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:
[Click image to enlarge]