Factor markets: The Labour market
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Transcript of Factor markets: The Labour market
Robin Naylor, Department of Economics, Warwick
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Factor markets: The Labour market
Topic 4 Lecture 18
Robin Naylor, Department of Economics, Warwick
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In previous material (running through Topics 2 and 3) we have focused on the question: “What determines the firm’s choice of output?”
We now ask the question is: “What determines the firm’s demand for labour?”
[The two questions are clearly related – because if we know the firm’s chosen output, the level of labour demand should follow from the production function, which links labour employed to output produced.]
Our answer to this question is that the profit-maximising firm will employ labour up to the level at which the addition to the firm’s total revenue (from the sale of the extra units produced when the firm takes on an extra unit of labour) is just equal to the addition to the firm’s total costs incurred by employing the extra unit of labour.
I.e., the profit-maximising employment rule is to employ an amount of Labour such that:
Marginal Revenue Product of Labour = Marginal Cost of Labour.
Topic 4 Lecture 18
Robin Naylor, Department of Economics, Warwick
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Topic 4 Lecture 18
Marginal Revenue Product of Labour = Marginal Cost of Labour.
What is the Marginal Revenue Product of Labour (MRPL)?
What is the Marginal Cost of Labour (MCL)?
If the product market is perfectly competitive, then:MRPL = ?
If the labour market is perfectly competitive, then:MCL = ?
Robin Naylor, Department of Economics, Warwick
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Topic 4 Lecture 18
Marginal Revenue Product of Labour = Marginal Cost of Labour.
What is the Marginal Revenue Product of Labour (MRPL)?
What is the Marginal Cost of Labour (MCL)?
If the product market is perfectly competitive, then:MRPL = (MPPL) multiplied by (competitive market product price, p)
If the labour market is perfectly competitive, then:MCL = unit cost of an extra unit of labour = wage rate
Robin Naylor, Department of Economics, Warwick
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Topic 4 Lecture 18
Consider the Marginal Revenue Product of Labour (MRPL)
L
MRPL
p.MPPL=MRPL
What does this assume?
Robin Naylor, Department of Economics, Warwick
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Topic 4 Lecture 18
Consider the Marginal Cost of Labour (MCL)
L
MCL
Ls = w = MCL
What does this assume?
Robin Naylor, Department of Economics, Warwick
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Topic 4 Lecture 18
Consider MCL and MRPL together
L
MCL
Ls = w = MCL
What is the firm’s chosen level of employment? Why?
MRPL
MRPL
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Topic 4 Lecture 18
Consider MCL and MRPL together
L
MCL
Ls = w = MCL
What happens to the firm’s chosen level of employment if the competitive wage shifts up?
MRPL
MRPL
L*
Robin Naylor, Department of Economics, Warwick
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Topic 4 Lecture 18
Consider MCL and MRPL together
L
MCL
Ls = w = MCL
MRPL
MRPL
L*
Ls = w2 = MCL2
L*2
What do you conclude about the firm’s demand for labour?
Robin Naylor, Department of Economics, Warwick
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Topic 4 Lecture 18
L
MCL
Ls = w = MCL
MRPL
MRPL
We have assumed perfect competition in both product and labour markets.
How is the analysis different for a monopolist?
Robin Naylor, Department of Economics, Warwick
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Topic 4 Lecture 18
L
MCL
Ls = w = MCL
MRPL
MRPL
We have assumed perfect competition in both product and labour markets.
How is the analysis different for a monopolist?
The answer is that product price is higher, but now falls as X (and hence L) increase. What does this do to the MRPL curve of the monopolist?
MRPL (monopoly)
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Topic 4 Lecture 18
L
MCL
Ls = w = MCL
MRPL
MRPL
We have assumed perfect competition in both product and labour markets.
How is the analysis different for a monopsonist?
Consider the next slide . . .
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Topic 4 Lecture 18
L
MCL
Ls
MRPL
MRPL
How is the analysis different for a monopsonist?
L1 L1+1
dw
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Topic 4 Lecture 18
L
MCL
Ls
MRPL
MRPL
How is the analysis different for a monopsonist?
L1 L1+1
dw
dw.L1
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Topic 4 Lecture 18
L
MCL
Ls
MRPL
MRPL
How is the analysis different for a monopsonist?
L1 L1+1
dw
dw.L1
MCL
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Topic 4 Lecture 18
L
MCL
Ls
MRPL
MRPL=Ld, in a perfectly competitive labour market
What happens with the introduction of a Minimum Wage (MWL) under perfectly competitive markets? (Then we’ll contrast this with Monopsony)
LC
wC
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Topic 4 Lecture 18
L
MCL
Ls
MRPL
MRPL=Ld, in a perfectly competitive labour market
What happens with the introduction of a Minimum Wage (MWL) under perfectly competitive markets? (Then we’ll contrast this with Monopsony)
wmin
LCLREG
wC
wmin
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Topic 4 Lecture 18
L
MCL
Ls
MRPL
MRPL
What happens with the introduction of a Minimum Wage (MWL) under a monopsonist?
MCL
LCLM
wM
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Topic 4 Lecture 18
L
MCL
Ls
MRPL
MRPL
What happens with the introduction of a Minimum Wage (MWL) under a monopsonist?
MCL
LCLM
wMwmin
The minimum wage is introduced
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Topic 4 Lecture 18
L
MCL
Ls
MRPL
MRPL
What happens to the Labour Supply curve with the introduction of a Minimum Wage (MWL) under a monopsonist?
MCL
LCLM
wMwmin
The labour supply curve is unaffected in this region . . .
. . . but is affected in this region
LCRIT
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Topic 4 Lecture 18
L
MCL
Ls
MRPL
MRPL
What happens to the MCL curve with a Minimum Wage (MWL) under a monopsonist?
MCL
LCLM
wMwmin
The MCL curve is unaffected in this region . . .
. . . but is affected in this region
LCRIT
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Topic 4 Lecture 18
L
MCL
Ls
MRPL
MRPL
What happens to the Monopsonist’s chosen employment level with the introduction of a Minimum Wage (MWL)?
MCL
LCLM
wMwmin
LCRIT
For L<LCRIT, how does MRPL compare with MCL? And therefore . . . ?
For L>LCRIT, how does MRPL compare with MCL? And therefore . . . ?
What do you conclude happens to employment with the introduction of a Minimum Wage under Monopsony?
Robin Naylor, Department of Economics, Warwick
Topic 3: Lecture 18
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Now read B&B 4th Ed., pp. 475-479, 400-408, 409-412.
You might also consult:
• Frank, Chapters 14-15
• Estrin, Laidler and Dietrich, Chapter 18
• Morgan, Katz and Rosen, Chapter 10.2