Factors Market
Part 1
Factors of Production
• Factors, Resources, Inputs
– Land
– Labor
– Capital
– Entrepreneurship
Perfectly Competitive Labor Market
• Households = Supply
• Firms = Demand
• Derived Demand
– Product Market Demand
– Shifts Labor Market Demand
Perfectly Competitive Market and Firm
MPP and MRP
• MPP- marginal physical product
– Additional output from additional unit of a resource
– Change in TP from one more unit of resource
• MRP- marginal revenue product
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Additional revenue from additional unit of resource
Change in TR from one more unit of resource
MPP X MR= MRP
MPP X Price = MRP (in a perfectly competitive product
market)
MRC
• Marginal Resource Cost (MFC=Marginal Factor Cost)
• Additional cost from one more unit of resource
• For labor, this is the wage
• Perfectly Competitive Labor Market
– Firms are wage takers
– MRC (MFC) is perfectly elastic
Tomorrow’s Quiz
• Derived Demand
• MRP
• MFC (MRC)
• Monopsony
Extra Credit: Cost minimizing and Profit
maximizing
combination of resources (open packet)
Monopsony
Cost Minimizing Combination of Resources
at a Given Level of Output
• MPP/$ of Labor = MPP/$ of Capital
– $ = MRC Example
• MPP last unit of labor = 5
• MPP last unit of capital = 8
• Labor MPP/$ = .5
Wage rate (MRC)= $10
MRC = $16
Capital MPP/$ = .5
Optimal Combination (Profit Maximizing)
of Resources
• MRP/$ of Labor = MRP/$ of Capital= 1
– $ = MRC
– Example
• MRP last unit of labor = $10
• MRP last unit of capital = $16
• Labor MRP/$ = Capital MRP/$ = 1
Wage rate (MRC)= $10
MRC = $16
Perfectly Competitive Market and Firm
• Supply = Marginal Resource Cost (MRC)
• Demand = Marginal Revenue Product (MRP)
• Profit-Max Q of Labor: MRP=MRC
What’s Left
• 4-6 Factors Market
• 7-14 Government and Market Failure
• 19/20 Bull's-eye Physical Challenge
On to MACRO
Year in Review
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Michael Brown and Eric Garner
June SCOTUS decision
David Sweat and Richard Matt
Refugee Crisis- most accepting country
SC Church shooting town
US visit
Former Pat pleads guilty
Perfectly Competitive Firm
• MRP>MRC- hire more
• MRC>MRP- fire some
11. Under what conditions is a firm’s
MRP of labor curve the same as its
demand curve for labor?
• If firm hires in perfectly competitive resource
market
MRP
Change in TR with one additional unit of an
input (labor)
• PC product market may use
– MRP = Product Price X MPP
• Monopolist in Product Market MUST use
– Change in TR
Monopolist and
Perfectly Competitive Labor Market
• Monopolist must drop the product price to
sell more.
• Monopolist must drop price when hiring more
workers.
• MRP is downward sloping due to decreasing
MPP and decreasing price.
• Must use change in TR to calculate MRP.
• CANNOT multiply price and MPP because
price is NOT MR!
Individual Supply of Labor Curve
• Trade-Off between work and leisure
Individual Supply of Labor Curve
• Trade-Off between work and leisure
Minimum Wage and Labor Unions
Minimum Wage in PC Labor Market?
Unions
• Collective Bargaining
• _________ of workers
• Clayton Antirust Act (1914)
Unions in PC Labor Market?
Unions and Monopsonistic Labor
Market?
Unions and Monopsonistic Labor
Market
• Bilateral Monopoly
– One buyer, One seller
– Outcome is difficult to predict
Minimum Wage with Monopsony in
Labor Market?
Combination of Resources
• Cost-Minimizing
– MPPL/MFCL = MPPC/MFCC
• Profit- Max
– MRPL / MFCL = MRPC / MFCC = 1
Other Factors
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Labor = Wage
Capital = Interest (that’s it until macro)
Land = Rent
Entrepreneurship- profit
Land (Natural Resources)
Economic Rent
• Term originally only applied to land
• Payment for land above price necessary for
land to be made available
• A decrease in the payment for land will not
reduce the quantity of land available for rent.
Economic Rent- modern
• Payment for any factor above price necessary
for that factor to be employed
• A decrease in the payment for the factor will
not reduce the available supply of the factor
Economic Rent- in other words
• Payment for/to any factor above the payment
required by its owner
Wage Determinant
• Productivity
*American worker overseeing mechanized
assembly line
*Foreign worker hand painting a decoration
Wage Differential
• Skills/Knowledge
– Limits supply
• MRP
• Risk
• Access
Human Capital
• Investment to improve skills and productivity of
labor
• Self or Firm
• High wage jobs OFTEN include large human
capital investments
*Profession/Unions often push for high human
capital requirements.