Understanding Factor Markets and Labor Economics

Factor Market

Market where factors of production are traded.

-the households own the factors and then sell them

-the firms possess land, labor, and capital

Marginal Revenue Product (MRP)

Extra revenue from hiring one additional resource.

(MR x MP)

When is MR x MP true?

when the product market is both perfect and in imperfect comp

Marginal Factor Cost (MFC)

Additional cost of hiring one more resource.

∆TFC/Q

TFC equals workers x wage rate

When does a firm hire up to?

they will hire until MRP = MFC

-produces the profit max quantity of output where MR = MC

-they will hire workers as long as they bring in as much or more than the cost to the firm (VMP = MFC)

Value of Marginal Product (VMP)

Revenue is generated by one additional unit of input.

MP x P

Derived Demand

Demand for labor is based on product demand.

-affected by productivity and output price

Marginal Physical Product (MPP)

Output increase from one more unit of input.

∆TP/∆Q

Diminishing Returns

Decreasing output increase with additional input.

Profit Maximization

Maximizing profit where MRP equals MFC.

Perfect Competition

Many firms and wage takers in labor market.

Monopsony

Market with a single buyer of labor.

-Imperfect comp labor market

-only 1 firm hires labor

-Wager maker

Graph of MOnopsony?

MFC > Supply

Least-cost Rule

Minimizing costs by employing optimal input combinations.

MPc/Pc = MPl/Pl

-you add more labor to the number that is largest

Labor Supply Determinants

Leisure, # of alternate options, Distribution of age, education, immigration

Education Impact

Higher education increases worker productivity.

Alternative Options

Other job opportunities affect labor supply.

Leisure Trade-off

Increased leisure time reduces labor supply.

Age Distribution

Retirement of baby boomers affects labor supply.

Immigration Effects

Increased immigration raises labor supply. and VV

Cost of Worker

Simplified version of worker's cost to firm.

Input Substitutes

Inputs that can replace each other in production.

Input Complements

Inputs that work together in production.

Market Failure

Inefficiencies in labor market due to monopsony.

Wage Maker

Monopsonist sets wage rate above market equilibrium.