511
13
Factor Markets 13
13.1 Demand in a Perfectly Competitive Factor Market
13.2 Supply in a Perfectly Competitive Factor Market
13.3 Labor Market Equilibrium
13.4 The Labor Market in the Long Run
13.5 Other Perfectly Competitive Factor Markets
13.6 Imperfectly Competitive Factor Markets: Monopsony, a Monopoly in Factor Demand
13.7 Imperfectly Competitive Factor Markets: Monopoly in Factor Supply
13.8 Bilateral Monopoly
13.9 Conclusion
In Chapter 6, we saw how firms like Samsung choose the mix of labor and capital inputs they use to produce their desired output. We know that, given the prices of labor and capital and its production function, a firm minimizes its production costs by hiring the input mix that equates the marginal rate of technical substitution to the input price ratio.
But what variables determine those input prices in the first place?
factor markets
Markets for inputs—
This chapter answers this and related questions by examining the markets for inputs (such as labor, intermediate goods, and land) that are used to produce outputs. (We learn about the capital market in Chapter 14.) Because inputs are also called factors of production, the markets for them are called factor markets.
In many ways, factor markets are like all the other product markets we’ve studied so far. There is demand. There is supply. And there is an equilibrium price that equates the quantity demanded and quantity supplied. But the “product” in the factor market isn’t an output anymore; it is an input (such as employees or a piece of leather) used to produce an output (such as headphones or shoes). The prices that matter are now the wage rate in the case of labor and the prices of material, service, energy, and land inputs. Although these similarities mean factor markets work in the same basic way as product markets, the stories behind the demand and supply curves are a bit different. (Even so, we’ll see in these stories some connections to the markets we’ve already studied.)
We begin by analyzing perfectly competitive factor markets. As with the perfectly competitive output markets we studied in Chapter 8, all market participants are price takers who are so small relative to the entire market that their choices of how much of a factor to supply or demand will not change the market price. Thus, market participants behave as if that price is fixed. Even though all or even most factor markets do not exactly fit this assumption, the perfectly competitive case is a useful benchmark against which to compare actual market outcomes.