501 Market for Factors

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Wow, the chapter on market structures was a challenging but intriguing one, wasn’t it? I hope you had fun! And I’m guessing that you’re probably feeling a little impatient to start MACROECONOMICS and I guarantee you it’ll be a very interesting field of study. You will start to understand how the financial works and also, what is going in the minds of those government people. 🙂

Before that, we’re left with just a little bit more of microeconomics so hang in there!

The market for factors chapter focuses mainly on labour economics, of course it’s a very small scope of it but nevertheless, it still gives us a very good understand on how individuals decide their working hours as well as how firms hire.

Remember MR=MC? That’s our profit maximizing output right? There is also a COST MINIMIZING INPUT level when we talk about a firm hiring labour and buying capital stock. It’s MRPL=w. Now, do not be worried! Let’s go through that slowly.

MRPL is the Marginal Revenue of Product results from adding 1 unit of labour. Yeap, read that sentence a few more times. Let’s translate that into english, how much money will the firm make out of 1 product that is value-added by 1 unit of labour.

w is my real wage. Remember real income, I/Px? That’s the same thing. Now we’re taking nominal wage, W, and divide it by price level, P. It shows our purchasing power of our wages.

So similar to MR, we have MRPL, and similar to MC, we have w. w is similar to MC because adding one more unit of labour (marginal) is simply the additional wage we have to pay. Therefore, the firm will hire and minimize cost at MRPL=w. See! Easy right? You just understood the demand for labour by firms!

What about the supply of labour? Do you believe that your wage level will determine how many labour hours you are willing to put in? You gotta believe it, it’s empirically proven.

So how does this work? Remember chapter 2? I know most of us don’t really like that chapter but, not to worry. After viewing quickienomics, I’m sure you will all be experts in that. Deciding how much labour hours we put in is determined just like how we determine consumption of x & y in chapter 2!

Now, instead of x & y, we have Leisure Hours on the X-axis and All other goods(x) on the Y-Axis. Yea, I know it’s weird labelling the Y-axis X but that’s the way it is. So from there, our substitution effect and income effect will tell us a lot about an individuals decision on his working hours.

Damn, this is a pretty long post, isn’t it? I’m just left with one more thing and this is important. Visualize this:

Assume that you are a very, very forward thinking person and you have concluded that you must have exactly 2 million dollars to live your life till you die; no more, no less. Now, I’m gonna offer you a hell of a good deal: a job that pays 0.5 million dollars an hour!!! How many hours are you going to work?

I hope you said 4 hours because that would give you exactly what you need: 2 million dollars to live your life.

Now, I’m gonna promote you and pay you 1 million dollars an hour instead!! WOW 2 times salary increment! How many hours are you gonna work now???

This time, I hope you answered 2 hours. 2 hours x 1 million = 2 million dollars. Isn’t it weird that you’re working lesser hours despite earning a higher wage?

That’s some food for though regarding the backward bending supply curve.

At the end of this video, you should be able to:

  • Derive the demand for labour by firms
  • Understand why MPRL=w & MPRK=r is cost minimizing
  • Derive the supply of labour
  • Explain the backward bending supply curve

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9 Comments

  1. Kim says:

    Good Video… I really enjoy learning from you. Will you be posting more TUTORIALS online? I see the tutorial section stops at chapter 4.

    Many thanks for all your efforts in producing such a wonderful learning experience for economic candidates.

    Tonnes of respect and admiration for your website!

    • Quickienomics says:

      Hi Kim!

      Thank you very much for the sweet words. I’m glad you enjoy using my material. 🙂

      Regarding the tutorials, I have been putting that on hold due to commitments to the workshop as well as my own academics. I will be doing more tutorials once I get the time. 🙂

      Cheers

  2. Romona says:

    Great video again.. question though regarding the graphs at the end – first -what exactly is L bar? is it the number of hours awake or the total number of hours in the day? I thought it was 24 hours…. if it is, then how would you draw the budget line for travel cost? is it a parallel shift down or would it be a move in for travel time then a pivot inwards? what about a travel subsidy? (also trying to understand if there is a difference in the graphs for traveling time and for travel cost/subsidy – looked like you have them as the same?)

    Thanks!
    Romona

    • Quickienomics says:

      Hello Romona! Nice to hear from you again. 🙂

      L Bar is the number of hours for LEISURE and WORK. It excludes sleep and travel time. 🙂 It will be more useful if we analyze what the individual does when he’s awake as compared to what he does when he sleeps. We won’t wanna analyze dreams. lol!

      If there is some travel cost involved, it would be a rotation with L bar as the pivoting point. The vertical intercept will now be lower because his real income decreases due to travel expenses. For a travel subsidy, it’s the other way round.

      For travelling time, it would be a shift of the curve to the left. This makes L bar smaller, which makes sense since he has lesser time to work. That leads to the vertical intercept being lower too because he now has lesser income to spend.

      So that’s the difference between the travel cost and time. 🙂 Hope that helps Romona! Look forward to chatting with you soon!

  3. Romona says:

    Thanks Gerald, and sorry for all the questions… but with traveling time, I understand the shift to the left on the Le axis, but won’t wages be the same if he took this time from his leisure time instead of work time? so shouldn’t the curve pivot on w? If it is that he has to take time and pay costs then it would be a sort of a parallel shift as you described above, (“For travelling time, it would be a shift of the curve to the left. This makes L bar smaller, which makes sense since he has lesser time to work. That leads to the vertical intercept being lower too because he now has lesser income to spend.”)?

    Romona

  4. Romona says:

    never mind my last comment there Gerald, I think I figured it out – you are right, it will be a parallel shift…. 🙂 🙂

    Romona

  5. Romona says:

    ok, i think this is the last question 🙂 in the video when you describe the shift of the graph for travelling COST, it looks like you were drawing a parallel shift (as in travelling time), but you are saying that it will pivot on L bar. So it is a pivot right? Thanks much!

    Romona

  6. Elena says:

    Hi. Thanks again for very useful videos. I have a question though. The chapter includes information about equilibrium. Do you have any videos about that?
    Thanks again.
    Elena