MR
• Input market
• Worth increasing the employed quantity of
inputs until the cost of the subsequent input
reaches the revenue of the subsequent input:
MFC=MRP  first criteria of the optimal
input allocation-general condition
• Marginal Factorial Cost (MFC): shows the
changes in the total cost if the amount of an input
is changing by one unit.
• Marginal Revenue Product (MRP): shows the
changes in the company’s total revenue if the
amount of an input is changing by one unit.
• Value Marginal Product (VMPL): shows the
market value of a variable input’s (Labour)
marginal product.
Optimal input allocation in competitive
market (both output and input market)
• In competitive market: MR=P
• How many inputs the company will use? Quantity at
which the price of the input equals with the value
marginal product of the input  PL=VMPL
• The price of one subsequent input increases the total cost
by the price of the input  PL=MFCL
• Selling an extra product increases the revenue by the
price of the product: MR=P MRP=MPL*MR=MPL*Px
PL=MFCL=MRPL=VMPL
Individual input demand curve
• Shows the connection between the price and the
demanded quantity of the input.
• The optimal input employment is where the input
price equals with the VMP
As P is constant the MPL determines the shape of the
curve
• MRPL=VMPL shows the demand of a profitmaximising company for the input at different input
prices  PL= MRPL=VMPL is the inverse demand
curve of the input
• Defined only in the decreasing part of the curve
APL
L
MPL
PL
L
Demand of the monopoly in a
competitive labour market
• Output market: monopoly, input market: competitive
PL=MFCL=MRPL<VMPL
• Profit max: MFC=MRP
• In the INPUT market competitive, so price-taker the
increase in the input increases the costs by the price of
the input PL=MFCL, the labour supply is constant
• In the OUTPUT market monopoly, MR<PMRP<VMP
• Input demand curve: DV=MRPL
• PL=MRPL<VMPL exploitation of monopoly
Input market
Output market
Exploitation of
the monopoly
SV
PL
P
VMPL
MRPL=DV
L*
MR
D
Q
q0
Monopsony
• One buyer and many sellers  input market: monopoly,
output market: competitive
• In the OUTPUT market: MR=P  MRPL=VMPL
• Profit max: MFCL=MRPL
• In the INPUT market: monopolycan inluence the P
SL input supply increasing curve
PL<MFCL=MRPL=VMPL
• A monopsony has no input demand curve as there is no
clear connection between the input price and the
demanded quantity
OUTPUT MARKET
Competitive
Monopoly
INPUT MARKET
Competitive
Monopoly
MONOPOLY
PL=MFCL=MRPL=VMPL
PL=MFCL=MRPL<VMPL
MONOPSONY
PL<MFCL=MRPL=VMPL
PL<MFCL=MRPL<VMPL
The personal labour supply
• Labour market: the owner of the labour is the seller and
the company is the buyer
• The personal labour supply depends on:
– The income needs to get consumption goods (income constraint)
Factors of
– The needs of leisure time
living
quality
• Who is not working: 24 hours leisure time
• Employee: Leisure is decreased by the working hours
working hour is the sacrificed leisure and the wage:
which is the labour price, is the price of sacrificed leisure
time.
• Individual labour supply curve shows the
willingness of the owner of the labour to work
at different wages
• The higher wage means the more precious of
leisure time.
• Doesn’t start from origo as there is a
minimum wage for which is worth sacrificing
the leisure time
• Exists a level a wages (high) where the leisure
becomes more prescious and that’s why the
labour supply decreases the labour supply
curve is bending back
• Market labour supply: horizontal sum of the
individual supplies, the more people willing to
sell there labour, the flatter the market supply
curve is.
• In case of perfect competition in long run, the
labour supply is linear, evolves a wage level at
which the company can find any numer of
people who is willing to work