1 1 Integrating the Input Market and the Output Market when Teaching Introductory Economics May 2015 Clark G. Ross Frontis Johnston Professor of Economics Davidson College Box 7022 Davidson, NC
2 2 Integrating the Input Market and the Output Market when Teaching Introductory Economics Abstract: This paper shows the integration of the competitive output and input markets. Text books invariably tend to separate the teaching of these two fundamental concepts (with several intervening chapters) to the extent that students frequently do not grasp the vital interrelationships between these two markets and the representative firm. With this paper as a teaching tool, both faculty and students will have a more efficient and clear way of teaching these concepts. By Clark G. Ross, Dept. of Economics, Davidson College July 2015 I. Introduction When studying introductory college economics, students frequently do not grasp the workings of the input market. Toward the end of the semester, teachers may not have enough time to provide good nuanced teaching. In more instances, insufficient contrast between the input and output markets leaves students baffled about the most basic of concepts, such as what is being measured on the quantity axis in the labor market. Even fewer students have a level of comfort that permits them to integrate well the competitive input market and the competitive output market. The principal reason for this omission and failing is the current teaching of these topics in introductory economics. Every major text book that includes detailed coverage of both the competitive output market and the competitive input market separates the discussion by intervening chapters, typically on other market structures. When students reach the discussion of the input market, they are not reminded of the natural relationship, shown on the production function, that in the short-run more labor employed must correlate to more output produced, and the converse. There is a clear dilemma. Market structures are covered over time, maybe three weeks, in a predictable order: perfect competition, followed by monopoly, then followed by other forms of imperfect competition (e.g., oligopoly or monopolistic competition). Then the labor market is considered. In few cases are direct references and analogies made between the perfectly competitive market and representative firm with output and with an input, such as unskilled labor. Also, many texts fail to define clearly the participants in the labor market, particularly on the demand side. Often students are led to believe that the firm s hiring of labor constitutes all the hiring in the labor market (almost like a monopsonist) or, at best, can influence the wage rates with its own labor hiring. In a truly perfectly competitive labor market, a single firm has no ability to influence the wage rate. And, in fact, unskilled labor may well be hired in a range of industries, not in just one industry. For instance, in Mankiw s 7h edition of Principles of Economics, he discusses the output market in chapter 14 and introduces the input market in chapter 18. In trying to show a linkage between the input and output markets he states in one place When labor demand increases from D1 to D2, perhaps because of an increase in the price of the firm s output, the equilibrium wage rises from W1 to W2 and employment increases from L1 to L2. (1) The statement, relating to the firm, could suggest that firm s hiring of labor could have a discernable effect on both wage and employment in the labor market
3 3 (causing the labor demand curve to shift out). This does not represent a rigorous analysis of the firm in the output market or in the labor market. Much greater care needs to be introduced. In the Krugman and Well s text some greater care is implicitly given. When the output price increases, they do show the firm s hiring of labor increasing without any impact on the wage rate. (2) They do not, however, link explicitly a change in the output market (the firm s producing more output following an increase in consumer demand) with a change in the input market (corresponding increase in the hiring of labor). This paper, will show faculty and, hopefully students, how to integrate correctly the output and the input markets, respecting the assumptions that economists make about competitive markets. The student of introductory economics should be able to grasp the logic shown below. Students need not wait until intermediate microeconomic theory or labor economics to study this basic theoretical integration. Section II of this paper will review quickly the competitive output market, using side-by-side graphs of the industry or the market and the individual or representative firm. Section III will introduce the basic theory of the input market, including graphs of the entire market for unskilled labor and the representative firm s hiring of unskilled labor. Finally, Section III will integrate the input and the output markets with some examples of how changes in exogenous parameters, such as the demand for the output or the supply of labor, have effects on the firm s production of output and short-run hiring of labor. The principal contribution of this paper to teaching is the integration of both the input and the output markets in a simple but effective way, allowing students to test rigorously their understanding of these important microeconomic concepts. Using this paper as a teaching tool should increase the effectiveness and efficiency with which these important topics are explained. This work can be used either as a complement to the textbook treatment of these issues or as a substitute for those concentrating on competitive markets. II. The Competitive Output Market In this competitive output market (Figure II-A), assume we have many apparel firms producing t-shirts, located in all sections of a country (for instance in each of the states of the United States). The representative firm shown in Figure II-B is located in one of these locales call it Norta. The many firms produce an identical basic white t-shirt, assumed to be a normal good. Thus, with many small firms, easy entry and exit, and a homogenous product, we can assume that the output market approaches the perfectly competitive model. Since most students tend to grasp the workings of the competitive output market, the following explanation of the four curves in the two graphs will be brief.
4 4 Output Market for the Industry: 1. The demand for output (t-shirts) is downward sloping. Since it is a normal good, the income and substitution effects of an output price decrease reinforce each other, leading to a greater quantity demanded in the market. 2. The short-run output supply curve is upward sloping. It is constructed by summing horizontally the rising portion of each firm s short-run marginal cost curve, above the intersection with average variable cost. The upward slope shows that with a higher output price, existing profitmaximizing firms (no new firms in the short run) will use more labor (assumed to be the variable input) to produce more output. The intersection of the market or industry demand and supply will lead to an equilibrium market price for t-shirts ($5.00 per t-shirt in this example) and equilibrium market quantity. See Figure II A below. Representative Firm s Output Decision: 1. As a price taker, the representative firm faces a perfectly elastic (horizontal) demand curve. The firm is able to sell no output above the competitive price and has no incentive to sell output below the competitive price. With a perfectly elastic demand curve, Price (P) = Average Revenue (AR) = Marginal Revenue (MR). 2. The individual profit maximizing firm s supply decision can be shown by using the rising portion of the short-run marginal cost curve above the intersection with average variable cost. Using the current competitive output price, this profit-maximizing firm produces where P or MR equals MC. See in Figure II B below. The firm will earn economic profit as long as P or AR is above Average Total Cost (ATC).
5 5 III. The Competitive Input Market The competitive input market requires additional explanation. Our labor market is in a defined geographic locality, say Norta, as above. On the horizontal axis is quantity of unskilled labor in total hours used in all industries in Norta. So, a very small number of the unskilled labor are employed by the one apparel firm (described above) in Norta. Other unskilled labor are employed in factories producing other goods or in service industries, like health care or education. The vertical axis shows the per hour price or wage for unskilled labor. A perfectly competitive input market is assumed. This means that there are many small buyers (demanders) of labor, such as the many small firms in Norta, and many individual sellers (suppliers) of labor. We assume that these unskilled workers bring identical characteristics (e.g., education, workplace experience, attitudes and aspirations) to the labor market. Thus, unskilled units of labor can be considered standard or homogeneous, just as we assume about units of output in the perfectly competitive output market. Labor Market for the Geographic Area: The demand for unskilled labor by all the firms in Norta is downward sloping. At higher wages, firms wish to employ fewer units of labor. The decrease in the quantity demanded of labor when the wage rises is motivated by two principal factors. The first, both in the short-run (when wages vary but other factors influencing the use of labor by firms such as worker skills, and available technology or plant and equipment are fixed) and the long-run (when these other factors are variable), is a desire to produce less output, as the price of an input price increases (the output effect shown by an increase in the firm s short-run marginal cost). The second, more relevant in the long-run, is a desire to substitute other inputs for labor, the price of which has relatively increased in this example (the substitution effect can be shown by the output costminimizing formula of equating marginal product per input price for each input). For instance, we have seen groceries stores, in checking-out customers, substitute machinery (automatic scanners for unskilled labor), as the relative price of labor to price of capital seems to have risen. The supply of unskilled labor is upward sloping. At higher wage rates we assume that individuals will work more hours, given that the opportunity cost of leisure has increased. [More formally, we argue that the substitution effect of the wage increase (more labor and less leisure) will be stronger than the income effect of the wage increase (additional leisure, as leisure is presumed to be a normal good). Also, some individuals who are not labor force participants at the lower wage will enter the labor market and seek employment at a higher per hour wage rate. Representative Firm s Labor Hiring Decision: The representative firm in Norta, our apparel firm producing t-shirts, will have both a demand for and supply of labor that jointly determine the quantity of labor hired by the firm.
6 6 The supply of labor to the firm is perfectly elastic at the prevailing wage. The firm in the input market is a wage taker. The firm can hire all the labor it wishes at the equilibrium wage. As a very small employer within the geographic area, it can hire all the labor it wishes at the prevailing wage, negating any need to increase the wage to hire more people. It can hire no units of labor at a wage below the prevailing wage. All workers can find employment at the prevailing wage and need not work for any lower wage. To argue that the firm would increase the wage to hire a more productive worker has a logic, of course; however, in that case the labor market is no longer perfectly competitive with homogeneous units of labor. Thus, for the firm Wage (w) or Price of Labor is equal to the Average Cost per unit of labor and is equal to the Marginal Factor Cost of Labor (MFC) or Marginal Resource Cost of Labor (MRC). The MFC or MRC is defined as the additional cost of an additional unit of input, labor in this example. The most complicated explanation for the student requires introducing the concept of the marginal revenue product of labor (more correctly called the value of marginal product of labor, VMP L, when the output market is competitive); this measure embodies the marginal contribution to revenue made by a unit of labor. The marginal revenue product of labor is determined by the amount of extra output produced by a unit of labor and the value of that output, measured by the price of output in a competitive output market. A student should understand intuitively that a unit of labor is more valuable to a firm as the laborer produces more output per hour for the firm (higher marginal product of labor per hour) and that the output is more valued (higher price of output). Thus, the MRP L (or VMP L) = MP L x P Q. Students should recall the short-run production function that links units of labor to output, for a given capital stock. From that function, the marginal product of labor in units of output, t-shirts for instance, can be calculated. From the marginal product of labor, the transformation to the marginal revenue product of labor is quite simple. It is the MP L x the Price of output (P Q in a competitive market), perhaps $5.00 per t-shirt, from the output market of Section II. For instance, Labor (hours) Quantity of Output Marginal Product of Labor Marginal Revenue Product of Labor $25 ($5 x 5) $30 ($5 x 6) $25 ($5 x 5) $20 ($5 x 4) $15 ($5 x 3) $10 ($5 x 2) $5 ($5 x 1)
7 7 This production function has increasing returns through two units of labor, then diminishing returns, consistent with the law of diminishing returns. It is critical that the student understand the meaning of the marginal revenue product of labor. This table shows that the first unit of labor will add five t-shirts to production, each of which can be sold in a competitive market for $5.00; thus the marginal contribution to revenue or the marginal revenue product of the first unit of labor is $25. Each of the others can be explained in an analogous manner. Now, if the price per hour of labor or the wage rate is $10.00, this firm will hire six units of labor to maximize economic profit. Each unit of labor until the 6 th contributes $10 or more to revenue, increasing the firm s profit; thus, we assume that the firm will hire each of the first six units. The seventh unit of labor adds $5 of additional revenue but would cost the firm $10. The firm will not hire the 7 th unit of labor, as profit would decrease by $5.00 from hiring that unit of labor. In essence, the decreasing portion of the marginal revenue product of labor becomes the firm s demand curve for labor. More accurately, it is the decreasing portion of the marginal revenue product of labor below the intersection with the average revenue product of labor. At any wage rate above the maximum of the average product of labor, the firm would shut down, as Total Variable Cost would exceed Total Revenue (or from the output perspective Average Variable Cost > Price). The graph below, Figure III A, shows a competitive labor market with an equilibrium wage of $10.00 per hour. Beside the labor market graph is the competitive apparel firm (producing t-shirts), showing its hiring of labor where the wage rate or supply of labor (perfectly elastic at $ per hour) equals the marginal revenue product of labor, with six units of labor hired in this example. In other words, the profit-maximizing firm is hiring labor where the Marginal Factor Cost of labor (labor supply to the firm) equals the Marginal Revenue Product of labor (the firm s labor demand).
8 8 IV. Comparative Statics Using three hypothetical changes we can illustrate the integration of the output and the input market. Each of these changes: a change in the price of output, a change in the wage rate or the price of the input, or a change in marginal productivity of labor will alter the firm s hiring of labor. 1. An Increase in the Demand for T-shirts As a result of a change in tastes towards t-shirts, assume that the market demand for t-shirts increases. Intuitively, we should assume that the short-run market price of t-shirts will increase, the quantity of t- shirts sold in the market will increase, and our representative firm will produce more t-shirts employing more labor, the variable input. In the short-run there can be no increase in the use of capital, the fixed input, or in the number of firms. Changes in the amount of capital or in the number of firms can only occur in the long run. The four graphs below, two for the output market and two for the input market show these intuitive results. In the output market below, we see the demand for output increases, leading to a higher equilibrium market price and quantity. The demand facing the individual firm shifts up with the higher price and continues to be horizontal or perfectly elastic. The new intersection of MR and MC (for output) has the representative firm producing more output, moving from q 0 to q 1. The increase in the market level of output represents the additional output (t-shirts) produced by all existing firms who benefit from the increased output price. In the labor market, the individual firm s marginal revenue product of labor increases or shifts to the right. Since the MRP L is the MP L x Pq, the higher price of t-shirts up from $ 5 per t-shirt means that each unit of labor, while contributing the same extra output in t-shirts, now has a higher incremental value to the firm with t-shirts selling for a higher price. For a given price of labor, or horizontal labor supply, the firm will increase its hiring of labor from l 0 to l 1. Now, in the labor market there is no perceptible change. There is no reason that the market supply of labor will shift. Given that the labor market encompasses all demands for unskilled labor and only this apparel firm increased its hiring of labor, then there is an imperceptible increase in the demand for labor. The equilibrium price of labor does not change. As an example, consider the labor market in Norta. If there is only one apparel firm in this area, then the firm s additional hiring of labor will have no perceptible effect on the overall demand for unskilled labor in Norta. These changes are shown in Figures IV- A, B, C, and D. [Additionally, there could be an offsetting reduction in the demand for labor by others firms producing goods for which there has been a negative change in tastes (i.e., change in tastes away from these goods).] Recall the other apparel firms are located throughout the country in many different labor markets. Each will be hiring an incremental amount of labor in its own labor market. However, no labor market must have a perceptible increase in the demand for labor. Were there to be a perceptible increase in the
9 9 demand for labor and increase in the market wage rate, then the supply of t-shirts in the output market would decrease or shift left and there would be an additional increase in the price of t-shirts. The marginal factor cost of labor to the firm would shift up and there would be an offsetting reduction in labor hiring. The simple interaction between the output market and the input market would no longer exist. There would be a more complicated, simultaneous interaction with both the price of output and the price of labor changing. 2. A Decrease in the Supply of Labor in one Labor Market Here, begin in the market for unskilled labor. With an increase in retirements or departures from the local labor market (only in Norta), the labor supply curve decreases or shifts to the left. The equilibrium wage rate increases and the equilibrium quantity of labor decreases. Take the new higher wage (the perfectly elastic labor supply to the firm or the marginal factor cost of labor) over to the firm graph; with
10 10 the higher wage, the firm will reduce its hiring of labor. With this higher wage rate, all firms in Norta or this geographic area, regardless of what they are producing, hire less labor, as reflected in a reduction in the quantity demanded of labor. If the firm hires less labor, it should be producing less output. How do we show that in the output graph for the representative firm? Recall that the marginal cost of output is equal to P labor (or the price of the variable input)/mp L. With an increase in the price of labor, the marginal cost of producing the output increases. With an upward shift of marginal cost, then at a given output price or given marginal revenue (of output), the firm will produce less output. Thus, following the reduction in the supply of labor and the increase in the local wage rate, the firm will hire less labor and will produce less output. With this firm producing less output, does the supply of output or the supply of t-shirts shift in and increase the price of t-shirts? In this case the reduction in the supply of t-shirts is imperceptible and there is no change in the price of t-shirts. Remember there are many firms producing t-shirts throughout the country; if the wage rate increases only in this one locality (Norta) then just this one firm will have an increase in its wage rate, decrease in its hiring of labor and resulting decrease in production of output (t-shirts). Thus, there is no visible effect on the supply of output. Now, if all firms had experienced an increase in the cost of labor and if all firms had reduced output levels, then the supply of output would fall, with a corresponding increase in the market price of output. 3. An Increase in the Marginal Product of Labor Assume that our firm increases its stock of capital or initiates a reorganization of its labor force. In each case there will be an increase in the marginal physical product of labor. For a given price of output, the increase in the marginal product of labor will increase or shift out the marginal revenue product of labor. The firm, for a given input price will now hire more labor and should produce more output. The firm will indeed produce more output, as the marginal cost of output will fall. Recall the marginal cost is P labor/mp L; with an increase in the marginal product of labor, there is a decrease in the marginal cost of output. For a given price of output or marginal revenue of output, the firm will produce more output where MR = MC. Assuming that this firm alone has the productivity gain, there is an imperceptible increase in the demand for labor, keeping the wage rate the same; there is also an imperceptible increase in the supply of output, keeping the output price the same. V. Additional Complications A principal complication in this analysis would be the possible secondary impact from a change in the wage rate or the price of labor following an increase in the demand for t-shirts and corresponding increase in the price of t-shirts. Recall that the firm produces more t-shirts and hires more labor. The analysis had an imperceptible increase in the demand for labor and an unchanged wage rate.
11 11 Were there many producers of t-shirts in the same area (e.g., Norta) and should the increase in labor hiring represent a perceptible increase in the demand for labor, then the wage rate would increase. There would then be an increase in marginal cost for firms and then a corresponding reduction in the supply of output, somewhat offsetting the increased output from the original increase in demand. Also, the firm s increase in the hiring of labor would be somewhat offset by the increased wage rate. For the student in introductory economics, this is a much more complicated scenario that does not add to a basic understanding of the labor market and the integration with the output market. VI. Conclusion Far too few students of introductory economics grasp the importance of the interaction between the input and the output market. The current teaching of these concepts encourages separation and not integration. Frequently, as shown in the introduction, these concepts are taught very individually and in text book chapters that are spaced far apart. When the student reaches the input market chapter, it is as though previous chapters on productivity, cost, and competitive price and output determination are long in the past and no longer relevant. This brief lesson effectively links the output and input market in a clear and time-efficient manner. The analysis should aid students in understanding i) the input market and firm s hiring of an input, ii) the integration of the input market and the output market, and iii) the importance of clearly defining the boundaries and number of participants, particularly firms in this case, in both the relevant output and input markets. Understanding this relationship is critical not only to understand well microeconomics but as a critical building block for macroeconomic analysis and policy discussions relating to unemployment. Moreover, within the introductory course, itself, this analysis provides a vital test to students to determine if they understand the most important basic concepts of a competitive output and competitive input market. The author wishes to thank Wilson Turner, (XXXX 15) for his work as research assistant and Professor Dennis A. (XXXX) for his helpful comments. XXXX to mask identification for now Endnotes: 1. Mankiw, N. G., Principles of Economics, 7 th Edition, CENGAGE Learning, 2015, page Krugman, P. and Wells, R., Economics 3 rd Edition, Worth Publishers, 2013, page 539.
I. Learning Objectives In this chapter students will learn: A. The significance of resource pricing. B. How the marginal revenue productivity of a resource relates to a firm s demand for that resource.
Unit 7: Factor Markets Factor Market Markets in which the factors of production are bought and sold. A factor input is either land, labor, capital, or entrepreneurship Entrepreneurship is not purchased
Monopoly and Monopsony abor Market Behavior 1 Introduction For the purposes of this handout, let s assume that firms operate in just two markets: the market for their product where they are a seller) and
Practice Questions Week 8 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The characteristics of a market that influence the behavior of market participants
Chapter 11 PERFECT COMPETITION Competition Topic: Perfect Competition 1) Perfect competition is an industry with A) a few firms producing identical goods B) a few firms producing goods that differ somewhat
University of Lethbridge Department of Economics ECON 1010 Introduction to Microeconomics Instructor: Michael G. Lanyi Lab #11 Chapter 11 Perfect Competition 1) Perfect competition occurs in a market where
Perfectly Competitive Markets It is essentially a market in which there is enough competition that it doesn t make sense to identify your rivals. There are so many competitors that you cannot single out
MODULE 70: THE MARKETS FOR LAND & CAPITAL SCHMIDTY SCHOOL OF ECONOMICS THE PURPOSE OF THIS MODULE IS TO SHOW HOW WE CAN USE SUPPLY AND DEMAND TO MODEL THE MARKETS FOR THE LAND AND CAPITAL INPUTS. Learning
Unit 5.3: Perfect Competition Michael Malcolm June 18, 2011 1 Market Structures Economists usually talk about four market structures. From most competitive to least competitive, they are: perfect competition,
Microeconomics Instructor Miller Practice Problems Monopolistic Competition 1. A monopolistically competitive market is described as one in which there are A) a few firms producing an identical product.
The Labour Market: Demand and Supply Learning Objectives Understand that the demand for a factor of production such as labour is derived from the demand for the product and that it will be influenced by
Perfect Competition Chapter 10 CHAPTER IN PERSPECTIVE In Chapter 10 we study perfect competition, the market that arises when the demand for a product is large relative to the output of a single producer.
ECON 3310 Homework #4 - Solutions 1: Suppose the following indicates how many units of output y you can produce per hour with different levels of labor input (given your current factory capacity): PART
Problems on Perfect Competition & Monopoly 1. True and False questions. Indicate whether each of the following statements is true or false and why. (a) In long-run equilibrium, every firm in a perfectly
AP Microeconomics 2002 Scoring Guidelines The materials included in these files are intended for use by AP teachers for course and exam preparation in the classroom; permission for any other use must be
Chapter 14 Markets for Factor Inputs 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
Agenda Productivity, Output, and Employment, Part 1 3-1 3-2 A production function shows how businesses transform factors of production into output of goods and services through the applications of technology.
Chapter 6 Competitive Markets After reading Chapter 6, COMPETITIVE MARKETS, you should be able to: List and explain the characteristics of Perfect Competition and Monopolistic Competition Explain why a
MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that
Chapter 16 MARKETS WITHOUT POWER Microeconomics in Context (Goodwin, et al.), 3 rd Edition Chapter Summary This chapter presents the traditional, idealized model of perfect competition. In it, you will
Econ 100B: Macroeconomic Analysis Fall 2008 Problem Set #3 ANSWERS (Due September 15-16, 2008) A. On one side of a single sheet of paper: 1. Clearly and accurately draw and label a diagram of the Production
Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets I. Perfect Competition Overview Characteristics and profit outlook. Effect
Chapter 14 DEMAND AND SUPPLY IN FACTOR MARKETS Key Concepts Prices and Incomes in Competitive Factor Markets Factors of production (labor, capital, land, and entrepreneurship) are used to produce output.
Monopoly Problem 1 (APT 93, P3) A single airline provides service from City A to City B. a) Explain how the airline will determine the number of passengers it will carry and the price it will charge. b)
Chapter 11 Firms in Perfectly Competitive Markets Chapter Summary Economists group industries into one of four market structures: Perfect competition, monopolistic competition, oligopoly, and monopoly.
Monopoly and Perfect Competition Compared I. Definitions of Efficiency A. Technological efficiency occurs when: Given the output produced, the costs of production (recourses used) are minimized. or Given
CASE FAIR OSTER PEARSON Publishing as Prentice Hall PRINCIPLES OF MICROECONOMICS E L E V E N T H E D I T I O N Prepared by: Fernando Quijano w/shelly Tefft 2of 35 Input Demand: The Labor and Land Markets
AP MICROECONOMICS 2015 SCORING GUIDELINES Question 1 10 points (1+5+1+3) (a) 1 point: One point is earned for stating that the firm s price is equal to the market price because the firm is a price taker.
Chapter 13 Perfect Competition 13.1 A Firm's Profit-Maximizing Choices 1) What is the difference between perfect competition and monopolistic competition? A) Perfect competition has a large number of small
MPP 801 Perfect Competition K. Wainwright Study Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Refer to Figure 9-1. If the price a perfectly
CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of -.0. It has a constant marginal cost of $0 per unit and sets a price to maximize
WSG8 7/7/03 4:34 PM Page 113 8 Market Structure: Perfect Competition and Monopoly OVERVIEW One of the most important decisions made by a manager is how to price the firm s product. If the firm is a profit
8 The Markets for the Factors of roduction R I N C I E S O F ECONOMICS F O U R T H E D I T I O N N. G R E G O R Y M A N K I In this chapter, look for the answers to these questions: hat determines a competitive
Microeconomics Instructor Miller Practice Problems Labor Market 1. What is a factor market? A) It is a market where financial instruments are traded. B) It is a market where stocks and bonds are traded.
THE LABOUR MARKET ECONOMY LEVEL OCCUPATION LEVEL INDIVIDUAL FIRM DEMAND FOR LABOUR IS DERIVED DEMAND Derived demand: occurs when the demand for a factor of production arises from the demand for the output
Chapter 6 We recall that perfect competition was theorised as a market structure where both consumers and firms were price takers. The behaviour of the firm in such circumstances was described in the Chapter
Chapter 14 Competitive Market Equilibrium We have spent the bulk of our time up to now developing relationships between economic variables and the behavior of agents such as consumers, workers and producers.
Labour Demand Labour is a factor of production, and labour, like other factors, such as capital (machinery, etc) are demanded by firms for production purposes. The quantity of labour demanded depends on
In this chapter, look for the answers to these questions: What is a perfectly competitive market? What is marginal revenue? How is it related to total and average revenue? How does a competitive firm determine
Miami Dade College ECO 2023 Principles of Microeconomics Summer B 2014 Practice Test #3 1. An economic institution that combines factors of production into outputs for consumers is a(n): A) industry. B)
Chapter 8. Competitive Firms and Markets We have learned the production function and cost function, the question now is: how much to produce such that firm can maximize his profit? To solve this question,
Econ Dept, UMR Presents Perfect Competition-- --A Model of Markets Starring The Perfectly Competitive Firm Profit Maximizing Decisions In the Short Run In the Long Run Featuring An Overview of Market Structures
Topic 3.1a Short-Run Labour Demand Professor H.J. Schuetze Economics 370 Labour Demand Let s turn our attention away from employees to focus on the behaviour of employers or firms. Recall that labour demand
Chapter 6 The Two Extremes: Perfect Competition and Pure Monopoly Learning Objectives List the four characteristics of a perfectly competitive market. Describe how a perfect competitor makes the decision
University of Pacific-Economics 53 Lecture Notes #8B I. Output Decisions by Firms Now that we have examined firm costs in great detail, we can now turn to the question of how firms decide how much output
1 of 20 12/1/2013 1:02 PM The willingness to work a certain amount of time at a given wage rate is known as Labor supply. Labor Derived supply. Derived Labor supply is the willingness and ability to work
CHAPTER 9: PURE COMPETITION Introduction In Chapters 9-11, we reach the heart of microeconomics, the concepts which comprise more than a quarter of the AP microeconomics exam. With a fuller understanding
AP Microeconomics 2003 Scoring Guidelines The materials included in these files are intended for use by AP teachers for course and exam preparation; permission for any other use must be sought from the
Economics 101 Fall 2013 Answers to Homework 5 Due Tuesday, November 19, 2013 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on
Summary Chapter 12 Monopoly Defining Monopoly - A monopoly is a market structure in which a single seller of a product with no close substitutes serves the entire market - One practical measure for deciding
UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES Monopolistic Competition Market Structure Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on
Pre-Test Chapter 25 ed17 Multiple Choice Questions 1. Refer to the above graph. An increase in the quantity of labor demanded (as distinct from an increase in demand) is shown by the: A. shift from labor
Lecture 22: Factor Markets c 2009 Je rey A. Miron Outline 1. Introduction 2. Monopoly in the Output Market 3. Monopsony 4. Upstream and Downstream Monopolies 1 Introduction The analysis in earlier lectures
2016-1 Labor Economics Unit 3. Labor Demand Prof. Min-jung, Kim Department of Economics Wonkwang University Textbook : Modern Labor Economics: Theory and Public policy written by Ronald G. Ehrenberg This
1. Which of the following would shift the demand curve for new textbooks to the right? a. A fall in the price of paper used in publishing texts. b. A fall in the price of equivalent used text books. c.
In this chapter, look for the answers to these questions: How is similar to perfect? How is it similar to monopoly? How do ally competitive firms choose price and? Do they earn economic profit? In what
Chapter 9 Lecture Notes 1 Economics 35: Intermediate Microeconomics Notes and Sample Questions Chapter 9: Profit Maximization Profit Maximization The basic assumption here is that firms are profit maximizing.
Equilibrium of a firm under perfect competition in the short-run. A firm is under equilibrium at that point where it maximizes its profits. Profit depends upon two factors Revenue Structure Cost Structure
Economics EOC Quiz Answer Key Microeconomic Concepts - (SSEMI1) Flow Of Goods, (SSEMI2) Law Of Demand, (SSEMI3) Economic Behavior, (SSEMI4) Organization And Role Of Business Student Name: Teacher Name:
Short-Run Production and Costs The purpose of this section is to discuss the underlying work of firms in the short-run the production of goods and services. Why is understanding production important to
CHAPTER 10: PURE MONOPOLY Introduction While the perfectly competitive firm has no power over prices in the marketplace, the monopoly has the power necessary to determine both the price and output of the
Understanding Economics 2nd edition by Mark Lovewell and Khoa Nguyen Chapter 5 Perfect Competition Chapter Objectives! In this chapter you will: " Consider the four market structures, and the main differences
Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!! For more, please visit: http://courses.missouristate.edu/reedolsen/courses/eco165/qeq.htm Market Equilibrium and Applications
R. Larry Reynolds Pure Competition urely competitive markets are used as the benchmark to evaluate market P performance. It is generally believed that market structure influences the behavior and performance
WSG9 7/7/03 4:34 PM Page 131 9 Market Structure: Monopolistic Competition OVERVIEW Although the conditions necessary for the existence of perfect competitive and monopoly are unlikely to be found in the
Chapter 9 Perfect Competition and Efficiency Introduction Microeconomics assumes that consumers, in demanding goods, attempt to maximize their satisfaction. Furthermore, we assume that, in supplying goods,
Chapter 04 Firm Production, Cost, and Revenue Multiple Choice Questions 1. A key assumption about the way firms behave is that they a. Minimize costs B. Maximize profit c. Maximize market share d. Maximize
ECON 600 Lecture 3: Profit Maximization I. The Concept of Profit Maximization Profit is defined as total revenue minus total cost. Π = TR TC (We use Π to stand for profit because we use P for something
CHAPTER SEVEN THE THEORY AND ESTIMATION OF COST The production decision has to be based not only on the capacity to produce (the production function) but also on the costs of production (the cost function).
1. /15 2. /20 3. /15 4. /25 Total: /75 Name: Team: AP Microeconomics Unit V: The Factor (Resource) Market Problem Set #5 1. ( /15) Define the term and explain a situation that demonstrates the real world
Factor Markets Problem 1 (APT 93, P2) Two goods, coffee and cream, are complements. Due to a natural disaster in Brazil that drastically reduces the supply of coffee in the world market the price of coffee
Eco 200 Group Activity 4 Key Chap 13 & 14 & 15 Chapter 13: 1. 4 th Edition: p. 285, Problems and Applications, Q4 3 rd Edition: p. 286, Problems and Applications, Q4 a. The following table shows the marginal
Chapter 3 A Classical Economic Model what determines the economy s total output/income how the prices of the factors of production are determined how total income is distributed what determines the demand
Final Exam Economics 101 Fall 2003 Wallace Final Exam (Version 1) Answers 1. The marginal revenue product equals A) total revenue divided by total product (output). B) marginal revenue divided by marginal
chapter 9 The industry supply curve shows the relationship between the price of a good and the total output of the industry as a whole. Perfect Competition and the >> Supply Curve Section 3: The Industry
Intermediate Microeconomics Economics 435/735 Fall 0 Answers for Practice Problem Set, Chapters 6-8 Chapter 6. Suppose a chair manufacturer is producing in the short run (with its existing plant and euipment).
POTENTIAL OUTPUT and LONG RUN AGGREGATE SUPPLY Aggregate Supply represents the ability of an economy to produce goods and services. In the Long-run this ability to produce is based on the level of production
Graduate Course Paper IV / Discipline Course Principles of Economics / Principles of Micro-economics CONTENTS Topic 6 Income Distribution and Factor Pricing Lesson 16 : Demand and Supply of Factors Lesson
This Appendix has been written and supplied by Paul J. Feldstein. It represents a prepublication document that Professor Feldstein will include in his forthcoming Sixth edition of Health Care Economics.