,Chapter 14,Markets for Factor Inputs,Chapter 14,Slide 2,Topics to be Discussed,Competitive Factor Markets Equilibrium in a Competitive Factor Market Factor Markets with Monopsony Power Factor Markets with Monopoly Power,Chapter 14,Slide 3,Competitive Factor Markets,Characteristics 1) Large number of sellers of the factor of production 2) Large number of buyers of the factor of production 3) The buyers and sellers of the factor of production are price takers,Chapter 14,Slide 4,Competitive Factor Markets,Demand for a Factor Input When Only One Input Is Variable Demand for factor inputs is a derived demand derived from factor cost and output demand,Chapter 14,Slide 5,Competitive Factor Markets,Assume Two inputs: Capital (K) and Labor (L) Cost of K is r and the cost of labor is w K is fixed and L is variable,Demand for a Factor Input When Only One Input Is Variable,Chapter 14,Slide 6,Competitive Factor Markets,Problem How much labor to hire,Demand for a Factor Input When Only One Input Is Variable,Chapter 14,Slide 7,Competitive Factor Markets,Measuring the Value of a Workers Output Marginal Revenue Product of Labor (MRPL) MRPL = (MPL)(MR),Demand for a Factor Input When Only One Input Is Variable,Chapter 14,Slide 8,Competitive Factor Markets,Assume perfect competition in the product market Then MR = P,Demand for a Factor Input When Only One Input Is Variable,Chapter 14,Slide 9,Competitive Factor Markets,Question What will happen to the value of MRPL when more workers are hired?,Demand for a Factor Input When Only One Input Is Variable,Chapter 14,Slide 10,Marginal Revenue Product,Hours of Work,Wages ($ per hour),Chapter 14,Slide 11,Competitive Factor Markets,Choosing the profit-maximizing amount of labor If MRPL w (the marginal cost of hiring a worker): hire the worker If MRPL w: hire less labor If MRPL = w: profit maximizing amount of labor,Demand for a Factor Input When Only One Input Is Variable,Chapter 14,Slide 12,Hiring by a Firm in the Labor Market (with Capital Fixed),Quantity of Labor,Price of Labor,Why not hire fewer or more workers than L*.,Chapter 14,Slide 13,Competitive Factor Markets,If the market supply of labor increased relative to demand (baby boomers or female entry), a surplus of labor would exist and the wage rate would fall. Question How would this impact the quantity demanded for labor?,Demand for a Factor Input When Only One Input Is Variable,Chapter 14,Slide 14,A Shift in the Supply of Labor,Quantity of Labor,Price of Labor,Chapter 14,Slide 15,Competitive Factor Markets,Comparing Input and Output Markets,Chapter 14,Slide 16,Competitive Factor Markets,Comparing Input and Output Markets In both markets, input and output choices occur where MR = MC MR from the sale of the output MC from the purchase of the input,Chapter 14,Slide 17,Competitive Factor Markets,Scenario Producing farm equipment with two variable inputs: Labor Assembly-line machinery Assume the wage rate falls,Demand for a Factor Input When Several Inputs Are Variable,Chapter 14,Slide 18,Competitive Factor Markets,Question How will the decrease in the wage rate impact the demand for labor?,Demand for a Factor Input When Several Inputs Are Variable,Chapter 14,Slide 19,Firms Demand Curve for Labor (with Variable Capital),Hours of Work,Wages ($ per hour),0,5,10,15,20,40,80,120,160,Chapter 14,Slide 20,Assume that all firms respond to a lower wage All firms would hire more workers. Market supply would increase. The market price will fall. The quantity demanded for labor by the firm will be smaller.,Competitive Factor Markets,Industry Demand for Labor,The Industry Demand for Labor,Labor (worker-hours),Labor (worker-hours),Wage ($ per hour),Wage ($ per hour),0,5,10,15,0,5,10,15,50,100,150,L0,Firm,Industry,Chapter 14,Slide 22,The Industry Demand for Labor,Question How would a change to a non-competitive market impact the derivation of the market demand for labor?,Chapter 14,Slide 23,The Demand for Jet Fuel,Observations Jet fuel is a factor (input) cost Cost of jet fuel 1971-Jet fuel cost equaled 12.4% of total operating cost 1980-Jet fuel cost equaled 30.0% of total operating cost 1990s-Jet fuel cost equaled 15.0% of total operating cost,Chapter 14,Slide 24,The Demand for Jet Fuel,Observations Airlines responded to higher prices in the 1970s by reducing the quantity of jet fuel used Ton-miles increased by 29.6% & jet fuel consumed rose by 8.8%,Chapter 14,Slide 25,The Demand for Jet Fuel,Observations The demand for jet fuel impacts the airlines and refineries alike The short-run price elasticity of demand for jet-fuel is very inelastic,Chapter 14,Slide 26,Short-run Price Elasticity of Demand for Jet Fuel,American -.06 Delta -.15 Continental -.09 TWA -.10 Northwest -.07 United -.10,Airline Elasticity Airline Elasticity,Chapter 14,Slide 27,The Demand for Jet Fuel,Question How would the long-run price elasticity of demand compare to the short-run?,Chapter 14,Slide 28,The Shor