Equilibrium in a Market for Inputs

Labour market

The price of labor is the wage(w), and the quantity demanded is the number of labor-hours employed(L). The demand for labor is the MRP, the price of output times the marginal productivity of labor in units of output. As usual, the equilibrium price (wage) and the equilibrium quantity demanded and supplied (employment) are at the point where the supply and demand curve intersect.

Figure 3: Supply and Demand for Labor

Land market

Land is not a homogenous resource, and that important complication cannot be skipped over. It is the basis of the theory of rent(land is more fertile than other kinds of land, or more profitable because it is closer to markets; and some land is more suitable to one kind of crop than another). These differences in fertility will be reflected in the marginal productivities and therefore in the demands for the different kinds of land.

: Marginal Productivity of Land with Different FertilitiesThe demand for good land is pMPA, for fair land pMPB, and for bad land pMPC. Supply of land of a particular quality is always a vertical line, because "they're not making any more of it" – the supply of land cannot be increased no matter how high the price. Since there are 10,000 acr. of each sort of land, three kinds of land have identical supply curves,all shown by the vertical line S.

In a supply-and-demand equilibrium, then, the rent per acre of good land will be R_A. For fair land it will be R_B, and for bad land zero.

Thus, the rent on fair land is just enough to offset its greater productivity relative to the marginal land. Similarly, the rent on good land is just enough to offset its productivity advantage over marginal land.The difference in rent between the good and fair land is just enough to offset the productivity differential between them. This is called the "differential" theory of rent – that the rent of any land is just large enough to offset its differential productivity relative to marginal land. To stress the basis of land rent, it is often called differential rent.

Capital market

As we increase the number of machines in use, with the same amount of land and labor, output will increase, but at a decreasing rate. Capital is subject to diminishing returns. Once again, we will focus on the "marginal productivity" of the machines. On the other hand, the costs of using the machinery will also increase as the number of machines increases. We assume that the firm uses a given quantity of labor and land and that the quantity of capital used varies. The quantity of capital used (measured in dollars' worth) is marked off on the horizontal axis. On the vertical axis is the rate of interest, which we understand as the price of capital.

The horizontal red line is the supply curve of capital to the firm, green-demand for capital, that is, the marginal productivity of capital (net of the cost of wear and tear of specific capital goods) times the price of the output – the value of the marginal product of capital. The profit-maximizing demand for capital for the firm is shown by K. That is, it will be profitable to expand the capital stock of the company until diminishing returns reduces the value of the marginal product to r, the market rate of interest, at K.

65. Labor market: labor demand and supply of labor.

The labour market is an example of a factor market

Supply of labour – those people seeking employment (employees)

Demand for labour – from employers

· A ‘Derived Demand’ – not wanted for its own sake but for what it can contribute to production

· Demand for labour related to productivity of labour and the level of demand for the product

· Elasticity of demand for labour related to the elasticity of demand for the product

The Supply of Labour

The amount of people offering their labour at different wage rates.

· Involves an opportunity cost – work v. leisure

· Wage rate must be sufficient to overcome the opportunity costof leisure

The supply and demand for labor is much like the supply and demand for any other service. Consistent with the law of supply and demand (as price rises, quantity demanded falls and quantity supplied rises), the demand curve has a negative slope and the supply curve has a positive slope.

The supply of labor, like the supply for other services, merely indicates how much labor workers are willing to offer at various prices. The supply curve for each worker will be different as each worker has different opportunity costs and preferences.

The demand for labor indicates how much labor a firm desires at different prices. The demand curve for each firm will differ as each firm faces different labor substitutes (differing rates of potential capital substitution, for instance), preferences, demand curves for the products they produce, and alternative employments for their resources.

Wage rates are simply the price of labor and as such, are determined like all other prices on the market. The intersection of the supply and demand curves for labor indicates the equilibrium, or market clearing, wage rate for certain types of labor. (In a free economy, unhampered by government regulation, wage rates for the same type of labor tend to equalize across markets).

Date: 2016-03-03; view: 984