Prepared by Dr Della Lee Sue, Marist College MICROECONOMICS: Theory & Applications Chapter 16: Employment and Pricing of Inputs By Edgar K Browning & Mark A Zupan John Wiley & Sons, Inc 12th Edition, Copyright 2015 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Learning Objectives Explore the factors influencing the demand for an input by an individual competitive form Derive the market demand curve for an input by aggregating the demand curves of the various firms interested in hiring the input Investigate the general shape of an input supply curve Explain how the price and employment of inputs is determined in an industry (continued) Copyright © 2015 John Wiley & Sons, Inc All rights reserved Learning Objectives (continued) Show how an input's price and employment level is determined in a multi-industry market Examine input demand and employment by an output market monopoly Define what is meant by monopsony in input markets Explain the mathematics behind input demand by competitive and monopoly firms Copyright © 2015 John Wiley & Sons, Inc All rights reserved Explore the factors influencing the demand for an input by an individual competitive form 16.1 THE INPUT DEMAND CURVE OF A COMPETITIVE FIRM Copyright © 2015 John Wiley & Sons, Inc All rights reserved The Input Demand Curve of a Competitive Firm Change of focus from product markets to input markets Material in this chapter considers: Demand for inputs by competitive firms Supply of inputs Market analysis between demand and supply of input under competitive conditions Market analysis under noncompetitive conditions Copyright © 2015 John Wiley & Sons, Inc All rights reserved The Firm’s Demand Curve: One Variable Input Marginal value product (MVP) – the extra revenue a competitive firm receives by selling the additional output generated when employment of an input is increased by one unit MVP curve = firm’s demand curve for a given input when all other inputs are fixed (continued) Copyright © 2015 John Wiley & Sons, Inc All rights reserved The Firm’s Demand Curve: One Variable Input (continued) Assumption: The firm is a profit maximizer in a competitive market Conclusions: The marginal value product curve identifies the most profitable employment level for the input at each alternative cost The marginal value product curve slopes downward Copyright © 2015 John Wiley & Sons, Inc All rights reserved Figure 16.1 - A Competitive Firm’s Demand for Labor: One Variable Input Copyright © 2015 John Wiley & Sons, Inc All rights reserved The Firm’s Demand Curve: All Inputs Variable In order for a firm’s MVP curve to be equal to the demand curve for an input, there is an assumption that quantities of other inputs are fixed However, a change in an input’s price leads a firm to alter its employment of other inputs as well => an input demand curve should allow a firm to adjust its use of these other inputs Consider effect of other inputs on the marginal productivity of an input Derive a long-run demand curve – all inputs can vary Assumptions: other inputs’ prices are unchanged final product’s price is constant Copyright © 2015 John Wiley & Sons, Inc All rights reserved Figure 16.2 – A Competitive Firm’s Demand for Labor: All Inputs Variable Copyright © 2015 John Wiley & Sons, Inc All rights reserved 10 Input Price Determination in a MultiIndustry Market The interaction between the number of people willing and able to work as engineers and the total demand for engineers by all firms and industries determines the wage rate for engineers An input supply curve to a given industry is based on given demand conditions in other industries The smaller the share of the total market accounted for by an industry, the more elastic its input supply curve Copyright © 2015 John Wiley & Sons, Inc All rights reserved 29 Figure 16.8 - Input Price Determination in a Multi-Industry Setting Copyright © 2015 John Wiley & Sons, Inc All rights reserved 30 Examine input demand and employment by an output market monopoly 16.6 INPUT DEMAND AND EMPLOYMENT BY AN OUTPUT MARKET MONOPOLY Copyright © 2015 John Wiley & Sons, Inc All rights reserved 31 Input Demand and Employment by an Output Market Monopoly Marginal revenue product – the product of an input’s marginal product and the marginal revenue that can be derived from selling that marginal product Input demand curves of an output monopoly slope downward: the input’s marginal productivity declines marginal revenue from selling output declines as more of any input is consumed are lower than they would be if the output market were competitive Note: An output market monopoly is not the same as an input market monopoly Copyright © 2015 John Wiley & Sons, Inc All rights reserved 32 Figure 16.9 – An Output Monopolist’s Demand for an Input Copyright © 2015 John Wiley & Sons, Inc All rights reserved 33 Define what is meant by monopsony in input markets 16.7 MONOPSONY IN INPUT MARKETS Copyright © 2015 John Wiley & Sons, Inc All rights reserved 34 Monopsony in Input Markets Monopsony – an input market in which a firm is the sole purchaser of an input Marginal input cost – the cost of using an additional unit of an input Average input cost – the total cost of an input divided by the unites of that input used by a firm Copyright © 2015 John Wiley & Sons, Inc All rights reserved 35 Comparison between Monopsony and Monopoly Output market monopoly: Restricts output Charges higher price because it faces a downward-sloping demand curve for its product Input market monopsony: Restricts employment Pays a lower wage because it faces an upward-sloping input supply curve Copyright © 2015 John Wiley & Sons, Inc All rights reserved 36 Figure 16.10 - An Input Market Monopsony Copyright © 2015 John Wiley & Sons, Inc All rights reserved 37 Explain the mathematics behind input demand by competitive and monopoly firms 16.8 THE CALCULUS BEHIND INPUT DEMAND AND COMPETITIVE AND MONOPOLY FIRMS* *Denotes digital-only content Copyright © 2015 John Wiley & Sons, Inc All rights reserved 38 The Calculus behind Input Demand by Competitive and Monopoly Firms Firm’s Objective: Maximize Profit Profit = Total Revenue – Total Cost Profit is a function of the quantities of inputs used The partial derivatives of the profit function with respect to both inputs must be equal to zero Copyright © 2015 John Wiley & Sons, Inc All rights reserved 39 Input Demand of a Competitive Firm Output price and input prices are constant 1st Order Condition: The firm should use an input up to the point where the input’s marginal value product equals its price 2nd Order Condition: The marginal value product curve is negatively sloped (continued) Copyright © 2015 John Wiley & Sons, Inc All rights reserved 40 Input Demand of a Competitive Firm (continued) A competitive firm maximizes profit by hiring each input up to the point where the input’s MVP equals its price Copyright © 2015 John Wiley & Sons, Inc All rights reserved 41 Input Demand by an Output Market Monopoly For a monopoly, price is not constant: Price is a function of output which is a function of the quantities of inputs employed Input prices are still constant The firm should use an input up to the point where the input’s marginal value product equals its price (continued) Copyright © 2015 John Wiley & Sons, Inc All rights reserved 42 Input Demand by Competitive and Monopoly Firms (continued) Copyright © 2015 John Wiley & Sons, Inc All rights reserved 43 ... Explore the factors influencing the demand for an input by an individual competitive form Derive the market demand curve for an input by aggregating the demand curves of the various firms interested... Show how an input's price and employment level is determined in a multi-industry market Examine input demand and employment by an output market monopoly Define what is meant by monopsony... demand by competitive and monopoly firms Copyright © 2015 John Wiley & Sons, Inc All rights reserved Explore the factors influencing the demand for an input by an individual competitive form 16. 1