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1. Factor Markets
1

2. FACTOR MARKET
• Transfer earning – the minimum
payments necessary for a factor to remain
at its present employment = supply price
• Economic rent – the payments received
by a factor over and above the minimum
payments necessary for a factor to remain
at its present employment
= the difference between the actual payments a
factor receives and the minimum payments the
factor is willing to accept.
2

3. Market Supply of and Demand for Labour
S
Wages
ER
TE
D
Quantity of Labor
3

4. In a Perfectly
Competitive Market,
what determines the
level of Wages?
The intersection of the
demand for labor
and the supply of
labor
4

5. Market Supply and Demand
S
Wages
D
Quantity of Labor
5

6. What does the Market Demand
Curve for Labor show?
~The different quantities of
labor employers are willing
to hire at different wage
rates in a given time period,
ceteris paribus
6

7. What does the Market Supply
Curve of Labor show?
~The different quantities of labor
workers are willing to offer
employers at different wage
rates in a given time period,
ceteris paribus
7

8. MARGINAL REVENUE
PRODUCT THEORY
• Marginal revenue product (MRP) is
determined by a worker’s
contribution to a firm’s total revenue.
• In perfect competition:
MRP = P x MP
 P = price of the product
 MP = worker’s marginal product (MP).
8

9. DEMAND FOR LABOUR
~ The demand curve for labor is the
curve showing the quantities of labor a
firm is willing to hire at different prices
of labor.
~ The marginal revenue product (MRP)
of labor curve is the firm’s demand curve
for labor.
~ Summing individual demand for labor
curves gives the market demand curve
for labor.
9

10. $350 Demand Curve for Labor
$280 M
RP
$210 =d
em
$140 an
d
$70
1 2 3 4 5Q
10

11. SHIFTS OF MRP/DEMAND CURVE
FOR LABOUR
-Derived demand means that a firm
demands labour because labour is
productive. Changes in consumer
demand for a product cause changes in
demand for labour and for other
resources used to make the product.
-MRP = P x MP (changes in the product
price and labour productivity will shift
MRP
11

12. Other factors that can shift MRP/
DEMAND CURVE for labour
•Unions
•Prices of substitute goods
•Demand for final products
•Marginal product of labor
12

13. SUPPLY OF LABOUR
-The supply curve of labour is the curve
showing the quantities of workers willing to
work at different prices of labour (wage rates).
-In a perfect competitive labour market,
supply curve of labour is given by the market
wage rate (marginal factor cost, MFC)
-The market supply curve of labor is derived
by adding the individual supply curves of
labor.
13

14. $350 Market Supply Curve of Labor
Wage Rate per day
$280
S
$210
$140
$70 D
Quantity of Labor
10 20 30 40 50
14

15. Factors can cause a
change in the Supply for
Labor
• Unions
• Demographic trends
• Expectations of future income
• Changes in immigrations laws
• Education and training
15

16. MARGINAL REVENUE PRODUCT
THEORY
• A firm will employ workers up to a
point where MRP=MFC.
• If wage rate is $140, the firm will
employ 3 workers (refer next slide).
16

17. $350 Equilibrium of a PC firm
$280
$210
MFC
$140
M
RP
$70
1 2 3 4 5Q
17

18. EARNINGS DIFFERENCES
-Human capital – the accumulated
wealth people make in education,
training, experience, and health in order
to make themselves more productive.
-Collective bargaining – the process
through which a union and
management negotiate a labour
contract.
-Monopsony - a labor market in which
a single firm hires labor. 18

19. MONOPSONY
• Monopsony is a labor market in which a single
firm hires labour. E.g. mining company, single
textile mill, schools
• Because the monopsonist faces the industry
supply curve of labor and each worker is paid the
same wage, changes in total wage cost exceed
the wage rate necessary to hire each additional
worker. As a result, the marginal factor cost
(MFC) of labor curve (MWC) lies above the
supply curve of labor.
19

20. Monopsonist exploits workers
• The monopsonist’s wage rate and
quantity of labor are determined where the
MFC equals MRP .
• However, since a monopsonist must raise
the wage rate to hire additional workers,
MFC>W
• As a result, the worker’s MRP is greater
than the wage paid  the monopsonist
exploits the workers (pays lower W, hires
fewer workers) 20

21. A Monopsonist determines its Wage Rate
MFC
S
Dollars per hour
$4
- Monopsony hires 2
$3 workers and pays $2
- PC hires 3 workers
$2 and pays $2.70
$1
D (MRP)
1 2 3 4
Quantity of Labor 21