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Equilibrium in a Competitive Factor Market:Labor Market Equilibrium

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Microeconomics ­ECO402
VU
·  Lesson 44
Equilibrium in a Competitive Factor Market
A competitive factor market is in equilibrium when the price of the input equates the quantity
demanded to the quantity supplied.
Labor Market Equilibrium
Wage
Wage
Competitive Output Market
Monopolistic Output Market
SL = AE
SL = AE
v
w
B
w
A
P * MPL
DL = MRPL
DL = MRPL
L
L
Number of Workers
Number of Workers
Equilibrium in a Competitive Output Market
­ DL(MRPL) = SL
­ wC = MRPL
­ MRPL = (P)(MPL)
­ Markets are efficient
Equilibrium in a Monopolistic Output Market
­ MR < P
­ MRP = (MR)(MPL)
­ Hire LM at wage wM
­ vM = marginal benefit to consumers
­ wM = marginal cost to the firm
­ Profits maximized
­ Using less than efficient level of input
Economic Rent
­ For a factor market, economic rent is the difference between the payments made to a
factor of production and the minimum amount that must be spent to obtain the use of
that factor.
199
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Microeconomics ­ECO402
VU
Wage
The economic rent associated with the
employment of labor is the excess of wages
paid above the minimum amount needed
to hire workers.
SL = AE
A
Total expenditure (wage) paid
w*
is 0w* x AL*
Economic Rent
DL = MRPL
B
Economic rent is ABW*
0
L*
Number of Workers
Question
­ What would be the economic rent if SL is perfectly elastic or perfectly inelastic?
Land: A Perfectly Inelastic Supply
­ With land inelastically supplied, its price is determined entirely by demand, at least in the
short run.
Land Rent
Supply of Land
Price
($ per
acre)
s2
Economic
Rent
s1
Economic
D2
Rent
D1
Number of Acres
Pay
in
the
Public Sector
The percentage of personnel working in public sector has been declining
Shortages of skilled personnel has occurred? Why?
­ If there is a shortage, the wage must be below the competitive wage rate
The Shortage of Skilled Personnel
S
Wage
w*
w
Shortage
DL =
Number of Skilled Workers
200
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Microeconomics ­ECO402
VU
Public sector pay is based on years of service not MRP.
MRP increases and the private sector pay is greater than public sector pay.
Many leave the public sector.
Factor Markets with Monopsony Power
Assume
­ The output market is perfectly competitive.
­ Input market is pure monopsony.
Marginal and Average Expenditure
Why is marginal expenditure
Price
Marginal
greater than SL?
20
(per unit
Expenditure (ME)
of input)
SL = Average
C
Expenditure (AE)
15
wc
w* = 13
10
D = MRPL
5
0
1
2
3
4
5
6 Units of Input
Lc
L*
Factor Markets with Monopsony Power
Examples of Monopsony Power
­ Government
·  Soldiers
·  Missiles
·  B2 Bombers
­ NASA
·  Astronauts
­ Company town
Monopsony Power in the Market for Baseball Players
Baseball owners created a monopsonistic cartel
­ Reserve clause prevented competition for players
­ 1969--Average salary was $42,000
­ 1997--Average salary was $1,383,578
­ 1975 salaries were 25% of team expenditures
­ 1980 salaries were 40% of team expenditures
201
Table of Contents:
  1. ECONOMICS:Themes of Microeconomics, Theories and Models
  2. Economics: Another Perspective, Factors of Production
  3. REAL VERSUS NOMINAL PRICES:SUPPLY AND DEMAND, The Demand Curve
  4. Changes in Market Equilibrium:Market for College Education
  5. Elasticities of supply and demand:The Demand for Gasoline
  6. Consumer Behavior:Consumer Preferences, Indifference curves
  7. CONSUMER PREFERENCES:Budget Constraints, Consumer Choice
  8. Note it is repeated:Consumer Preferences, Revealed Preferences
  9. MARGINAL UTILITY AND CONSUMER CHOICE:COST-OF-LIVING INDEXES
  10. Review of Consumer Equilibrium:INDIVIDUAL DEMAND, An Inferior Good
  11. Income & Substitution Effects:Determining the Market Demand Curve
  12. The Aggregate Demand For Wheat:NETWORK EXTERNALITIES
  13. Describing Risk:Unequal Probability Outcomes
  14. PREFERENCES TOWARD RISK:Risk Premium, Indifference Curve
  15. PREFERENCES TOWARD RISK:Reducing Risk, The Demand for Risky Assets
  16. The Technology of Production:Production Function for Food
  17. Production with Two Variable Inputs:Returns to Scale
  18. Measuring Cost: Which Costs Matter?:Cost in the Short Run
  19. A Firm’s Short-Run Costs ($):The Effect of Effluent Fees on Firms’ Input Choices
  20. Cost in the Long Run:Long-Run Cost with Economies & Diseconomies of Scale
  21. Production with Two Outputs--Economies of Scope:Cubic Cost Function
  22. Perfectly Competitive Markets:Choosing Output in Short Run
  23. A Competitive Firm Incurring Losses:Industry Supply in Short Run
  24. Elasticity of Market Supply:Producer Surplus for a Market
  25. Elasticity of Market Supply:Long-Run Competitive Equilibrium
  26. Elasticity of Market Supply:The Industry’s Long-Run Supply Curve
  27. Elasticity of Market Supply:Welfare loss if price is held below market-clearing level
  28. Price Supports:Supply Restrictions, Import Quotas and Tariffs
  29. The Sugar Quota:The Impact of a Tax or Subsidy, Subsidy
  30. Perfect Competition:Total, Marginal, and Average Revenue
  31. Perfect Competition:Effect of Excise Tax on Monopolist
  32. Monopoly:Elasticity of Demand and Price Markup, Sources of Monopoly Power
  33. The Social Costs of Monopoly Power:Price Regulation, Monopsony
  34. Monopsony Power:Pricing With Market Power, Capturing Consumer Surplus
  35. Monopsony Power:THE ECONOMICS OF COUPONS AND REBATES
  36. Airline Fares:Elasticities of Demand for Air Travel, The Two-Part Tariff
  37. Bundling:Consumption Decisions When Products are Bundled
  38. Bundling:Mixed Versus Pure Bundling, Effects of Advertising
  39. MONOPOLISTIC COMPETITION:Monopolistic Competition in the Market for Colas and Coffee
  40. OLIGOPOLY:Duopoly Example, Price Competition
  41. Competition Versus Collusion:The Prisoners’ Dilemma, Implications of the Prisoners
  42. COMPETITIVE FACTOR MARKETS:Marginal Revenue Product
  43. Competitive Factor Markets:The Demand for Jet Fuel
  44. Equilibrium in a Competitive Factor Market:Labor Market Equilibrium
  45. Factor Markets with Monopoly Power:Monopoly Power of Sellers of Labor