AP Microecon 5.3- 5.4 Perfectly Competitive Factor Markets & Monopsony

Marginal Factor/Resource Cost

Marginal Factor/Resource Cost

the additional cost of employing an additional unit of a factor of production

Marginal Resource Cost

The change in total cost when an additional unit of a resource is hired, other things constant (Same as MFC)

MRP of Perfectly Competitive Firm

Higher than MRP of imperfectly competitive firm - due to imperfectly competitive firm having a downward sloping MR curve

Supply Curve for a firm hiring in a perfectly competitive labor market

Horizontal Line = MFC

Demand curve for a firm hiring in a perfectly competitive labor market

Downward Sloping Line = MRP

Wage Takers

Firms that only hire a small percentage of the industry total, have no influence on the market wage, and must pay its hired workers the market-determined wage rate.

Least-Cost Rule

The combination of labor and capital that minimizes total costs for a given production rate. Hire L and C so that MPL / PL = MPC / PC or MPL/MPC = PL/PC

Diminishing Returns

the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases

Substitute Inputs

an increase in the usage of one input results in a decrease in the usage of the other input (self-checkout vs. person at the grocery store)

Complimentary Inputs

An increase in the usage of one input results in a increase in the usage of the other input (landscaper and lawn mowers)

When to use Least-Cost Rule

Perfectly Competitive Labor AND Product Market

Value of Marginal Product

the marginal product of an input times the price of the output

When Does MRP = VMP

Both the labor and product market are perfectly competitive

Monopsonist

a single buyer in a factor market

Monopsony

Market with only one buyer

Monopsonistic Labor Market

1. Imperfectly Competitive Market 2. Only 1 firm hiring labor 3. Wage Maker

MFC > Supply (Wage Rate)

Monopsonist Firm

Profit Maximizing Monopsony

MRP = MFC

Monopsony v. Perfectly Competitive

Monopsonist will hire fewer workers and pay them a lower wage than Perfectly Competitive firms

Market Failure in Monopsony

Because MFC>S then W < MRP