Competitive Factor Markets a 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 16
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
Competitive Factor Markets Demand for a Factor Input when Several Inputs Are Variable ■ Scenario o Producing farm equipment with two variable inputs ◆ Labor ◆ Assembly- ine machinery o Assume the wage rate falls Chapter 14 Slide 17
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
Competitive Factor Markets Demand for a Factor Input when Several Inputs Are Variable ■ Question o How will the decrease in the wage rate impact the demand for labor Chapter 14 Slide 18
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
Firm's Demand curve for labor (with Variable Capital When two or more inputs are Wages variable, a firm's demand for one input (s per depends on the marginal revenue hour) product of both inputs When the wage rate is $20, A represents one point on the firms demand for labor curve A When the wage rate falls to $15, the MRP curve shifts, generating a new point c on the firm's demand for labor curve. Thus a and c are n the demand for labor curve but 15 B is not. B 5 MRPL1 MRPL2 40 80 120 160 Hours of work Chapter 14 Slide 19
Chapter 14 Slide 19 MRPL1 MRPL2 When two or more inputs are variable, a firm’s demand for one input depends on the marginal revenue product of both inputs. Firm’s Demand Curve for Labor (with Variable Capital) Hours of Work Wages ($ per hour) 0 5 10 15 20 40 80 120 160 When the wage rate is $20, A represents one point on the firm’s demand for labor curve. When the wage rate falls to $15, the MRP curve shifts, generating a new point C on the firm’s demand for labor curve. Thus A and C are on the demand for labor curve, but B is not. DL A B C
Competitive Factor Markets Industry Demand for Labor Assume that all firms respond to a lower Nage o all firms would hire more workers o Market supply would increase ● The market price wil‖fal o The quantity demanded for labor by the firm will be smaller Chapter 14 Slide 20
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