Intro to Factor Markets

  • Factors = Resources

  • Firms demand resources (need resources)

    • land, labor, and capital

      • land’s payment is rent

      • Labor’s payment is wages

      • Capital’s payment is interest

  • The decision is employ a factor is based on

    • productivity of the factor

    • cost of the factor

    • price of the good/service

  • Labor Market

    • Market demand 

      • many firms with jobs

    • Market supply

      • many willing and able workers

Graph:

W = wage

  • Wage differentials

    • Human capital

      • ability

      • education

      • training

    • Networking

    • Discrimination

    • Luck

Minimum Wage: Unskilled labor

  • Case Against minimum wage

    • Unemployment

    • some small businesses shutdown

    • Benefits those who don’t need it

  • Case For Minimum Wage

    • Fights poverty

    • fights monopsony (single hirer)

    • increases productivity

    • reduces turnover (staying at one job)

Evidence and Conclusions

  • Creases unemployment

  • Labor welfare increases

  • stops monopsonists

Changes in Factor Demand and Supply

Determinants of Factor Demand

  • Productivity of resource (MP)

    • better resources

    • education/training

    • technology

  • Price of the product (P)

    • derived demand - factor demand is derived from (driven by) product demand

Related Factors:

  • Changes in the price of complementary resources

    • don’t worry about the price of substitute resources

Determinants of Factor Supply

  • Immigration/emigration

  • age distribution

  • working conditions (better=more people willing to work and vice versa)

  • Education/Training (inc. in supply)

  • preferences for leisure (dec. in supply when people do not value work as much)

  • availability of substitute resources

Profit Maximizing Behavior in Perfectly Competitive Factor Markets:

  • Marginal Revenue Product (MRP)

    • MRP= change in Total Revenue/change in Resource Quantity

  • Marginal Resource Cost (MRC)

    • Change in Total Resource cost/change in resource quantity

  • Hire as long as MRP is greater than/= to MRC

    • The optimal amount of a factor is the last unit where MRP>/= MRC

  • In perfect competition ONLY:

    • MP x P=MRP

Imperfect Competition:

  • Imperfect markets have more inelastic Demand than Perfect

Optimal Combination of Resources

  • All resources are variable

  • Last dollar spent on each resource yields the same marginal product

MPL/PL = MPC/PC

Monopolistic Markets

Monopsony Model

  • single buyer for a type of laobr

  • “wage maker” behavior

    • pay all workers the same wage

    • have to increase wages to attract more workers