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Factor markets
Factor markets
In the idea of factor markets, firms are now the consumers who are searching for inputs and individuals and labour units are now the suppliers.
Main ideas for factor market
Derived demand
Derived demand
Derived demand is the relationship between the factors of production and the product. For example, there is a demand for teachers which is derived from the demand for education.
Marginal revenue product(Mrp)
Marginal revenue product(Mrp)
The Mrp, how much more profit the firm gets with one additional input, is depicted by a downward demand curve.
Marginal factor cost(Mfc)
Marginal factor cost(Mfc)
Marginal factor is the extra cost of having another unit of input. Firms will strive to obtain inputs as long as the Mrp>Mfc
Least-cost rule
Least-cost rule
The least cost rule states that to minimize costs, firms will adjust their inputs until MRl/Pl=MPk/Pk where l=labour and k=captial.
Monopsony
Monopsony
A monopsony occurs when there is only one firm in need of labour. Similar to a monopoly, this firm can pay workers less because workers have nowhere else to go.
Factors
Factors
Factors are what change the supply and demand for resources. For example, a decrease in the price of automated chair makers will decrease the demand for labour.
Marginal revenue product
Marginal revenue product
The marginal revenue product(Mrp) is how much extra revenue is generated by an additional unit of input
This is calculated by: Mrp=Change in total revenue divided by change in resource quantity
or
Mp x P for perfect competition
or
Mp x Mr
Marginal factor cost
Marginal factor cost
The marginal product resource cost(Mfc) is the price of obtaining another unit of input. In a competitive market, Mfc is usually equal to the wage.
Mfc=Change in total resource cost divided by change in resource quantity=wage
Change in product demanded
Change in product demanded
When the price of a product increases also increases the Mrp. When the Mrp increases, more inputs will be hired and the Mfc will increase.
Productivity change
Productivity change
Changes in productivity happen when the Mrp gets shifted to the right due to higher production efficiency. This will entice firms to hire more.
Complements and substitutes
Complements and substitutes
Changes in substitute goods can alter the Mrp for existing inputs. For example, if machinery becomes cheaper, the Mrp for human labour will decrease.
Complement resources are goods that can only be used thanks to the help of a type of input. For example, if the price of ores increases, miners will have more Mrp.
Perfectly competitive resource market
Perfectly competitive resource market
A perfectly competitive resource market is a market in which there are lots of firms hiring labour. These firms have to take the wage that the market sets because the labour elasticity of demand is perfectly elastic. This is shown by a graph for the labour market and a graph for the firm.
Minimum wage
Minimum wage
Similar to a price floor, for a minimum wage to be effective, it should be above the previous equilibrium wage. This will increase wages but the downside of this is that firms will hire fewer people and more people will want to work. Thus, there will be a surplus in labour.
On the firm graph, it can be seen that the equilibrium point for labour and wage changes from Q1 to Q2. From the graph of the market, it can also be seen that the supply and demand are no longer in equilibrium resulting in a surplus of labour.
Monopsony
Monopsony
Similar to a monopoly, a monopsony is where there is only one consumer of inputs. An example of this is a remote mining city where there is only one mining company. This company can pay the workers as little as they want because there are no other consumers. The graph for a monopsony has an upward-sloping supply and Mfc lines. The supply curve is how much people are willing to work for and the Mfc is how much they actually get. The Mfc will always be higher than the supply curve because the monopsony cannot wage discriminate. In other words, they have to pay everyone the same but some people would have settled for a lower wage.
In this example, the number of workers will be at Q and the wage will be at W1. The reason the wage is not at W2 is becasue the wage is always based on the supply line and not the Mfc line. This is because the supply curve is the minimum workers are willing to work for and firms want to pay less.
Least cost rule
Least cost rule
The least cost rule states that firms will adjust their ratios of labour and capital until they are equal(MPl/Pl=MPk/Pk). If a firm uses too much capital, the value of that capital will become increasingly obsolete. To battle this, the firm should hire more labour. For example, if Mpl/Pl>MPk/Pk, then the firm should recognize that labour is giving more benefits and that capital is not as needed. Thus, this firm should increase labour and decrease capital.
Vocabulary/Summary:
Factor markets: The idea that firms are consumers of labour and the suppliers are individuals.
Derived demand: The relationship between the product and the factors of production.
Marginal revenue product: The extra revenue generated by an additional unit of input.
Marginal factor cost: The price of obtaining another unit of input.
Least cost rule: Firms will adjust their ratios of capital and labour until there is an efficient equilibrium between labour and capital.
Monopsony: A group of firms with total control over the supply of a product.
Factors: Factors are what change the supply and demand for resources.
Perfectly competitive markets: A market in which many firms are hiring for labour.
Minimum wage: A price floor for employers to pay workers.
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