Labour Market: Profit Maximization

Labour Market and Wage Determination

• A profit-maximizing firm will maximize profit by increasing its usage of a variable factor input (e.g. labour) as long as marginal revenue product of labour (MRPL) is greater or equal to the marginal factor cost of labour (MFCL)
• MRPL is the change in total revenue resulting from a one-unit change in the variable factor input (i.e. labour)
• MFCL is the change in the firm's total costs resulting from a one-unit change in labour
• The firm will employ workers as long as MRPL ≥ MFCL, and no further

Profit Maximization and Labour

• A profit-maximizing firm employs workers up to the point where MRPL = MFCL
• The firm will not employ additional workers if MRPL < MFCL

Wage Determination

• Wages refer to the total package (cash plus benefits) given as a reward per time period to anyone who is employed by someone else
• The wage rate in any particular labour market is determined by the forces of demand for labour and supply of labour
• Other factors influencing wages include:
  • Activities of trade unions and professional bodies
  • Government policy
  • Social convention
• Wages will be higher in occupations where demand for labour is high and supply is low, and where demand and supply are inelastic

Transfer Earnings and Economic Rent

• Transfer earnings are the minimum payment required to prevent a worker from transferring to their next best occupation
• Economic rent is the payment above the supply price of labour
• The singer's economic rent is equal to €800 (€1000 - €200)

The Role of Trade Unions in Wage Determination

• Trade unions prevent the forces of demand and supply from moving freely
• They help to keep wages higher than they would otherwise be in a free market
• Trade unions contribute to cost-push inflation and lead to potential unemployment
• The effectiveness of trade union action is greater when demand for and supply of labour are wage inelastic

The Role of a Monopsonist Employer in Wage Determination

• A monopsonist employer is a sole buyer of labour and pays a wage below that which would operate in a competitive labour market
• The single purchaser of a type of labour can exploit its market power and the discrepancy between marginal and average costs of labour
• The profit-maximizing level of employment remains at the point where MRPL = MFCL, but the monopsonist firm can offer a lower wage to its workforce

Market Failure

• Market failure occurs when the price mechanism results in an inefficient allocation of resources
• Public goods create a free-rider problem, where no one has an incentive to pay for them
• Characteristics of public goods:
  • Non-diminishable (or non-rival) - once supplied, one person's consumption does not reduce the supply available to others
  • Non-excludable (or non-exclusive) - once supplied, it is impossible or prohibitively expensive to exclude any member of society from consuming it
  • Non-rejectable - public goods cannot be rejected

Merit Goods

• Merit goods are goods that are under-provided by the market, but are considered desirable by society
• The market system is based on ability to pay, but some goods should be allocated on the basis of need or merit, not just income or wealth### Market Failure
• Goods and services that are under-supplied or over-supplied in a market economy, leading to inefficient outcomes.
• Examples: museums, library provision, education, healthcare, and waste management.

Merit Goods

• Goods and services that are deemed socially desirable, but are under-supplied in a market economy.
• Examples: education, healthcare, and museums.
• Characteristics: facilitate a redistribution of real income, provide positive externalities, and are available to all citizens at a lower price than the market clearing price.

Demerit Goods

• Goods and services that are socially harmful, but are over-supplied in a market economy.
• Examples: dangerous drugs, alcohol, prostitution, and pornography.
• Characteristics: damage the consumer and others, and may be banned or regulated by the government.

Externalities

• Positive externalities: beneficial effects on third parties, such as vaccinations and honey production.
• Negative externalities: harmful effects on third parties, such as pollution and noise.
• Characteristics: occur when the production or consumption of a good or service affects third parties, and the market equilibrium is inefficient.

Market Structure

• Monopolistic and imperfectly competitive market structures lead to market failure.
• Characteristics: too little is produced at too high a price, and the market outcome is neither allocatively efficient nor productively efficient.

Asymmetric Information

• Buyers and sellers have unequal information about the quality of a good or service.
• Examples: used cars and insurance markets.
• Characteristics: leads to market failure, and bad products can drive out good products.

Measures to Correct Market Failure

Public Goods

• Public provision: the government provides public goods, such as national defense and public parks.
• Characteristics: the government provides the good or service, and it is available to all citizens.

Merit Goods

• Maximum price legislation: the government sets a maximum price for a merit good.
• Subsidies: the government provides a subsidy to the private producer of a merit good.
• Public provision: the government provides the merit good itself.

Demerit Goods

• Self-regulation: the government provides information about the harm caused by demerit goods.
• Controls and regulations: the government regulates or bans the sale and consumption of demerit goods.
• Economic instruments: the government uses taxes and subsidies to discourage the consumption of demerit goods.

Externalities

• Self-regulation: households and firms consider it in their own interest to protect the environment.
• Controls and regulations: the government sets emission standards and imposes penalties for breaking the regulation.
• Economic instruments: the government uses taxes and subsidies to influence the price of a good or service and reduce negative externalities.

Market Structure

• Regulation: the government regulates monopolistic and imperfectly competitive market structures.
• Price controls: the government sets a price equal to marginal cost to restrict monopoly abuse.
• Taxing monopoly profits: the government taxes the profits of monopolies.
• Public ownership: the government owns and operates a monopoly.
• Privatization: the government sells a monopoly to a private company.

Asymmetric Information

• Market signaling: sellers send signals to buyers about the quality of their products.
• Guarantees and warranties: sellers provide guarantees and warranties to assure buyers of the quality of their products.
• Government subsidies: the government subsidizes "consumer reports" to help buyers make informed decisions.

Labour Market and Wage Determination

• A profit-maximizing firm will maximize profit by increasing its usage of a variable factor input (e.g. labour) as long as marginal revenue product of labour (MRPL) is greater or equal to the marginal factor cost of labour (MFCL)
• MRPL is the change in total revenue resulting from a one-unit change in the variable factor input (i.e. labour)
• MFCL is the change in the firm's total costs resulting from a one-unit change in labour
• The firm will employ workers as long as MRPL ≥ MFCL, and no further

Profit Maximization and Labour

• A profit-maximizing firm employs workers up to the point where MRPL = MFCL
• The firm will not employ additional workers if MRPL < MFCL

Wage Determination

• Wages refer to the total package (cash plus benefits) given as a reward per time period to anyone who is employed by someone else
• The wage rate in any particular labour market is determined by the forces of demand for labour and supply of labour
• Other factors influencing wages include:
  • Activities of trade unions and professional bodies
  • Government policy
  • Social convention
• Wages will be higher in occupations where demand for labour is high and supply is low, and where demand and supply are inelastic

Transfer Earnings and Economic Rent

• Transfer earnings are the minimum payment required to prevent a worker from transferring to their next best occupation
• Economic rent is the payment above the supply price of labour
• The singer's economic rent is equal to €800 (€1000 - €200)

The Role of Trade Unions in Wage Determination

• Trade unions prevent the forces of demand and supply from moving freely
• They help to keep wages higher than they would otherwise be in a free market
• Trade unions contribute to cost-push inflation and lead to potential unemployment
• The effectiveness of trade union action is greater when demand for and supply of labour are wage inelastic

The Role of a Monopsonist Employer in Wage Determination

• A monopsonist employer is a sole buyer of labour and pays a wage below that which would operate in a competitive labour market
• The single purchaser of a type of labour can exploit its market power and the discrepancy between marginal and average costs of labour
• The profit-maximizing level of employment remains at the point where MRPL = MFCL, but the monopsonist firm can offer a lower wage to its workforce

Market Failure

• Market failure occurs when the price mechanism results in an inefficient allocation of resources
• Public goods create a free-rider problem, where no one has an incentive to pay for them
• Characteristics of public goods:
  • Non-diminishable (or non-rival) - once supplied, one person's consumption does not reduce the supply available to others
  • Non-excludable (or non-exclusive) - once supplied, it is impossible or prohibitively expensive to exclude any member of society from consuming it
  • Non-rejectable - public goods cannot be rejected

Merit Goods

• Merit goods are goods that are under-provided by the market, but are considered desirable by society
• The market system is based on ability to pay, but some goods should be allocated on the basis of need or merit, not just income or wealth### Market Failure
• Goods and services that are under-supplied or over-supplied in a market economy, leading to inefficient outcomes.
• Examples: museums, library provision, education, healthcare, and waste management.

Merit Goods

• Goods and services that are deemed socially desirable, but are under-supplied in a market economy.
• Examples: education, healthcare, and museums.
• Characteristics: facilitate a redistribution of real income, provide positive externalities, and are available to all citizens at a lower price than the market clearing price.

Demerit Goods

• Goods and services that are socially harmful, but are over-supplied in a market economy.
• Examples: dangerous drugs, alcohol, prostitution, and pornography.
• Characteristics: damage the consumer and others, and may be banned or regulated by the government.

Externalities

• Positive externalities: beneficial effects on third parties, such as vaccinations and honey production.
• Negative externalities: harmful effects on third parties, such as pollution and noise.
• Characteristics: occur when the production or consumption of a good or service affects third parties, and the market equilibrium is inefficient.

Market Structure

• Monopolistic and imperfectly competitive market structures lead to market failure.
• Characteristics: too little is produced at too high a price, and the market outcome is neither allocatively efficient nor productively efficient.

Asymmetric Information

• Buyers and sellers have unequal information about the quality of a good or service.
• Examples: used cars and insurance markets.
• Characteristics: leads to market failure, and bad products can drive out good products.

Measures to Correct Market Failure

Public Goods

• Public provision: the government provides public goods, such as national defense and public parks.
• Characteristics: the government provides the good or service, and it is available to all citizens.

Merit Goods

• Maximum price legislation: the government sets a maximum price for a merit good.
• Subsidies: the government provides a subsidy to the private producer of a merit good.
• Public provision: the government provides the merit good itself.

Demerit Goods

• Self-regulation: the government provides information about the harm caused by demerit goods.
• Controls and regulations: the government regulates or bans the sale and consumption of demerit goods.
• Economic instruments: the government uses taxes and subsidies to discourage the consumption of demerit goods.

Externalities

• Self-regulation: households and firms consider it in their own interest to protect the environment.
• Controls and regulations: the government sets emission standards and imposes penalties for breaking the regulation.
• Economic instruments: the government uses taxes and subsidies to influence the price of a good or service and reduce negative externalities.

Market Structure

• Regulation: the government regulates monopolistic and imperfectly competitive market structures.
• Price controls: the government sets a price equal to marginal cost to restrict monopoly abuse.
• Taxing monopoly profits: the government taxes the profits of monopolies.
• Public ownership: the government owns and operates a monopoly.
• Privatization: the government sells a monopoly to a private company.

Asymmetric Information

• Market signaling: sellers send signals to buyers about the quality of their products.
• Guarantees and warranties: sellers provide guarantees and warranties to assure buyers of the quality of their products.
• Government subsidies: the government subsidizes "consumer reports" to help buyers make informed decisions.

Labour Market and Wage Determination

• A profit-maximizing firm will maximize profit by increasing its usage of a variable factor input (e.g. labour) as long as marginal revenue product of labour (MRPL) is greater or equal to the marginal factor cost of labour (MFCL)
• MRPL is the change in total revenue resulting from a one-unit change in the variable factor input (i.e. labour)
• MFCL is the change in the firm's total costs resulting from a one-unit change in labour
• The firm will employ workers as long as MRPL ≥ MFCL, and no further

Profit Maximization and Labour

• A profit-maximizing firm employs workers up to the point where MRPL = MFCL
• The firm will not employ additional workers if MRPL < MFCL

Wage Determination

• Wages refer to the total package (cash plus benefits) given as a reward per time period to anyone who is employed by someone else
• The wage rate in any particular labour market is determined by the forces of demand for labour and supply of labour
• Other factors influencing wages include:
  • Activities of trade unions and professional bodies
  • Government policy
  • Social convention
• Wages will be higher in occupations where demand for labour is high and supply is low, and where demand and supply are inelastic

Transfer Earnings and Economic Rent

• Transfer earnings are the minimum payment required to prevent a worker from transferring to their next best occupation
• Economic rent is the payment above the supply price of labour
• The singer's economic rent is equal to €800 (€1000 - €200)

The Role of Trade Unions in Wage Determination

• Trade unions prevent the forces of demand and supply from moving freely
• They help to keep wages higher than they would otherwise be in a free market
• Trade unions contribute to cost-push inflation and lead to potential unemployment
• The effectiveness of trade union action is greater when demand for and supply of labour are wage inelastic

The Role of a Monopsonist Employer in Wage Determination

• A monopsonist employer is a sole buyer of labour and pays a wage below that which would operate in a competitive labour market
• The single purchaser of a type of labour can exploit its market power and the discrepancy between marginal and average costs of labour
• The profit-maximizing level of employment remains at the point where MRPL = MFCL, but the monopsonist firm can offer a lower wage to its workforce

Market Failure

• Market failure occurs when the price mechanism results in an inefficient allocation of resources
• Public goods create a free-rider problem, where no one has an incentive to pay for them
• Characteristics of public goods:
  • Non-diminishable (or non-rival) - once supplied, one person's consumption does not reduce the supply available to others
  • Non-excludable (or non-exclusive) - once supplied, it is impossible or prohibitively expensive to exclude any member of society from consuming it
  • Non-rejectable - public goods cannot be rejected

Merit Goods

• Merit goods are goods that are under-provided by the market, but are considered desirable by society
• The market system is based on ability to pay, but some goods should be allocated on the basis of need or merit, not just income or wealth### Market Failure
• Goods and services that are under-supplied or over-supplied in a market economy, leading to inefficient outcomes.
• Examples: museums, library provision, education, healthcare, and waste management.

Merit Goods

• Goods and services that are deemed socially desirable, but are under-supplied in a market economy.
• Examples: education, healthcare, and museums.
• Characteristics: facilitate a redistribution of real income, provide positive externalities, and are available to all citizens at a lower price than the market clearing price.

Demerit Goods

• Goods and services that are socially harmful, but are over-supplied in a market economy.
• Examples: dangerous drugs, alcohol, prostitution, and pornography.
• Characteristics: damage the consumer and others, and may be banned or regulated by the government.

Externalities

• Positive externalities: beneficial effects on third parties, such as vaccinations and honey production.
• Negative externalities: harmful effects on third parties, such as pollution and noise.
• Characteristics: occur when the production or consumption of a good or service affects third parties, and the market equilibrium is inefficient.

Market Structure

• Monopolistic and imperfectly competitive market structures lead to market failure.
• Characteristics: too little is produced at too high a price, and the market outcome is neither allocatively efficient nor productively efficient.

Asymmetric Information

• Buyers and sellers have unequal information about the quality of a good or service.
• Examples: used cars and insurance markets.
• Characteristics: leads to market failure, and bad products can drive out good products.

Measures to Correct Market Failure

Public Goods

• Public provision: the government provides public goods, such as national defense and public parks.
• Characteristics: the government provides the good or service, and it is available to all citizens.

Merit Goods

• Maximum price legislation: the government sets a maximum price for a merit good.
• Subsidies: the government provides a subsidy to the private producer of a merit good.
• Public provision: the government provides the merit good itself.

Demerit Goods

• Self-regulation: the government provides information about the harm caused by demerit goods.
• Controls and regulations: the government regulates or bans the sale and consumption of demerit goods.
• Economic instruments: the government uses taxes and subsidies to discourage the consumption of demerit goods.

Externalities

• Self-regulation: households and firms consider it in their own interest to protect the environment.
• Controls and regulations: the government sets emission standards and imposes penalties for breaking the regulation.
• Economic instruments: the government uses taxes and subsidies to influence the price of a good or service and reduce negative externalities.

Market Structure

• Regulation: the government regulates monopolistic and imperfectly competitive market structures.
• Price controls: the government sets a price equal to marginal cost to restrict monopoly abuse.
• Taxing monopoly profits: the government taxes the profits of monopolies.
• Public ownership: the government owns and operates a monopoly.
• Privatization: the government sells a monopoly to a private company.

Asymmetric Information

• Market signaling: sellers send signals to buyers about the quality of their products.
• Guarantees and warranties: sellers provide guarantees and warranties to assure buyers of the quality of their products.
• Government subsidies: the government subsidizes "consumer reports" to help buyers make informed decisions.