Microeconomics

The input market

Institute of Economic Theories - University of Miskolc

Mónika Kis-OrloczkiAssistant lecturer

Definitions• Input=resources/factors of production: Goods

or services that are used by the companies to produce certain products.

• Factors of production: A, L, K, E

• According to their origin can be:– Primary resources: don’t evolve from economical

reasons but they can be used in the economy (L, A)

– Secondary resources: evolve from economical reasons (K, E)

• In the output market (market of products) the consumer=demand, the companies=supply

• In the input market the company=demand for the resources of the housholds (labour) and pays for it (wages)

Products and services

SD

S D

K, L, A, E

Demand of the resources

• The demand of the resources depends on the quantity of the output of the company.

• Derivative demand: the company seeks for inputs to fulfill the consumers’ requirements in the output market to make his own profit in short run, but to ensure at least the normal profit in long run.

Optimal input employment

• Output market

• It is worth increasing the production until the cost of the increase in the output reaches the revenue of the subsequent output: MC=MR

• Input market

• Worth increasing the employed quantity of inputs until the cost of the subsequent input reaches the revenue of the subsequent input: MFC=MRP first criteria of the optimal input allocation-general condition

• Marginal Factorial Cost (MFC): shows the changes in the total cost if the amount of an input is changing by one unit.

• Marginal Revenue Product (MRP): shows the changes in the company’s total revenue if the amount of an input is changing by one unit.

• Value Marginal Product (VMPL): shows the market value of a variable input’s (Labour) marginal product.

Optimal input allocation in competitive market (both output and input

market)• In competitive market: MR=P

• How many inputs the company will use? Quantity at which the price of the input equals with the value marginal product of the input PL=VMPL

• The price of one subsequent input increases the total cost by the price of the input PL=MFCL

• Selling an extra product increases the revenue by the price of the product: MR=P MRP=MPL*MR=MPL*Px

PL=MFCL=MRPL=VMPL

Individual input demand curve

• Shows the connection between the price and the demanded quantity of the input.

• The optimal input employment is where the input price equals with the VMPAs P is constant the MPL determines the shape of the curve

• MRPL=VMPL shows the demand of a profit-maximising company for the input at different input prices PL= MRPL=VMPL is the inverse demand curve of the input

• Defined only in the decreasing part of the curve

MPL

L

APL

MRP=VMP

PL

L

Demand of the monopoly in a competitive labour

market• Output market: monopoly, input market: competitive

• Profit max: MFC=MRP• In the INPUT market competitive, so price-taker the

increase in the input increases the costs by the price of the input PL=MFCL, the labour supply is constant

• In the OUTPUT market monopoly, MR<PMRP<VMP

• Input demand curve: DV=MRPL

• PL=MRPL<VMPL exploitation of monopoly

PL=MFCL=MRPL<VMPL

P

q0

MR D

Q

Output market

SVPL

L*

Input market

VMPL

MRPL=DV

Exploitation of the monopoly

Monopsony• One buyer and many sellers input market: monopoly,

output market: competitive

• In the OUTPUT market: MR=P MRPL=VMPL

• Profit max: MFCL=MRPL

• In the INPUT market: monopolycan inluence the P SL input supply increasing curve

• A monopsony has no input demand curve as there is no clear connection between the input price and the demanded quantity

PL<MFCL=MRPL=VMPL

OUTPUT MARKETIN

PU

T M

AR

KE

T

Competitive MonopolyC

ompe

titiv

eM

onop

oly

MONOPOLY

MONOPSONY

PL=MFCL=MRPL=VMPL PL=MFCL=MRPL<VMPL

PL<MFCL=MRPL=VMPL PL<MFCL=MRPL<VMPL

The personal labour supply

• Labour market: the owner of the labour is the seller and the company is the buyer

• The personal labour supply depends on: – The income needs to get consumption goods (income constraint)

– The needs of leisure time

• Who is not working: 24 hours leisure time

• Employee: Leisure is decreased by the working hours working hour is the sacrificed leisure and the wage: which is the labour price, is the price of sacrificed leisure time.

Factors of living quality

• Individual labour supply curve shows the willingness of the owner of the labour to work at different wages

• The higher wage means the more precious of leisure time.

• Doesn’t start from origo as there is a minimum wage for which is worth sacrificing the leisure time

• Exists a level a wages (high) where the leisure becomes more prescious and that’s why the labour supply decreases the labour supply curve is bending back

• Market labour supply: horizontal sum of the individual supplies, the more people willing to sell there labour, the flatter the market supply curve is.

• In case of perfect competition in long run, the labour supply is linear, evolves a wage level at which the company can find any numer of people who is willing to work