Embed Size (px)
Citation preview
Week 12 – 25th April 2019
BUDAPEST UNIVERSITY OF TECHNOLOGY AND ECONOMICS
ECONOMICS I
Lecturer: Krisztina Sőreg
FACULTY OF ECONOMIC AND SOCIAL SCIENCES
Department of Economics
Course code: BMEGT301004
TIMELINE OF THE SEMESTER
Week Topic Date
1. Introduction – Basic Definitions of Microeconomics 7th Febr 2019
2. Market Theory: The Basics of Supply And Demand 14th Febr 2019
3. Markets and Welfare 21st Febr 2019
4. Consumer Theory 28th Febr 2019
5. Production and Cost Theory 7th Mar 2019
6. 1st Test 14th Mar 2019
7. SPRING BREAK 21st Mar 2019
8. Sketch Design week 28th Mar 2019
9. Firm Behaviour and the Organization of Industry: Competitive Markets & Monopolistic Competition 4th Apr 2019
10. Firm Behaviour and the Organization of Industry: Monopoly 11th Apr 2019
11. Firm Behaviour and the Organization of Industry: Oligopolistic Markets 18th Apr 2019
12. The Economics of Labour Markets 25th Apr 2019
13. Externalities, The Economics of the Public Sector 2nd May 2019
14. 2nd Test 9th May 2019
15. Draughting Week 16th May 2019
16. Re-Submission: Repetitive Tests – Application in Neptun (Exams)! 20th & 23rd May
Warm-Up: Oligopolies
What are the characteristics of Oligopolies?
• Few sellers and many buyers;
• High interdependence: action and reaction!
• Intense competition;
• High entrance barriers.
How do we measure market concentration?
Herfindahl-Hirschman Index (HHI)
Cournot, Stackelberg or Bertrand?
Homogeneous products
All of them!
Sequential acting
Stackelberg
Perfect competition
Bertrand
Price Leader & Price Follower
Stackelberg
Output competition
Cournot and Stackelberg
Simultaneous acting
Cournot and Bertrand
Outline of the Presentation
I. Labour Market
1.1 Introduction
1.2 Basic Assumptions and Equilibrium
1.3 The Supply of Labour Market
1.4 The Demand of Labour Market
Product and Factor Markets – Flow Chart
Markets in which firms sell goods and services to households or other firms.Products are made from the economy’s resources.
Markets in which resources are sold to firms.Resources include capital, land, labor and natural resources.
Households sell,Firms buy
Firms sell,Households buy
How To Define the Labour Market
The supply and demand for labor: employees provide the supply and employers the demand. It is a major component of any economy tied in with markets for capital, goods and services.
Firms vs.
Emloyees: hiring,
firing, wages,
working hours
Supply vs.
Demand: influence
on wages and
benefits
Micro Domestic &
international market
dynamics: population
features, migration,
education level
Unemployment,
productivity,
participation rates,
total income and GDP
Macro
Unemployment Rate in the USA and the EU
Even during the period of economic growth 2000-2007, unemployment in Eurozone was higher than in the US.
Rigidity in EU labour markets e.g. minimum wages, generous benefits, growing competition from Asian countries
Who Earns the Minimum Wage? – US Results
Minimum Wage
Derived Demand
Demand for a factor of production is a derived demand – derived from a firm’s decision to supply a good in another market.
It arises from, and will vary with - the demand for the firm’s output (final product) e.g. demand forraw materials, production materials, cotton
The demand for labor by a firm will change whenever the demand for the firm’s product changes
Derived Demand – Scenarios
Expanding economy: rise in demand for labour if the rise in output is
greater than the increase in labour productivity
Recession/slowdown: the aggregate demand for labour will decline
as businesses look to cut their operations costs and scale back on
production.
Recession: business failures, plant closures and short term
redundancies lead to a reduction in the derived demand for labour.
Fast-growing markets: strong rise in demand for labour – e.g. an
increase in demand for new apps for smart phones and tablets causes an
increase in labour demand higher wage rates for app programmers
Two Assumptions
o We assume that all markets are competitive.
o The typical firm is a price taker in the market for the product
it produces in the labor market.
o We assume that firms care only about maximizing profits.
o Each firm’s supply of output and demand for inputs are
derived from this goal.
Equilibrium in a Perfectly Comptetitive Labour Market
What are the bases of a labourrelated decision of a company?
Quantity of labor thenumber of workers needed for
the activity of the firm
Wage rate: rate of pay based on per unit of production or per
period
Let’s See an Example!
Situation: a farmer sells wheat in a perfectly competitive market.
He hires workers in a perfectly competitive labor market.
When deciding how many workers to hire, the farmer maximizes
profits by thinking at the margin.
When will the farmer hire an extra worker?
If the benefit from hiring another worker exceeds the cost.
What is the cost of hiring a worker?
Primary cost: wage; other costs: taxes, time of training/coaching
Let’s See an Example!
What is the benefit of hiring another worker?
A farmer can produce more wheat to sell, increasing his revenue.
The size of this benefit depends on the farmer’s production function:
the relationship between the quantity of inputs used to make a
good and the quantity of output of that good.
Production Function
Marginal Product of Labor (MPL)
Marginal product of labor: the increase in the amount of output
from an additional unit of labor.
where ∆Q = change in output ∆L = change in labor
The Market Supply of Labor
What is the opportunity cost of work?
Leasure time The more time you spend working,
the less time you have for leisure
What is the opportunity cost of leasure?
Wage The more time you spend with leisure,
the less incomes you’ll get!
The Market Supply of Labor
An increase in W is an increase in the opportunity
cost of leisure.People respond by taking less leisure and by working more.
The Market Supply of Labor - Changes
Situation 1: due to the low birth rate there is a slow decrease in the
population of the given country.
Supply curve shifts to
the left (decrease)
Number of laborers ↓
Wage rate ↑
Higher wages are paid to
workers pressure on
the economy!
The Market Supply of Labor - Changes
Situation 2: there is a growing number of labor participation rate in a sector where women are provided a higher salary.
Supply curve shifts to
the right (increase)
Number of laborers ↑
Wage rate ↓
The number of workers
grows more and more women are engaged in
work wages will fall!
The Market Supply of Labor - Changes
Situation 3: more and more skilled people are migrating from EasternEurope to Germany.
Supply curve shifts to
the right (increase)
Number of laborers ↑
Wage rate ↓
The number of skilled
workers grows more and more people are willing towork wages will fall!
The Market Supply of Labor - Changes
Situation 4: the trade union of miners decides to ask for higher
wages per hour since it is a risky job and it has adverse health effects.
Supply curve shifts to
the left (decrease)
Number of laborers ↓
Wage rate ↑
Higher wages are paid to
workers firms will try to
apply more automatization.
The Market Supply of Labor - Changes
Situation 5: due to some restrictive policies, the pension age limit is
increased by the government.
Supply curve shifts to
the right (increase)
Number of laborers ↑
Wage rate ↓
Lower wages are paid to
workers there is an
abundance of elderly +
experienced workers!
Things that Shift the Labor Supply Curve
Change in population
Change in labor force participation
Change in migration
Trade union actions
Wages in other occupations
Changes in tastes/attitudes in labor-leisure trade-off
The Demand for Labor Curve
The labor demand curve is derived from the marginal revenue product curve. Firms hire employees until the wage rate equals the marginal revenue product.
Marginal Revenue Product and Marginal Factor Cost
The change in a firm’s total revenue divided by change in its employment of a resource MRP is the change in the firm’s revenue when it employs one more unit of the resource.
The MFC tells us the rise in cost per unit increase in the resource.
Marginal Revenue Product and Marginal Factor Cost
To maximize profit firm should increase its employment of any resource whenever MRP > MFC.But not when MRP < MFC!
Profit-maximizing quantity: MRP = MFC
If MRP > MFC, employing more of resource increases revenue more than cost profit will rise.
When MRP < MFC, using more of resource adds more to cost than to revenue profit falls.
The Market Demand of Labor - Changes
Situation 1: there is a significant improvement in technology within
the IT sector.
Demand curve shifts to
the right (increase)
Number of laborers ↑
Wage rate ↑
Overall better economic
situation innovation
increases demand and
stimulates economic growth.
The Market Demand of Labor - Changes
Situation 2: the global prices of crude oil increase and as a result,
fuel prices also grow.
Demand curve shifts to
the left (decrease)
Number of laborers ↓
Wage rate ↓
Higher costs of productionless profit is realized,
customers buy less fuel,
wages are cut!
Things that Shift the Labor Demand Curve
Changes in the output price
Technological change (affects MPL)
The supply of other factors (e.g. capital)
Change in number of firms
International trade
A new substitute for labor (e.g. computers, robots)
Technological Progress – Examples
Figure 1: U.S. technology, rate of
adoption (%)
Figure 2: Labor force participation by educational
attainment vs. Number of industrial robots
Technological Progress – Effects
Figure 1 Explanation
The pace of adoption of recent
technological innovations is
speeding up compared with history,
offering potential for new job functions
to emerge:
- complementing existing workers’
jobs (output per worker will grow);
- creating entirely new, higher
productivity industries (e.g.,
computer software engineering),
offsetting the displacement of
workers by machines
Figure 2 Explanation
o In the past, skills deepening through
education and retraining allowed workers
to benefit from technology;
o Widespread automation across many
sectors at once creates a challenge to
lower skilled workers;
o Role of government: motivate
companies to promote skills deepening
and help optimize processes that
combine human and machine labor
Technological ProgressThe Efficiency of Labour
How can labour force become more efficient?
Increasing rate of
highly skilled
labour (education
and trainings)
Developing more
effective
technology (high
rate of R+D
investments)
Improving
working
conditions
The Biggest Employers in Hungary by State
The Biggest Employers in the USA by State
The World’s Largest Employers (Private and Public Sector)
The Connection Between Input Demand & Output Supply
In general: MC = W/MPL
o To produce additional output, hire more labor. o As L rises, MPL falls…o causing W/MPL to rise…o causing MC to rise.
Hence, diminishing marginal product and increasing marginal cost are two sides of the same coin.
The competitive firm’s rule for demanding labor:P x MPL = W
Divide both sides by MPL:P = W /MPL
Substitute MC = W/MPL: P = MC
Imperfect Labor Markets
Why are labour markets imperfect?
1. Asymmetric information between employers & employees.
2. Labor force is quite heterogeneous (skills, experience, preferences)
3. Labor force is not that mobile in reality!
4. Activity of trade unions to organize workers.
5. Government intervention has strong effect on labor.
6. Labor market is segmented difficult to move!
How Can Trade Unions Affect the Labor Market?
Restrict labor supply
Increase the demand for the
firm’s product
Negotiate a higher than
equilibrium wage rate for
workers
Trade Unions: Restricting Labor Supply
Trade Unions: Increasing the Demand for the Firm’s Product
The Profit-Maximizing Employment Level
The Two Approaches to Profit Maximization
MR = MC and MRP = MFC
Can these two approaches lead to different decisions? No these two “different” approaches are actually the same method viewed in two different ways!
If MRP > MFC MR > MC If MRP < MFC MR < MC If MRP = MFC MR = MC
MR = MC profit-maximizing output MRP = MFC profit-maximizing employment
Thank you for your attention!
Mankiw: Chapter 18
pp. 391-410
