Factor markets Flashcards
What are FOP, how are price and quantity determined?
Inputs used to produce goods and services.
Labour, land and capital
Price and quantity determined by supply and demand.
What does derived demand mean?
Firms demand for FOP is dependant on supply of a good.
What are the assumptions about the labour market?
A single commodity is produced in a perfectly competitive market.
Firm aims to profit maximise
Labour is the only FOP
What is the production function?
Shows reltionship between the quantity of inputs and the quanitity of output.
Q (output) = f(L)
What is the marginal product of labour?
The increase in the amount of ouptut from one extra unit of labour. Change in output or total product / Change in labour
What is diminishing marginal product?
As the no.of workers increases the marginal product of labour falls as when more workers are hired each worker contributes less to production than the previous so the production function curve gets flatter with greater number of workers.
What is the value of marginal product of labour?
Value of additional output of hiring one more worker in monetary terms.VMPL = P x MPL
What happens to the VMPL as workers rise and why?
Diminishes as no.of workers rise as in a perfectly competitive market the price is constant.
Where is the profit maximising point of hiring labour?
Where VMPL (MB) = wage (MC) therefore the VMPL curve is the labour demand curve in a perfectly competitive market.
What factors shift the labour demand curve?
Change in the output price, increase price = shift right
Tech change (affects MPL), improvements = shift right
Supply of other factors e.g more equipment = workers more productive so MPL rises and VMPL rises shifting labour demand curve upwards
What does the upward sloping demand curve illustrate?
Reflects how consumers consumers decisions on the labour-leisure trade off respond to changes in the opportunity cost.
Upward sloping means increase in wages induces workers to increase their supply.
What are the assumptions made in the optimal work-leisure decision?
- worker has 24 hours to split between leisure and work
- worker is paid a competitive wage
- worker consumes consumption goods
- leisure and consumption goods are two goods that the worker consumes.
Why are there labour market distortions?
-minimum wage
-trade unions
-monopsony
-bilateal monpoly
-eos
-insiders/outsiders
efficiency wages
What is the result of insufficient labour market flexibility?
Market is prevented from clearing .
What are the benefits to a NMW?
- tackles povert
- reduces gap between the rich and poor
- prevents monposony power
- creates a fiscal benefit
- increases fairness in some professions
- decreases voluntary unemployment
What are the effects of a NMW?
Set above the equilibirum wage so there is excess supply.
Creates involuntary unemployment between Qd and Qs whereby those that are willing and able to work arent able to.
What does the extent of unemployment created by NMW depend on?
Depends on EOD/S. If elastic then greater unemployment
Why is setting the NMW below the equilibirum wage not economically binding?
Because the market will clear as the excess demand for labour will put upward pressure on the wage causing Qs of labour to rise until equilibirum is reached.
What is a trade union and its assumptions we make about them?
Formed by workers to improve their conditions of work
Assume;
-closed shops (all workers are union members creating a monopsony supplier of labour)
-bargain for higher wages
-collective bargaining
Where is the trade union wage on a diagram, what is the new supply curve ?
Trade union wage is higher than the perfectly competitive wage acheived through collective bargaining. New supply curve = WTUSupply. Those that are paid below the WTU wage will be happy to work at the new bargained wage (horizontal, wage takers at this point) whereas those that are already earning above the WTU wage will not work at bargained wage and the firm will have to increase the wage to hire more workers.
How does a trade union affect wage and employment?
Increases wage but decreases employment as more workers are willing to supply at this wage than firms are willing to demand.
What is a monopsony? What are characteristics?
a single buyer or employer of labour,
. wage setter
.aims to profit maximise by hiring workers at VMPL = MCL
Where is a monposonys wage set, what is the new supply curve? What is the new Mc curve and why is it not the same as the AC curve?
Set at profit max point VMPL=MCL and determined by the supply curve, set below perfectly competitive wage. New supply curve = WmSupply. New MC curve = WmPQMCL as in horizontal up until point of P as cost of hiring new worker = wage, beyond this point in order to hire more workers the firm needs to increase wage not only for that worker but for all previous workers.
How does monopsony affect employment and wage?
Decreases wage and employment below the perfectly competitive level.
