Contents žfeatures of input market žrevenue and cost functions – profit maximizing conditions žperfect competition labour market ždemand for labour – perfect competition labour market + perfect competition output market ždemand for labour – perfect competition labour market + imperfect competition output market žminimal wage žeconomic rent Input market features žoutput market: supply side=firms, demand side=households žinput market: supply side=households, demand side=firms ždemand for inputs = demand, derived from the demand for output pfoduced with the specific inputs Revenue functions of input market žMRP = Marginal Revenue Product = revenue of the additional unit of the specific input, or... žMRP = how the firm´s total revenues change if the firm recruits the additional unit of input žMRPK = δTR/δK = (δTR/δQ).(δQ/δK) = MR . MPK žMRPL = δTR/δL = (δTR/δQ).(δQ/δL) = MR . MPL žARP = Average Revenue Product = revenue to the unit of the specific input žARPK = TR/K = (P.Q)/K = P.(Q/K) = P . APK žARPL = TR/L = (P.Q)/L = P.(Q/L) = P . APL Revenue functions of input market žMRP and ARP functions depend on the type of competition of output market Generally – MRP and ARP functions „copy“ the development of MP and AP functions MRPL ARPL L ARPL MRPL Perfect competition output market: MR=AR=P=const. MRPL ARPL L ARPL MRPL Imperfect competition output market: MR, AR and P decrease with increasing output → MRPL and ARPL functions steeper Cost functions of input market žMFC = Marginal Factor Costs = costs on additional unit of input, or... ž...how the total costs change if the firm recruits an additional unit of input žMFCK = δTC/δK MFCL = δTC/δL žAFC = Average Factor Costs = costs per unit of input žAFCK = TC/K = r.K/K = r žAFCL = TC/L = w.L/L = w žMFC and AFC development depends on the type of input market Cost functions of input market MFCL= AFCL=w L AFCL MFCL L AFCL MFCL MFCL AFCL=w Perfect competition labour market Imperfect competition labour market Optimal volume of inputs ž...is that which maximizes the firm´s economic profit žTR(K,L) – TC(K,L) = π(K,L) max. žNecessary condition of profit maximizing: žδπ/δK = δTR/δK – δTC/δK = 0 → ž δTR/δK = δTC/δK → MRPK = MFCK žδπ/δL = δTR/δL – δTC/δL = 0 → ž δTR/δL = δTC/δL → MRPL = MFCL Perfect competition labour market demand žPERFECT COMPETITION LM: žmany firms demanding the labour force žwage rate giwen by the labour market (intersection of demand and supply) žindividual labour supply (willingness to work for the specific firm) is horizontal at the level of the market equilibrium wage rate žMFCL=AFCL=w=sL Demand for labour žLabour market: perfect competition žOutput market: perfect competition Perfect competition labour market žMFCL=w=AFCL=sL MFCL= AFCL=w=sL L CZK/L L SL w DL Firm Labour market L* w* Perfect competition demand for labour in short run žmodified golden rule of profit maximizing: žMRPL=MFCL or MR.MPL=MFCL or MRPL=w MRPL ARPL L MFCL= AFCL=w=sL1 MFCL= AFCL=w=sL2 MFCL= AFCL=w=sL3 MFCL= AFCL=w=sL4 red spots: golden rule fulfilled, but only on negative sloped part of MRPL firm maximizes its profit (otherwise max. loss) CZK/L but not all of the red spots lie on the demand for labour Perfect competition demand for labour in short run žFirm must cover its VC in short run: žTR ≥ VC žTR = ARPL.L žVC = w.L žARPL.L ≥ w.L žARPL ≥ w ž ž ž žFirm´s demand for labour: negative sloped part of MRPL limitted with the maximum of ARPL Perfect competition demand for labour in short run MRPL ARPL L CZK/L short run shut down point If the wage rate increases above the maximum of ARPL , firm would shut down, because it would not cover its VC DL Perfect competition demand for labour in long run žin LR the firm is able to change the volume of labour and capital žif „w“ changes, firm changes either the volume labour either the volume of capital žchange of volum of capital influences the MPL function and MRPL either žchange of „w“ → substitution effect, production effect, total effect Perfect competition demand for labour in long run L K Q1 Q2 SE PE A TE B C SE: firm substitutes capital for labour, shift from A to B, pressure on the MPL decrease PE: firm is motivated to increase the volume of capital and labour either, shift from B to C, pressure on the MPL increase TE: firm´s MPL increases w decreases Perfect competition demand for labour in long run MRPL1 L w DL(LR) MFCL= AFCL=w=sL1 w1 E1 TE of w decrease: increase of MPL and MRPL and short run DL w2 MFCL= AFCL=w=sL2 E2 Set of equilibria upon different levels of „w“ (different levels of MRPL) we acquire the long run demand for labour L1 L2 MRPL2 Market demand for labour L w w1 w2 L1 L2 DL = ∑dL ž... a horizontal sum of individual demands for labour: ž Demand for labour žLabour market: perfect competition žOutput market: imperfect competition MRPL ARPL L ARPL MRPL MRPL ARPL L ARPL MRPL Perfect competition demand for labour in short run DL DL Firm on perfect competition output market Firm on imperfect competition output market Perfect competition demand for labour in long run žBesides SE and PE also „revenue effect“ (RE) žDecrease of „w“ leads to the decrease of MC – the firm rearranges its equilibirum → lower MR žif w decreases: SE → MRPL ↓ (due to ↓MPL) ž PE → MRPL ↑ (due to ↑MPL) ž RE → MRPL ↓ (due to ↓MR) žMRPL shifts up but not as much as in the case of perfect competition firm on the output market Perfect competition demand for labour in long run MRPL1 L w DL(LR) MFCL= AFCL=w=sL1 w1 E1 w2 MFCL= AFCL=w=sL2 E2 L1 L2 MRPL2 Red line – LR demand for labour of firm (perfect+imperfect) Yellow broken line – LR demand for labour of firm (perfect+perfect) Minimal wage ž= wage regulation of the labour market žGoals: žto grant a minimal income for specific workers → instrument of social policy žto rise the motivation to look for jobs žto rise the employment Impacts of minimal wage L SL w DL Labour market L* w* wmin1 wmin1 – minimal wage below the equilibrium wage – LM will not be affected wmin2 wmin2 – minimal wage above the equilibrium wate – existence of unvoluntary unemployment involuntary UNE Impacts of minimal wage žif minimal wage below the equilibrium, then no impact on the labour market (market clearing wage is higher) žif minimal wage below the equilibrium, then it causes the unvoluntary unemployment ž ž ž ž ž ž MINIMAL WAGE ON THE PERFECT COMPETITION LABOUR MARKET DOES NOT MAKE ANY SCENCE Minimal wage in the CR Source: http://www.finance.cz/home/hospodarstvi/prace/mzda/ Minimal wage in the CR Source: http://www.mesec.cz/clanky/minimalni-mzda-roste-vzroste-nezamestnanost Economic rent žEconomic rent = total revenue of input minus transfer wage žtotal revenue of input – sum of all really paid wages on the labour market žtransfer wage – minimal level of wage that represents the willingnes of the labour force to work žEconomic rent = difference between the really paid wages and minimal levels of wage, the labour force is willing to work Economic rent on the labour market L w DL L* w* SL sum of really paid wages in the market aquilibrium transfer wage economic rent The less elastic supply, the higher economic rent