Economics 104 Notes - Employment of Factors under Imperfect Markets PDF

LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez ECONOMICS 104 Topic 4: Employment of Factors under Imperfect Markets LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez LEARNING OBJECTIVES At the end of the topic, the learners should be able to: compa...

LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez ECONOMICS 104 Topic 4: Employment of Factors under Imperfect Markets LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez LEARNING OBJECTIVES At the end of the topic, the learners should be able to: compare and contrast perfectly competitive and imperfect factor markets demonstrate profit maximization under imperfect product and factor markets 1 LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez Recall: Monopoly – an industry (firm) with only one seller (of the good) Why is MR lower than P under a monopoly? TR Q P(Q) TR  P(Q)  Q  P(Q) Q Q Q Q PCM MONOPOLY P(Q) P(Q) 0 0 Q Q P(Q)  MR  P MR  P(Q)  Q  MR  P Q LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez  dP(Q)  P MR   P  Q   Q   dQ  P  P  Q  Q dP(Q)  MR    P  P P dQ  Recall: dQ P dP Q 1 eQD    D dP Q dQ P eQ  1  MR  P  Q  1  D   eQ   2 LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez  1  MR  P  Q  1  D   eQ   Results: when eQ   , as in the case of PCM, MR=P D eQD   perfectly elastic P when 0  eQ   , MR < P D LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez Recall: Monopsony – an industry (firm) with only one buyer (of the input) If we focus on the product market, we have two main cases PCM: P  MR Imperfect Market (Monopoly): P  MR But now, we are considering two markets! Product Market: MR  MC Factor Market: MRPL  MFCL ; MRPK  MFCK 3 LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez In the factor market, we also have two main cases PCM: MFCL  w ; MFCK  r Imperfect Market (Monopsony): MFCL  w( L) ; MFCK  r ( K ) Thus, we have 4 possible cases (single-input): PCM in product, PCM in factor: MVPL  w PCM in product, IM in factor: MVPL  MFCL IM in product, PCM in factor: MRPL  w IM in product, IM in factor: MRPL  MFCL LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez CASE 1: IM in output, PCM in input Recall: Monopoly Product Market Factor Market P,MR MVPL, MRPL P* MVPL MR MRPL P MRPL MVPL MR Q* Q L* L For any level of Q, For any level of L, P>MR MVPL>MRPL 4 LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez Solving for the profit maximizing L or L* Given: Q  QL  production function C  wL  cost function w  w  MFC L  PCM in factor market P  PQ   IM in product market Profit maximizing condition: In general: MRPL  MFCL In this case: MRPL  w LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez Graphically: MVPL ,MRPL, MFCL , w w MFCL MVPL MRPL LM = L* LPCM L Comparing Monopoly and PCM conditions: QPCM  QM LPCM  LM 5 LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez CASE 2: PCM in output, IM in input Recall: Monopsony sole employer of (specialized) input e.g., sole buyer of (specialized) labor thus, the firm faces the market supply curve of input w L  L w S S s L (w) w2 S dL w1 0 dw L1 L2 L LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez Aside: The labor supply curve would usually have a flat portion at lower wages to represent the reservation wage w w = w(L) w = w(L) w wr reservation wage L L 6 LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez Inverse Supply Curve of L w w  w( L) w = w(L) dw w 0 dL TFCL TFCL  w( L)  L L L MFC L  dTFCL d wL   L MFC L  dL dL d wL   L dwL   wL   L dL dL dL dL MFC L  wL   L dw dL LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez MFC L  wL   L dw dL dw under PCM  0 , since w is fixed  w  dL MFCL  w  L   w w dw MFCL under monopsony, 0 dL 0 MFCL  w  L  MFCL w = w(L) 0 w MFCL  w  L  0 L L 7  LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez Suppose: wL  20  2L dwL  2 w MFCL = 20+4L dL TFCL  w  L   L w = 20+2L 40 TFCL  20L  2L2 30 20 dTFCL MFCL   20  4 L dL 5 L  MFC L L  wL LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez Why is MFCL  wL ? (1) the firm should offer a higher wage rate to encourage more (new) workers (2) the old workers should also be given higher wages dw MFCL  w  L dL additional (labor) (higher) w for cost for the firm additional (new) wage differential workers for old workers 8 LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez Graphically: w w = w(L) L0  w w1 w MFCL or TFCL w0 w1  L L0 L1 L L LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez Finding the profit maximizing level of L  L  P  QL  wL L  Q  L w  0 P w  L 0 L L  L L   w  P  MPL   w  L 0  L  MVPL  MFCL  0 We choose L  L*M where MVPL  MFCL 9 LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez Graphically: w, MFCL Under Monopsony MVPL, MFCL MVPL  MFCL w = w(L) MFCL L  L*M ; w  wM wPCM wM Under PCM (input) MVPL MVPL  w L*M L*PCM L L  L*PCM ; w  wPCM  L*PCM  L*M ; wPCM  wM LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez Monopsonistic Exploitation * Consider LM , wM MVPL  w value of additional additional cost to output to society society the value of the additional output produced by an individual is greater than the amount paid to the factor inefficient, since it is still beneficial for the society to hire more units of labor at L*M 10 LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez rate of monopsonistic exploitation:   MVPL  wM w MFCL MVPL w = w(L)  wPCM wM MVPL L*M L*PCM L employment restriction: L*M  L*PCM wage repression: wM  wPCM LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez Numerical Example: QL  25L  0.1L2 - production function P  P  10 - output price wL  100  1.5L - wage rate function Monopsony Solution Q MPL   25  0.2 L L MVPL  P  MPL  250  2L TFC  wL L  100L  1.5L2 TFC MFC L   100  3L L 11 LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez Recall: profit max condition MVPL  MFCL Solving for L*M 250  2L  100  3L L*M  30 Solving for wM wM L  100  1.530 wM  145 LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez Solving for MFCL and MVPL MFCL  100  3L  100  330 MFCL  190 MVPL  250  2L  250  230  190 MVPL  MFCL  190 Solving for    MVPL  wM  190 145  45 12 LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez Perfectly Competitive Solution MVPL  wPCM Solving for L*PCM 250  2L  100  1.5L 150 L*PCM   42.875 3.5 Solving for wPCM wPCM  100  1.542.875 wPCM  164.286 LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez Solving for MVPL MVPL  250  242.875 MVPL  164.286 Aside: MRPL  MFCL LHS: market condition of the product market RHS: market condition of the factor market 13 LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez LEARNING OBJECTIVES At the end of the topic, the learners should be able to: compare and contrast perfectly competitive and imperfect factor OR markets demonstrate profit maximization under imperfect product and OR factor markets LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez REFERENCES Nicholson, W. and Snyder, C. 2007. Microeconomic Theory: Basic Principles and Extensions. 10th Ed., South-Western, Cengage Learning, pp 491-494 & 584-586. Varian, H. 2010. Intermediate Microeconomics: A Modern Approach, 8th Ed. New York: WW Norton and Co. Note: Learning resources can be accessed in our ECON 104 eLBI Course Site at http://ilcecourses.uplb.edu.ph/course/ 14 LMAT-A4 Learning Facilitator: Paul Joseph B. Ramirez END OF TOPIC 4 Topic 4: Employment of Factors under Imperfect Markets Next Topic: Labor Supply & Time Allocation Model 15