E. Market for Factor Inputs

1.  Competitive factor markets

a.  Demand for inputs

• Derived demand - demand for input depends on the demand for the output produced by inputs

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(1)  One variable input

• Suppose only labor can be varied

• Marginal revenue product (MRP) -

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(a)  Perfectly competitive vs. monopoly output markets

• In monopoly output markets, P > MR

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(b)  Equilibrium for a firm

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(2)  More than one variable input

• Suppose both labor and capital can be changed

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(3)  Market demand curve

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b. Supply of inputs

(1)  Firm's supply of an input

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(2)  Expenditures on inputs

• Average expenditure (AE) - average expenditure per unit of the input

• Marginal expenditure (ME) - change in expenditures due to a one-unit change in an input

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(3)  Supply of labor

(a)  Consumer choice

• Tradeoff between labor and leisure

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(b)  Supply curve of labor

• May be backward bending

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c.  Equilibrium

(a)  Firm's equilibrium

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(b)  Comparison with perfect competition

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(c)  Market equilibrium and economic rent

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• Land rent

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2.  Monopsony power

• Monopsony - one buyer

• Oligopsony - few buyers

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a.  Monopsony and expenditures on inputs

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b.  Market impact of monopsony power

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c.  Monopsony vs. monopoly

• Monopsony - one buyer

• Monopoly - one seller

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d.  Sources of monopsony power

(1)  Elasticity of market supply

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(2)  Number of buyers

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(3)  Interaction among buyers

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e.  Social cost of monopsony

• Surplus affected

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f.  Monopsony and the minimum wage

• Suppose minimum wage imposed on a monopsony

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3.  Markets with monopoly power

a.  Monopoly power over the wage

• Labor union - one seller of labor

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b.  Unionized and nonunionized workers

• Higher wages for unionized workers affect nonunionized workers

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c.  Bilateral monopoly

• Monopoly on one side, monopsony on the other

• Power tends to cancel out