Lecture 24: Microeconomics (B.Sc. B)

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1 ecture 24: Microeconomics (B.Sc. B) Professor: Nabanita Datta Gupta Topic: Markets for Factor Inputs Reading: Ch. 14 P&R Outline: Equilibrium in input markets Both markets competitive Only input market is competitive Only output market is competitive Both markets non-competitive Problem Economic Rent Shortages and Surpluses in the abour Market Monopoly Union Model Problem 1

14 P&R Outline: Equilibrium in input markets Both markets competitive Only input market is

2 Equilibrium Putting demand and supply together both in the firm and in the market, e get the equilibrium in the factor market. Case I: Both input and output markets are competitive. Output market is competitive MRP =VMP ; Input market is competitive ME =. S * *=v* D ME=AE=s MRP=VMP=d * l* MARKET FIRM l Ex: Firm produces soyabeans and hires cleaning orkers. Notice that orkers get paid exactly the value of their marginal product, * = VMP = v*, so there is no exploitation. 2

Output market is competitive MRP =VMP ; Input market is competitive ME =.

3 Case II: Only input market is competitive Output market is non-competitive MRP <VMP ; Input market is competitive ME =. S v* * D * * l* MARKET FIRM ME=AE=s VMP MRP=d l Ex: Firm produces insulin and hires cleaning orkers Note: There is exploitation = v* - * > 0. 3

S v* * D * * l* MARKET FIRM ME=AE=s VMP MRP=d l Ex: Firm produces

4 Case III: Only output market is competitive Output market is competitive MRP = VMP ; Input market is noncompetitive ME >. ME AE=S v* * MRP=VMP=D * Ex: A large university in a small ton that produces college education and hires all the orkers in the ton. Again, exploitation = v* - *. 4

ME AE=S v* * MRP=VMP=D * Ex: A large university in a small ton that

5 Case IV: Both markets are non-competitive. Output market is non-competitive MRP < VMP ; Input market is noncompetitive ME >. ME v* AE=S * VMP MRP=D * Ex: Firm produces insulin and hires biomedical researchers specializing in diabetes research. Exploitation= v* - * > 0 and is biggest in this case. 5

6 Problem Suppose a firm s production function is given by Q = 12 2, for = 0 to 6, here is labour input measured in hours per day and Q is output per day. Derive and dra the firm s demand for labour curve if the firm s output sells for $10 in a competitive market. Ho many orkers ill the firm hire hen the age rate is $30 a day? $60 a day? (hint: the marginal product of labour is 12-2.) Solution The firm s demand for labour is given by MRP = MR*MP. If the firm is competitive in the output market, MRP = VMP = P*MP. Thus, the VMP = $10(12-2). Setting this equal to =$30, e get: 10(12-2) = = 30 or, = 90/20 = 4.5 hours per day. If the age rate is $60, then the firm ill set VMP = $60: 10(12-2) = = 60 or = 60/20 = 3 hours per day VMP=10(12-2)=d

(hint: the marginal product of labour is 12-2.) Solution The firm s demand for labour is given by MRP = MR*MP. If the firm is competitive in the output market, MRP = VMP = P*MP.

7 Problem Suppose that the production function of a firm is Q = K 0.5, and that K is fixed at 100 units. Suppose that P = $1 and = $50. Suppose that the firm is competitive in both input and output markets. Determine the quantity of labour that the firm should hire in order to maximize its profit. Is there exploitation of labour in this case? Solution: The firm ill hire up to the point at hich MRP = ME. If both markets are competitive, e can rite this as VMP = P*MP =. TP = Q = K 0.5 Thus, MP = dtp/dq = 0.5(100) -0.5 (100) 0.5 = As P=$1, VMP = ($1) And =$50. Thus, setting VMP =, e get: = 50, or = (500/50) 2 = 100. Thus, 100 units of labour should be hired by the firm, if profits are to be maximized. No, labour is being paid the value of their marginal product=$50. 7

Is there exploitation of labour in this case? Solution: The firm ill hire up to the point at hich MRP = ME. If both markets are competitive, e can rite this as VMP = P*MP =. TP = Q = 100 0.5 K 0.

8 Economic Rent See Figure abour Shortages See Figure Unions and Monopoly Poer See Figures and Bilateral Monopoly in the abour Market See Figure

13 Unions and Monopoly Poer See Figures 14.

9 Problem The demand for labour by an industry is given by the curve = , and the supply is given by = 20. a) What is the equilibrium age rate and the quantity of labour hired? b) What is the economic rent earned by the orkers? c) Suppose no a monopolistic labour union ith MR curve = ishes to maximize rent of its members. Ho much labour ill be hired, and hat ill be the age? Solution a) The equilibrium is found by equating S and D: = 20 => = $40, and =800. b) The economic rent is the difference beteen the age and the supply curve = 0.5*$40*(800)=$16,000. c) To maximize rent, the union ill find the labour size by setting MR = S and then go up to demand to find the age. Thus, =600 5 or = And = 20, or =/20. Setting them equal, e get = /20 = 2400/5 = 480, and = ( )/10 = $72. 9

Ho much labour ill be hired, and hat ill be the age? Solution a) The equilibrium is found by equating S and D: 1200 10 = 20 => = $40, and =800.

Labor Demand. 1. The Derivation of the Labor Demand Curve in the Short Run:

Labor Demand. 1. The Derivation of the Labor Demand Curve in the Short Run: CON 361: Labor conomics 1. The Derivation o the Curve in the Short Run: We ill no complete our discussion o the components o a labor market by considering a irm s choice o labor demand, beore e consider