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There are two types of input markets: Primary input markets include resources that have not been processed by other firms, such as land, oil and labour. Intermediate input markets are the processed output from other firms, such as iron ingots, hog bellies and rolled steel.
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2005 Pearson Education Canada Inc.
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Large Numbers-There are a large number of input demanders/suppliers and no individual buys (sells) a significant portion of total quantity traded. Perfect Information-Demanders/suppliers have perfect knowledge of prices and all firms have perfect information of production functions. Input Homogeneity-In any input market, all units of the input are identical. Perfect Mobility of Resources-All inputs are perfectly mobile.
2005 Pearson Education Canada Inc.
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Renewable resources, such as land, can be used over and over again. Non-Renewable resources, like oil, once used it is gone. In the analysis that follows, it is assumed that the supply of non-labour inputs is perfectly price-elastic.
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An individual faces two constraints: The time constraint says that total time available (T) equals work time (h) plus leisure time (x1): h+x1=T The income constraint says that a persons income (x2) is the sum of work income (wage x h) and non-work income (A): X2=wh+A
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2005 Pearson Education Canada Inc.
leisure income constraint: wx1+x2=A+wT The wage (w) is the price of leisure and the slope of the budget constraint. A+wT is full (all work) income. The utility maximizing bundle of leisure/labour is where the indifference curve is tangent to the leisure-income constraint in Figure 11.1
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2005 Pearson Education Canada Inc.
Figure 11.1 The demand for leisure and the supply of labour
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Figure 11.4 (a & b) The demand for leisure and the supply of labour
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short-run demand function relates to a scenario where only one input is variable.
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any wage less than the maximum value of the average product, the firms demand function is the downward sloping portion of the marginal product curve. For any wage rate greater than the maximum value of the average product, the firm maximizes profits by hiring no labour.
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2005 Pearson Education Canada Inc.
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Revenue Product is the marginal product from an addition unit of labour times the marginal revenue when the additional output is sold: MRP(z)=MR(y)MP(z) Similarly, average revenue product equals the price of the output times average product of the variable input: ARP(z)=pAP(z)
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2005 Pearson Education Canada Inc.
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2005 Pearson Education Canada Inc.
value of the marginal product (MRP) of the variable input (VMPz) is output price time marginal product: VMPz=pMP(z). For a perfect competitor VMP =MRP (since p=MR). For a monopolisy MRP<VMP since MR<P.
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the long-run all inputs are variable. In the long run, the firms response to an input-price change will via both the substitution effect and the output effect, produce a downward sloping input demand curve
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response to an input price change in both the short and long run is to demand more (less) of an input as its price fall (rises). The response to a input price change is greater in the long run than in the short run.
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2005 Pearson Education Canada Inc.
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monopsonist has significant control over what it pays for an input. The relationship between input price (w) and quantity of the input (z) is determined by the market supply function for the input: w=S(w).
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monopsonist buys all units of an input at the same price (average factor cost or AFC). Total factor cost (TFC) is quantity (z) times AFC or price S(z): TFC(z)=zS(z)
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marginal factor cost (MFC) is the rate at which TFC changes as the quantity of output (z) changes. When a monopsonist buys a positive quantity of the input, the MFC exceeds price (w) or average factor cost. The MFC=w+z(slope of supply curve):
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general profit-maximizing rule in an input market is to buy an input up to the point where marginal factor cost is equal to marginal revenue product. For a competitive input market: MRP(z*)=MFC(z*)=w* For a monopsonist: MRP(z*)=MFC(z*)>w*
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2005 Pearson Education Canada Inc.
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2005 Pearson Education Canada Inc.
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capital-investments in education and training. Human capital production function: R=F(H) Which says additional income (return on human capital investment) (R), is a diminishing function of the quantity of human capital (H).
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2005 Pearson Education Canada Inc.
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in an additional dollar of human capital if the marginal product (MP) exceeds the rate at which current foregone consumption can generate future consumption (1+i). To maximize the present value of net income, invest in human capital up to the point where MP=(1+i).
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2005 Pearson Education Canada Inc.
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