Factor Markets Flashcards
Marginal product formula
Change in output/Change budget quantity of of F.O.P
E.G for MPL=Change in output/Change in labour
Diminishing marginal product represented on a diagram w axis
Upward sloping then flattens shallower as quantity of factor increases
Y axis-output
X axis-number of workers
Value of marginal product (VMP) and formula
Measure how much hiring an extra unit of labour is worth to the firm
Price x Amount of additional output (MARGINAL PRODUCT)
Where does a profit maximising firm hire up to
Where wage=VMPL
Supply of labour of an individual
Divide time between work vs leisure
We assume normally upward sloping, but not always the case
How do we respresent the trade off between leisure and consumption
Indifference curves
What does the budget constraint on supply of individual labour depend on?
Wage rate shows us how much we can spend on consumption per each leisure hour given up
Effect of higher wage
Work is more attractive as can pay for more consumption (steeping on budget constraint as max possible consumption increases)
As a result people increase work and less leisure, LEISURE BECOMES MORE EXPENSIVE AS MEANS GIVING UP MORE MONEY, SUBSTITUTION EFFECT (more consumption less leisure)
However, LEISURE BECOMES CHEAPER (work less hours for same amount of consumption), so as labour is a normal good, a increase in income means we are richer, so increase leisure and consumption. INCOME EFFECT
Do people work more or less when wages rise?
At low income, a wage rise tends to lead to more hours worked
But at higher income, people prioritise leisure as already high
This explains backward bending individual supply curve
In a competitive labour market, are firms price takers or makers.
Takers, no influence so ACL=MCL=W
Average cost=marginal cost which is the wage
The additional cost of hiring an extra worker is their wage
Monopsony
Dominant buyer, and so price maker
Monopsony diagram + AXIS and curve
Y axis-wage X axis-hours of labour
Supply curve-(ACL) Demand curve-VMPL
Set MCL=VMPL, rather than W=VMPL like in competitive labour market
So operate at quantity of lower workers at a higher wage rate
MCL is greater than ACL because hiring an additional worker means we have to raise wage for all workers. (UNLIKE COMPETITIVE LABOUR MARKET, WHERE ACL=MCL=W AS THE COST OF HIRING AN ADDITIONAL WORKER IS JUST THE WAGE)
Ways to raise wage above equilibrium
Unions or minimum wages
What does an individuals labour supply curve look like
Think about it by considering an increase in wage
If, sub>income effect. People sub leisure for more work hours, thus increasing consumption. THIS IS A UPWARD SLOPING SUPPLY CURVE: AS WAGES RISE, LABOUR HOURS RISE
If, income>sub effect, the increased wage means people are richer, so may increase their leisure hours. THIS IS A DOWNWARD SLOPING SUPPLY CURVE: as wage increases, hours of labour fall
BUT MORE GENERALLY WE ASSUME UPWARD SLOPING.
Where does a competitive labour market hire up to vs a monopsony
W=VMPL
MCL=VMPL
