Part 7 © 2006 Thomson Learning/South-Western Further Topics.

Part 7Part 7

© 2006 Thomson Learning/South-Western

Further Topics

Chapter 15Chapter 15

© 2006 Thomson Learning/South-Western

Pricing in Input Markets

3

Profit-Maximizing Behavior and the Hiring of Inputs

A profit-maximizing firm will hire additional units of any input up to the point at which the additional revenue from hiring one more unit is exactly equal to the cost of hiring that unit.

Let MEK and MEL denote the marginal expense of hiring capital and labor, respectively.

4

Profit-Maximizing Behavior and the Hiring of Inputs

Let MRK and MRL be the extra revenue that hiring more units of capital and labor allows the firm to bring in.

Profit maximizing behavior requires:

1.15.LL

KK

MRME

MRME

5

Price-Taking Behavior

If the firm is a price taker in the capital and labor market then it can always hire an extra unit of capital at the prevailing rate (v) and an extra unit of labor at the wage rate (w).

2.15.LL

KK

MRMEw

MRMEv

6

Marginal Revenue Product

Marginal product is how much output the additional input can produce.

Marginal revenue (MR) is the extra revenue obtained from selling an additional unit of output.

Thus, the profit maximizing rules are:

3.15.MRMPMRMEw

MRMPMRMEv

LLL

KKK

7

A Special Case--Marginal Value Product

If the firm is also a price taking in the goods market, marginal revenue equals the price (P) at which the output sells.

The profit maximizing conditions become

3.15PMPw

PMPv

L

K

8

Marginal Value Product

The marginal value product (MVP) of capital and labor, respectively, are special cases of marginal revenue product in which the firm is a price taker for its output.

5.15L

K

MVPw

MVPv

9

Responses to Changes in Input Prices: Single Variable input Case

Assume the firm has fixed capital and can only vary its labor input in the short run.

Labor will exhibit diminishing marginal physical productivity so labor’s MVP will decline as more labor is hired.

In Figure 15-1, the profit maximizing firm will hire L1 labor hours when the wage rate is w1.

10

MVPWage

MVPL

w1

Labor hours0 L1 L2

w2

FIGURE 15-1: Change in Labor Input When Wage Falls: Single Variable Case

11

Responses to Changes in Input Prices: Single Variable input Case

If the wage rate falls to w2 the firm hires increased labor to L2. If the firm continued to hire L1 it would not

be maximizing profit since labor would be capable of producing more in additional revenue than hiring additional labor would cost.

With one variable input, diminishing marginal productivity results in a downward sloping demand curve.

12

TABLE 15-1: Hamburger Heaven’s Profit-Maximizing Hiring Decision

Labor Input

per Hour

Hamburgers Produced per Hour

Marginal Product

(Hamburger)

Marginal Value Product

($1.00 per Hamburger)

1 20.0 20.0 $20.00 2 28.3 8.3 8.30 3 34.6 6.3 6.30 4 40.0 5.4 5.40 5 44.7 4.7 4.70 6 49.0 4.3 4.30 7 52.9 3.9 3.90 8 56.6 3.7 3.70 9 60.0 3.4 3.40 10 63.2 3.2 3.20

13

The Substitution Effect

The substitution effect, in the theory of production, is the substitution of one input for another while holding output constant in response to a change in the input’s price.

In Figure 15-2(a), a fall in w will cause the firm to change from input combination A to B to equate RTS to the new w/v.

Diminishing RTS leads to more labor hired.

14

Capitalper week

MC

K1

K2

A

q1B

Labor hoursper week

0 L1 L2

(a) Input Choice

Price

P

Outputper week

0 q1

(b) Output Decision

FIGURE 15-2: Substitution and Output Effects of A Decrease in Price of Labor

15

The Output Effect

The output effect is the effect of an input price change on the amount of the input that the firm hires that results from a change in the firm;s output level.

In Figure 15-2(b), the lower w causes the marginal cost curve to shift to MC’.

The profit maximizing output raises to q2 resulting in more labor hired.

16

Capitalper week

MC’MC

K1

K2

AC

q2

q1B

Labor hoursper week

0 L1 L2

(a) Input Choice

Price

P

Outputper week

0 q1 q2

(b) Output Decision

FIGURE 15-2: Substitution and Output Effects of A Decrease in Price of Labor

17

Responsiveness of Input Demand to Price Changes

Ease of Substitution The size of the substitution effect will depend

upon how easy it is to substitute other factors of production for labor.

The size of the substitution effect will also depend upon the length of time as it becomes easier to find substitutes in a longer period of time.

18

Costs and the Output Effect

The size of the output effect will depend upon How large the increase in marginal costs brought

about by the wage rate increase is, and How much quantity demanded will be reduced by

a rising price. The first depend upon how important labor is in

production while the latter depends upon the price elasticity of demand for the final product.

19

Input Supply

Resources come from three major sources: Labor is provided by individuals. Capital equipment is produced which other firms

can buy outright or rent. Natural resources are extracted from land and can

be used outright or sold to other firms. As shown in earlier chapters, capital and

natural resources have upward sloping supply curves.

20

Labor Supply and Wages

Wages represent the opportunity cost of not working at a paying job for individuals.

For purposes of this analysis, wages should be interpreted to include all forms of compensation.

Individuals will balance the monetary rewards from working against the psychic benefits of other, nonpaid activities.

21

Labor Supply and Wages

Labor supply curves will differ based upon individual preferences. Noneconomic factors such as pleasant working

conditions will affect the location of the supply curve.

It is likely that an increase in the wage will result in more labor supplied to the market. Graphically, the market labor supply curve is likely

to be positively sloped.

22

Equilibrium Input Price Determination

In Figure 15-3, the market demand for labor is labeled D, and the market supply of labor is labeled S.

The equilibrium wage and quantity is where quantity demanded equals quantity supplied, [w*, L*].

Other things equal, this equilibrium will tend to persist from period to period.

23

Wage

D

S

w*

Labor hours per week0 L*

FIGURE 15-3: Equilibrium in an Input Market

24

Shifts in Demand and Supply

Any factor that shifts the firms’ underlying production function will shift its input demand curve.

Demand for an input is derived from the demand for the output, changes in the prices of the output will shift input demand curves

25

Shifts in Demand and Supply

In Figure 15-3, the demand curve shifts to D’ which reduces equilibrium wages from w* to w’ and equilibrium employment from L* to L’.

The various factors that shift input demand and supply curves are summarized in Table 15-2.

26

Wage

D’

D

S

w’

w*

Labor hours per week0 L’ L*

FIGURE 15-3: Equilibrium in an Input Market

27

TABLE 15-2: Factors That Shift Input Demand and Supply Curves

Demand Labor Supply Capital Supply Demand Shifts Outward Supply Shifts Outward

Rise in output price Decreased preference for Leisure

Fall in input costs of equipment makers

Increase in marginal productivity

Increased desirability of job

Technical progress in making equipment

Demand Shifts Inward Supply Shifts Inward Fall in output price Increased preference

for Leisure Rise in input costs of

equipment makers Decrease in marginal

productivity Decreased desirability

of job

28

An Overview of Labor MarketScience is built up with facts, as a house is with stones. But a collection of factsis no more a science than a heap of stones is a house. -Jules Henri Poincar’e-

Labor Force: All those over 15 years of age who are either employed, actively seeking work, or awaiting recall from a layoff. (The age may vary in different countries. For example, it is 16 years of age for the U.S.)

Labor Force Participation Rate: The ratio of the labor force to those of age over 15.

29

Unemployment: Those in the labor force who are not employed (for pay).

Unemployment Rate: The ratio of those unemployed to those in the labor force. This is the most widely cited measure of labor market condition.

An Overview of Labor Market

30

Wage Rate: The price of labor per working hour.

Wage rate × Units of time worked = Earnings.

Earnings + Fringe benefit = Compensation.

Compensation + Unearned income (interest, dividends, transfer payments etc.) = Income

An Overview of Labor Market

31

Population(Age 15 and

over)

Labor Force(Employed plus Unemployed)

Not in Labor Force

New EntrantsReentrants

DropoutsRetirements

Employed

Unemployed(Not employed, butlooking for work or

awaiting recall)

LayoffsQuits

New HireRecalls

FIGURE 15-4

32

FIGURE 15-5: Demand for Labor

Product demandWages, amount of KChoice of technologies

Determines number of workers employed

Wage Changes: (1) Scale Effect (2) Substitution Effect

A demand curve for labor tells us howthe desired level of employment varieswith changes in the price of labor whenthe other factors affecting demand are held constant.

Wages

# of workers

D

33

Market Supply: The supply of labor to a particular market is positively related to the wage rate prevailing in that market holding other wages constant.

Wages Wages

# of workers # of workers

S S2

S1

FIGURE 15-6: Market Supply

34

Supply to Firms:The supply to a firm would be a horizontal line since each firm is a price taker in the competitive labor market .

Wages

# of workers

W*

FIGURE 15-7: Supply to Firms

35

FIGURE 15-8: Determination of the Wages

Wages

# of workers

Demand

Supply

W2

W*

W1

W1 ： demand exceeds supply

W2 ： supply exceeds demand

W* ： Market-Clearing Wage

36

FIGURE 15-9: Wage rates are determined by the market and announced to individual firm.

Wages

# of workers

Demand

Supply

W*

Wages

# of workers

DA

W* SA

Market A Typical Firm

37

表 15-3: 重要人力指標項目別總計男性女性

年度

經濟成長率(%)

勞動力( 千人 )

就業者( 千人 )

失業者( 千人 )

勞動力參與率(%)

勞動力( 千人 )

就業者( 千人 )

失業者( 千人 )


勞動力( 千人 )

就業者( 千人 )

失業者( 千人 )


70 6.24 6764 6672 92 57.82 4503 4448 55 76.78 2261 2224 37 38.76

71 3.47 6959 6811 149 57.93 4605 4509 96 76.47 2354 2301 53 39.30

72 8.32 7266 7070 197 59.26 4687 4561 126 76.36 2580 2509 71 42.12

73 10.71 7491 7308 183 59.72 4778 4661 116 76.11 2713 2647 67 43.30

74 5.02 7651 7428 222 59.49 4860 4719 141 75.47 2790 2709 81 43.46

75 11.49 7945 7733 212 60.37 4957 4821 136 75.15 2988 2912 75 45.51

76 12.66 8183 8022 161 60.93 5065 4966 100 75.24 3118 3057 61 46.54

77 8.04 8247 8107 139 60.21 5130 5043 87 74.83 3116 3064 52 45.56

78 8.45 8390 8258 132 60.12 5231 5149 82 74.84 3159 3110 49 45.35

資料來源：行政院主計處

38

表 15-3: 重要人力指標 ( 續 )

項目別總計男性女性

年度

經濟成長率(%)

勞動力( 千人 )

就業者( 千人 )

失業者( 千人 )

勞動力參與率

(%)

勞動力( 千人 )

就業者( 千人 )

失業者( 千人 )

勞動力參與率

(%)

勞動力( 千人 )

就業者( 千人 )

失業者( 千人 )

勞動力參與率

(%)

79 5.70 8423 8283 140 59.24 5263 5175 88 73.96 3160 3108 52 44.50

80 7.58 8569 8439 130 59.11 5355 5274 80 73.80 3214 3165 49 44.39

81 7.85 8765 8632 132 59.34 5460 5380 81 73.78 3304 3252 52 44.83

82 6.90 8874 8745 128 58.82 5497 5422 75 72.67 3377 3323 54 44.89

83 7.39 9081 8939 142 58.96 5595 5511 84 72.44 3485 3428 58 45.40

84 6.49 9210 9045 165 58.71 5659 5558 101 72.03 3551 3487 64 45.34

85 6.30 9310 9068 242 58.44 5662 5508 154 71.13 3648 3560 88 45.76

86 6.59 9432 9176 256 58.33 5731 5562 169 71.09 3701 3613 88 45.64

87 4.55 9546 9289 257 58.04 5780 5610 169 70.58 3767 3679 88 45.60


39

表 15-3: 重要人力指標 ( 續 )

項目別總計男性女性

年度

經濟成長率(%)

勞動力( 千人 )

就業者( 千人 )

失業者( 千人 )

勞動力參與率

(%)

勞動力( 千人 )

就業者( 千人 )

失業者( 千人 )

勞動力參與率

(%)

勞動力( 千人 )

就業者( 千人 )

失業者( 千人 )

勞動力參與率

(%)

88 5.75 9668 9385 283 57.93 5812 5624 188 69.93 3856 3761 95 46.03

89 5.77 9784 9491 293 57.68 5867 5670 197 69.42 3917 3821 95 46.02

90 -2.17 9832 9383 450 57.23 5855 5553 302 68.47 3977 3830 148 46.1

91 4.25 9969 9454 515 57.34 5896 5547 348 68.22 4074 3907 167 46.59

92 3.43 10076 9573 503 57.34 5904 5579 326 67.69 4172 3994 177 47.14

93 6.07 10240 9786 454 57.66 5968 5680 288 67.78 4272 4106 166 47.71

94 4.03 10371 9942 429 57.78 6012 5753 259 67.63 4359 4190 169 48.12

95 4.62 10522 10111 411 57.92 6056 5810 246 67.35 4467 4301 166 48.69


40

圖 15-10: 70-95年台灣地區趨勢圖

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

11000

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 年

勞動力（千人）就業者（千人）失業者（千人）

41

圖 15-11:勞動參與率勞動力參與率

30

40

50

60

70

80

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95年

%

(%)勞動力參與率 (%)男性勞動力參與率

(%)女性勞動力參與率

42

表 15-4: 歷年五月台灣地區有偶婦女勞動參與率項目年

總平均女性平均

有偶婦女平均

子女均在６歲以上有偶婦女

有未滿 6 歲子女有偶婦女

尚無子女有偶婦女

70 57.82 38.76 31.42 32.75 28.26 39.3071 57.93 39.30 31.51 32.29 28.99 41.1272 59.26 42.12 35.53 35.70 33.40 48.8973 59.72 43.30 38.74 38.55 37.34 50.8874 59.49 43.46 39.84 39.63 39.07 48.9575 60.37 45.51 41.82 41.85 40.55 50.6276 60.93 46.54 43.74 43.18 42.95 56.7577 60.21 45.56 42.66 41.82 42.29 56.5578 60.12 45.35 43.65 42.35 44.64 54.7979 59.24 44.50 42.49 41.04 43.69 55.21

80 59.11 44.39 44.00 42.66 44.36 60.5081 59.34 44.83 43.23 42.49 42.30 58.2482 58.82 44.89 44.39 43.78 42.99 59.71

43

表 15-4: 歷年五月台灣地區有偶婦女勞動參與率 ( 續 )

項目年總平均女性

平均有偶婦女平均

子女均在６歲以上有偶婦女

有未滿 6 歲子女有偶婦女

尚無子女有偶婦女

83 58.96 45.40 45.41 44.03 45.73 64.16

84 58.71 45.34 45.75 44.45 45.75 65.01

85 58.44 45.76 47.11 45.70 48.15 62.66

86 58.33 45.64 46.98 45.48 48.16 62.42

87 58.04 45.60 46.50 44.20 49.60 65.58

88 57.93 46.03 46.82 44.87 49.24 64.99

89 57.68 46.02 46.34 43.54 51.39 65.97

90 57.23 46.1 46.48 43.23 52.99 66.76

91 57.34 46.59 47.30 44.39 53.57 63.94

92 57.34 47.14 47.34 44.69 53.46 64.30

93 57.66 47.71 47.84 44.92 54.15 69.37

94 57.78 48.12 47.88 44.54 55.64 71.21

95 57.92 48.69 48.38 44.67 58.14 71.31

44

圖 15-12:歷年子女年齡別有偶婦女勞動力參與率

20

30

40

50

60

70

80

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95

總平均女性平均有偶婦女平均子女均在６歲以上有偶婦女

6有未滿歲子女有偶婦女無子女有偶婦女

45

Monopsony

If the firm is not a price taker in the input market, it may have to offer a higher wage to attract more employees.

A monopsony is the condition in which one firm is the only hirer in a particular input market.

If the firm is a monopsony, it faces the entire market supply curve for the input.

46

Marginal Expense

The marginal expense of an input is the cost of hiring one more unit of an input. The firm has to offer a higher wage to the

hired worker and to the workers already employed.

The marginal expense of labor (MEL) will exceed the price of the input if the firm faces an upward-sloping supply curve for the input.

47

A Numerical Illustration

Suppose the Yellowstone Park Company is the only hirer of bear wardens.

The number of people willing to take this job (L) is given by

This relationship is shown in Table 15-3

6.152

1wL

48

TABLE 15-5: Labor Costs of Hiring Bear Wardens in Yellowstone Park

Hourly Wage

Workers Supplied per Hour

Total Labor Cost per

Hour

Marginal Expense

$2 1 $2 $2 4 2 8 6 6 3 18 10 8 4 32 14 10 5 50 18 12 6 72 22 14 7 98 26

49


Total labor costs (w·L) is shown in the third column and the marginal expense of hiring each warden is shown in the fourth column.

Since the new warden and the existing wardens receive the wage increase, the marginal expense exceeds the wage rate.

50


Figure 15-4 shows the supply curve (S) for wardens. If Yellowstone wishes to hire three wardens it

must pay $6 per hour with total outlays of $18 (point A on the graph).

The wage must be increased to $8 to get a fourth warden (point B) which results in total outlays of $32.

51

Hourlywage

S

A

B

6

$8

Bear wardens per hour

0 3 4

FIGURE 15-13: Marginal Expense of Hiring Bear Wardens

52


The marginal expense of the fourth warden, $14 is reflected in the graph. The hourly wage ($8) is shown in gray. The extra outlay to the three previous workers

($8 per hour versus $6 per hour previously) is shown in color.

Total outlays exceed the amount for three wardens by the sum of these two areas.

53

Hourlywage

S

A

B

6

$8

Bear wardens per hour

0 3 4

FIGURE 15-13: Marginal Expense of Hiring Bear Wardens

54

Monopsonists and Resource Allocation: A Graphical Demonstration

The demand curve in Figure 15-5 is D. Since marginal expense (MEL) exceeds

the wage, the marginal expense curve is above the supply curve (S).

L1 is the profit maximizing choice while the marginal value product is MVP1 and the wage is w1.

55

Wage

S

D

ME

MVP1

w1

Labor hoursper week0 L1

FIGURE 15-14: Pricing in a Monopsonistic Labor Market

56

A Graphical Demonstration

L1 is less than L*, the amount hired with perfect competition.

As with a monopoly, the “demand curve” for a monopolist actually consists of the single point given by L1, w1.

57

Wage

S

D

ME

w*

MVP1

w1

Labor hoursper week0 L*L1

FIGURE 15-14: Pricing in a Monopsonistic Labor Market

58

Monopsonists and Resource Allocation

Since the monopsonist restrict its input use, it pays an input less than its marginal value product (w1 < MVP1).

Total output could be increased by drawing more labor into the market.

The more inelastic the labor supply, the more the monopsonists can benefit from this profit opportunity.

59

Bilateral Monopoly

A bilateral monopoly is a market in which both suppliers and demanders have monopoly power.

In Figure 15-6, “supply” and “demand” intersect at P*, Q*, but this is not equilibrium since neither player is a price taker.

The monopoly supplier will operate on its marginal revenue curve (MR) and prefer price-quantity combination P1, Q1.

60

Bilateral Monopoly


The monopsonistic will operate on its marginal expense curve (ME) and prefer combination P2, Q2.

61

Bilateral Monopoly


The monopsonistic will operate on its marginal expense curve (ME) and prefer combination P2, Q2.

The final outcome, after bargaining, will lie between these two combinations.

62

Inputprice

S

D

ME

MR

P*

P1

P2

Quantity perperiod0 Q*Q1Q2

FIGURE 15-15: Bilateral Monopoly

Part 7 © 2006 Thomson Learning/South-Western Further Topics.

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Transcript of Part 7 © 2006 Thomson Learning/South-Western Further Topics.