L22 - Perfect Labour Markets Flashcards
What are the factors of production?
These are the inputs required to produce output:
- LABOUR –> people available for employment to produce output
- units: number of people, hours of work
- cost to firm: wage, salary
- CAPITAL –> machines and equipment used by labour to produce output
- units: number of machines, tools or factories
- cost to firm: rent, price
LAND –> the site of production (commonly merged with capital)
Which factor of production is variable in the short run?
- Only labour is variable in the short run - Increasing output in the short run likely to lead to diminishing returns (where the next unit of labour is not as productive as the last)
- In the long-run, capital can be used to replace labour
What are the two main costs to the worker?
Work involves two main costs to the worker
(a) the worker must sacrifice leisure
(b) the work may be unpleasant, challenging, boring or dangerous etc
- An extra hour worked involves extra disutility: requires higher wages to work more
What are the effects of the two main costs of work for the individual worker?
There are two effects:
(a) Substitution effect Higher wages, a person will work more greater opportunity cost of leisure
(b) Income effect Higher wages imply worker can afford more leisure time
How can the effects of the two main costs of work for individual workers be represented on a graph?
- With wage (£) on the y-axis and hours worked on the x-axis
- The supply of labour is a positive diagonal line –> represents the substitution effect
- The supply of labour being a backwards bending curve –> represents the income effect
How is an employer’s labour supply effect by the market structure?
An individual employer’s labour supply depends on market structure:
- If employer wage taker, the supply curve will be perfectly elastic
- If employer wage maker, it will be upward sloping
What does the market labour supply curve look like?
- The market labour supply curve is usually upward sloping
What positively effect the market labour supply curve?
- Number of qualified people
- non-wage benefits/costs of jobs & other jobs
How responsiveness of the supply of labour is dependent on what?
- How responsive the supply of labour is to a change in wages (elasticity) depends on
- (a) difficulty to change jobs
- (b) whether we’re in the long- or short-run
- Wages will increase more with demand if supply is more inelastic
How do we derive the demand for labour in a market?
- PREVIOUSLY: used marginal output rule to ask: “how much will the firm produce?”
- NOW: use marginal input rule to ask, “how much labour will the firm employ?”
- Both questions will lead to the same conclusion
- (1) Marginal input rule:
- So long as the firm does not shut down, a buyer should employ the number of
- units of labour where:
- marginal revenue product of labour (MRP{L} = marginal cost of labour
- (MC{L})
Why?
- MRP{L} –> is the change in TR revenue due to employing one more unit of labour
- MC{L} –> is the change in TC due to employing one more unit of labour
- If MRP{L} > MC{L} –> then employing one more unit increases TR more than TC
Why does the Marginal Input Rule lead to the same conclusion as the Marginal Output Rule?
- The marginal revenue product of labour is given by:
- MRP{L} = MR x MPP{L} –> (marginal revenue x marginal physical product of labour)
- where MPP{L} is how much output the extra unit of labour produces
- Thus, in general, the marginal input rule is:
- MRP{L} = MPP{L} x MR = MC{L}
- MR = MC{L}/ MPP{L}
- What is MC{L}/ MPP{L}?
- The cost of extra unit of labour divided by number of units it produces
- It is the extra cost of producing one of those units of output: MC{L}/ MPP{L} = MC
- MR = MC = MC{L}/ MPP{L}
- Marginal input rule & marginal output rule are effectively the same
What does the graph of the Marginal Physical Product of Labour look like?
- With Output of the y-axis and Quantity of labour of the x-axis
- The Marginal Physical Product of Labour is a ‘n’ shaped curve
- At a certain point (usually when dy/dx=0) there is diminishing returns for each additional unit of labour
What is Assumption 1 of Perfectly Competitive Labour Markets?
- A(1) –> Buyers of labour (firms) operate in a perfectly competitive output market
- The price for the output is taken as given
- They believe that they can sell as much of their produce as they want at the going
- price without affecting that price, so p = MR
- ## When buyers are price takers in the product market, MRP{L} = MR x MPP{L} = p x MPP{L}
What is Assumption 2 of Perfectly Competitive Labour Markets?
- A(2) –> Buyers of labour (firms) are wage takers in the labour (input) market
- Each firm takes the wage rate as given
- They believe that they can employ as much labour as they want at the going wage
- rate without having an effect on that wage rate
- When buyers are wage takers, MC{L} = w
What is Assumption 3 of Perfectly Competitive Labour Markets?
- A(3) –> Both buyers and sellers have complete information
- Workers are aware of available jobs and know the conditions of employment
- Employers know the amount of labour available and how productive it is
