1. Markets for
factor of
production
Microeconomic Foundation
Alaleh Mani
2011

2. Factors of production and it’s
price
1. Labor  wage
2. Land  rental rate
3. Capital  interest rate
4. Entrepreneurship  normal profit

3. Demand and Supply in factor
of production Market
Exceptional
Income ≈ Demand
elasticity
erived Demand

4. Marginal Revenue Product
 Change in Revenue ,MR, hiring one more
labor. MP*MR=MPR
Every Labor
 Every employed labor produce a MP make MPR
revenue
 Every Product has a MR
 (reading 17- output and cost)

5. MRP is diminishing
Competition Market:
MR=d=p= Cte
MP diminishing
MP*MR=MRP diminishing
MP
Rest Market Structure:
MR diminishing
MP diminishing
MP*MR=MRP diminishing

6. Labor Individual Demand
Curve=MRP
 MPR=Demand??
Firm wants to maximize its profit
MRP/MP=wage rate/MPMRP=wage rate=d
MR=MC in firm:
MC=Wage rate/q(MP)
MR*MP=MRP
MR=MRP/MP

7. Change in individual Demand
of labor(cfa 2007)
 1. Price of output
∆P  ∆ MR  ∆ MRP  ∆ D (increase in short run, decrease in long
run)
 2.Price of other factors (long run effect)
∆P of Factor of production that substitute(+) or complement (-)the
labor force  ∆ D
 3.Technology and Capital that substitute(+) or complement (-)the
labor force (long run effect)
Technology and capital ∆ MP  ∆ MRP  ∆ D

8. Market Demand of Labor
 Summation of individual derived demand
curve would depict market demand
which is still derived from production
demand

9. Elasticity of Demand for labor
depends on:
 Responsiveness of labor demand to wage rate change reflect
the labor income changes when supply change:
1.Labor Intensity: labor intensive production is
a one that use a lot of labor and a little capital
which has a elastic demand for labor
If wages ↑  firm cost ↑  decrease the labor
2.Elasticity of demand for good produced:
If production demand is elastic  labor demand would be
elastic
If wages ↑  MC ↑ Supply ↓ P ↑ demand of goods↓↓
(elastic)labor demand↓↓ decrease the labor
3.Substituability of capital for Market (long run)
Exp : robot is a good substitute for worker(elastic) but not for
news reporter, teacher, bank officer (inelastic

10. Supply of Labor
Leisure
 People time Labor supply
 Reservation wage= Minimum wage people
are willing to work at
If wage > reservation wage  labor supply >
leisure

11. Quantity of labor supply
depend on:
1.Substitution effect
wage rate= opportunity cost of leisure
If wage↑cost of leisure↑work substitute leisure 
labor supply ↑
2.Income Effect
If wage↑ income ↑ demand for leisure↑ labor
supply ↓
3.Backward bending of supply curve:
at low wage rate substitute works
at higher wage rate income effect works

12. Backward Bending Supply
curve
Reservation wage

13. Change in supply and
demand
 Population growth lead to labor supply rise
 Technology and capital create more job than
destroy and save time for household to supply
labor more on average
Pace of labor supply < Pace of labor demand 
Exceptions about skilled worker:
1.Demand for their services decrease
2.The production of low skilled worker are sold in
competition market and make low revenue for
firms that lead them to demand for low skilled
labor less.

14. Labor unions
A group of worker who have been
organized to increase the wages and
make the job condition better
Crafts : Smallest Union, Same skill worker in different indus
 Union
Industrial: Largest Union, different skill worker in same indu

15. Union Terms
 Collective Bargaining: a process of
negotiation between employee and worker
 Strike: worker weapon to refuse prevailing
condition
 Lockout: Employer main weapon to employ
 Binding Arbitrage: a third part or arbitrator
makes the last decision

16. Union’s Objectives and
Constrain
Increase compensation
 Objectives
Improve condition
 Constrain Expand Job opportunity
Supply Side: nonunion and union members can not be recogn
Demand Side: firms decrease labors after wage r

17. Union activity in Labor Market
Restrict Supply of union member (U
 Increase the wage rate Stimulate the demand
Inelastic supply of limited labor force
Decrease job available

18. Union control the demand
 1. make it less elastic less effective
 2. increase the demand for unionized labor:
 Increase the marginal product of UM:
 OTJ training( apprenticeship)
 Import restriction:
 Lobby to restrict
 Encourage people to buy local goods
 Support minimum wage law
 Substitute high skilled worker for low skilled
 Immigration restriction
 Decrease foreign supply
 Increase demand for local good
 Demand for labor derived from demand for goods

19. Monopsony in Labor Market
A Market with single buyer;
 Only one employer exist to hire at lowest
wage rate
Monopsony control
the wage  MCL>S =MCL
minimum wage a labor willing to wo
= ATC of labor
The more elastic the supply the less wage
Equilibrium wage=
=Demand

20. Bilateral Monopoly
 If
Union act like Monopoly and There is
monopsony in labor Market, bilateral
monopoly occur.
Strike
Monopoly union wage
Bargaining
Monopsony
Lockout wage

21. Monopsony and minimum
wage
 (reading 15 market in action):
 Reminding: every minimum wage above
equilibrium increase unemployment but
here min wage increase employement
Minimum wage
Monopoly wag

22. Wages
 Equilibrium wage
 Monopsony wage
 Minimum wage
 Efficiency wage : a wage above
equilibrium to attract productive worker
and make shirker to work harder not to
lose this good payment job

23. Capital Market
 Goods have value named price
 Capital has value named Investment that come from
saving
 Physical capital is stock of (an object that is deplete
or replenish):
 tools
 Instrument
 Machines
 Buildings
 Inventory:
1. Raw material
2. Semi finished material
3. finished material
 To buy physical capital (investment),firms need
financial resources (financial capital)which gained
through capital Market.

24. Price of capital
Quantity of Financial Capital

25. Demand for Capital
 People compare present expenditure
with future income
 firms borrow financial capital  pay interest buy physical
capital  produce MRPC
•Marginal revenue Product of
capital(future)=expenditure on capital (present)
Firm maximize •Interest rate≈1/ borrowing and investment
its profit
•Firm decide to borrow money in given time
Planned •Firm decide to buy physical capital (investment)
Investment

26. Supply of Capital
 It derives from people decision on saving that
affected from:
1. Income: influence on current(spend) and
future(save) consumption
2. Expected future Income :
if future income >current income  people save
less spend more exp: young people
if future income<current income  people save
more spend less exp: old people
3. Interest rate : the bigger the interest rate the
more the opportunity cost of spending the
more the interest of saving

27. Fluctuation in interest rate
 Population and technology increase the
demand and supply of capital not
equally but continually.
 As the effect timing of population growth
and technology on demand and supply is
different the interest rate fluctuate over
time but amount of capital always grow

28. Natural resource Market INDIRECT
 Nonrenewable natural resource supply: INFLUENCE
Gas, coal, oil, hydrocarbon fuels ON PRICE
1. Stock : Quantity existence in given time.
2. KNOWN STOCK : AMOUNT OF DISCOVERED RESOURCES
3. FLOW SUPPLY: AMOUNT OF RESOURCE SUPPLIED USE FOR
PRODUCTION =Perfectly elastic  Direct Influence
on Price
Exp: Saudi Arabia choose to sell or keep the inventory of oil:
P≤E(p)/(1+r) Saudi Arabia sells oil
otherwise keeps it
 Renewable(replenished by nature) natural resource supply:
Rain, river, lakes, wind, sunshine, land

29. Price and hotelling principal
 Hotteling principal: Nonrenewable natural
resource Price rise at the rate of interest rate
 Actual price=PV(E(Pf))
 The reason why actual price does not follow
the hotteling principal is :
Unexpected change of technology that leads
to discover more of resources .or use
resources more efficient price falls
continually

30. Economic
rent, tax, opportunity cost
 Economic rent=producer surplus for factor
of production
If s=inelastic all income=Economic rent=tax burden by suppl
Like land that have not other opportunity cost
wage
Producer surplus
If s=elastic all income=opportunity cost=tax burden by
Like low skilled worker that have not rent
Quantity of factor of production