General Notes for Factor Markets

Factor Markets

For an individual firm, demand for labor is known as Marginal Revenue Product (MRP). This can also be known as the Value of Marginal Product of Labor (VMPL). This slopes downward because Marginal Physical Product (MPP) decreases as more workers are hired due to diminishing marginal returns. MRP = MPP * priceex: If hiring a worker lets a company to produce 5 more chairs, and chairs can be sold for $50, then the worker's MRP is $250 (5 * 50). So, the worker may be paid up to $250 per day. Demand for a resource (like labor) is derived from demand for a good or service produced from that resource. For example, a decrease in the demand for automobiles leads to a decrease in demand for auto workers. The individual firm will hire additional workers up to the point where MRP = the wage rate. In a competitive situation, the wage rate is the Marginal Resource Cost (MRC) of laborIn a competitive labor market, supply and demand for labor determine the wage. Supply comes from people selling their labor Demand comes from firms who hire labor The supply curve for labor is upward sloping because more people are willing to work in markets with higher wages. The demand curve for labor is derived from individual firms' MRP curves. It's downward sloping because of DMR.

Labor demand (position of D curve) is determined by: Demand for / price of product being produced **increased price, increased demand for labor Productivity of workers Price and productivity of substitute and complimentary goods Labor supply (position of S curve) is determined by: Population Wages in other markets Working conditions Education / certification / special requirements Niche Topics: If a firm is a monopoly in the product market, it causes the MRP to drop more rapidly than in a factor market. As a result, monopolies hire fewer workers. In a monopsony, the firm is the entire resource market, being the only buyer of labor. The MRC curve is above supply curve because the monopsonist must raise the wage of all workers to hire additional workers. [see monopsony graph below - MCL = MRC]

With an increased wage, an individual may choose to work longer hours (due to the substitution effect) or shorter hours (due to the income effect). The individual labor supply curve slopes upwards if the substitution effect dominates, and downwards if the income effect does. However, it can become "backwards bending" if these both occur on the same graph. [see below]

In an imperfectly competitive market, the marginal revenue product of labor (MRPL) can be found by the equation: MRPL = MPL * MRWhen the MR of the last factor unit equals the factor's cost, firms will stop employing factors of production for subsequent units. Marginal factor cost of labor (MFCL) is the cost of hiring one more unit of labor. In imperfectly competitive markets, the labor supply curve is upward-sloping and firms can affect the market wage (eg; a monopsonist, the single buyer of a factor). Firms must raise the wage to hire more workers. Firms will hire workers up to the point where: [see below graph for equilibrium wage rate]MRPL = MFCL