Markets for Factors of Production
Understand how demand for inputs of production is determined and what factors influence elasticity, esp for labor. Also how does market for financial capital establish price (interest rate) and factors that affect supply and demand for capital. Last, understand components of payments to productive resources (opp cost and economic rent).
Demand for productive resource is depends on demand for final goods it will produce - thus this is a derived demand.
- Marginal Product of a resource - additional output of final product produced by a unit of input, holding others constant - aka "marginal physical product"
- Marginal Revenue - addition to total revenue from selling one more output unit
- Equal to price for a price taker
- Marginal Revenue Product - revenue generated by selling the product from one unit of input and holding other inputs constant
- Downward sloping for any range of output where there are diminishing marginal returns to inputs
- This curve is in fact the firm's short run demand curve for the input
- MRP of labor = Price of labor
- This determines the equilibrium wage rate - highest price a firm will pay to hire an additional unit of labor
Demand for labor
- Increase in price of output increases demand for labor, and vv
- Price increases the marginal revenue which increases MRP of labor, and vv
- If another factor of production changes price, depends whether it is compliment or sub to labor
- If substitute, decrease demand (e.g. phone systems replacing cust service)
- If complement, increase demand (e.g. IT professionals)
- Technology in general has increased the demand for labor - evidenced by increases in real wages
Elasticity of Demand for Labor
- More elastic in long than short run
- Short run is defined as period in which it is fixed
- Will see a greater decrease in demand for labor when there are substitutes (e.g. machines)
- More labor intensive = higher elasticity
- E.g. warehouse (lots of workers) vs. airline (not many pilots)
- If labor and K can be substituted easily, e.g. machines and robots replace humans
Work/Leisure
- Leisure is a normal good, so people want more of it
- Employers need to make wage high enough to give up leisure for employment
- Wages are the opportunity cost of leisure
- Higher wages, more leisure you will give up
- This is substitution effect - subbing out leisure so you can work instead
- As a worker's wage increases, his demand for goods increases, including his demand for leisure
- This is income effect
- On supply curve, upslope is substitution, and it bends backward due to income at some max quantity of labor
- Size of adult population
- Capital accumulation in items that improve home productivity - greater proportion can work outside the home (automatic food preparation)
Labor unions
- Organized so workers can bargain for wages via collective bargaining
- Can restrict supply by refusing to work
- Can work to increase the demand for union labor
- Increase marginal product of workers through training
- Encourage people to buy union made products (advertisements)
- Influence trade restrictions on imported goods (e.g. steel)
- Can also reduce supply of substitutes for union labor (increasing price of substitutes)
- Increase in min wage for unskilled labor, since unskilled might be a substitute
- Restricting immigrants is another tactic
Monopsony
- Buyer of a good or productive asset has market power
- Opposite of a monopoly
- If employer pays a single wage, increasing wage to hire more workers means paying all workers more
- Marginal cost of additional labor is higher than in perfect competition
- Results in underemployment and DWL
- Monopsonist hires fewer workers even though marginal revenue product of an added worker is greater than the wage rate
- When facing a monopoly labor supplier (union) final wage rate will be somewhere between monopsony (too low) and price from union's reduction of labor (too high)
Physical and Financial Capital
- Physical is the physical assets of the firm - PP&E, inventory
- More demand for physical = more demand for financial capital (money raised through issuing securities) to buy more physical capital
- We equate MRP of capital to the Cost of Capital
- MRP of capital is future MRP so current value is the present value of MRP
- Cost of Capital is cost of funds firm must raise - think of MRP as returns over time (in percent terms) and then MRP must equal interest rate on capital
Demand for Financial Capital
- Downward sloping derived from its MRP curve
- Downward function of the interest rate - low interest, high demand and vv, for both physical and financial capital
- Note: Labor produces right away, capital takes time - so you need present value of MRP
- Upward function of the interest rate
- Suppliers are savers - face choice of consume now, or later
- Savings affected by:
- Interest rates - higher means more savings (put it in the bank)
- Increases in current income (decreases do opposite)
- Expected future incomes increase means less savings (if they decrease, you will save more now)
Equilibrium of supply and demand in capital markets determines interest rates
Renewable/Nonrenewable resources
- Renewable - a water well - Q always same, price changes
- Price determined by demand - quantity is fixed
- Land also falls in this category
- Supply is therefore perfectly inelastic
- Nonrenewable - an oil well that depletes over time - price always same, Q changes
- Depends on known stock - this is fixed at any one time
- Known stock will generally increase with tech that makes more resources available
- Rate at which source is supplied - flow supply - perfectly elastic at a price that equals present value of expected next period price
- Hotelling Principle
- If price of oil expected to rise faster than Rf rate, oil producers will wait on production now and produce more in the future
- If price of oil expected to rise slower than Rf, oil producers will produce now and then sell and invest proceeds in Rf rate
- Thus, price of oil is expected to rise at a rate equal to Rf
Economic Rent vs Opportunity Costs
- Difference in income is due to difference in MRP (movie star vs. car wash worker)
- Opportunity cost = what you would make in your next best opportunity
- For an actor this could be quite large
- Difference between earnings and opportunity cost = economic rent
- Ex, a TV actor might get accept getting paid considerably less
- Economic rent is similar to concept of Producer Surplus and depends on supply curve shape for the resource
- Inelastic - all economic rent
- Perfect elastic - no economic rent
- If factor of production easy to create/supply, economic rent reduced by competition
- If difficult, that resource has high MRP, and gets significant economic rent
- Scarcity is not enough - a good curler is rare, but not as valuable as a good soccer player
End
6:00 PM
1.25 hours
No comments:
Post a Comment