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1、Part 7, 2006 Thomson Learning/South-Western,Further Topics,Chapter 15, 2006 Thomson Learning/South-Western,Pricing in Input Markets,3,Profit-Maximizing Behavior and the Hiring of Inputs,A profit-maximizing firm will hire additional units of any input up to the point at which the additional revenue f
2、rom hiring one more unit is exactly equal to the cost of hiring that unit. Let MEK and MEL denote the marginal expense of hiring capital and labor, respectively.,4,Profit-Maximizing Behavior and the Hiring of Inputs,Let MRK and MRL be the extra revenue that hiring more units of capital and labor all
3、ows the firm to bring in. Profit maximizing behavior requires:,5,Price-Taking Behavior,If the firm is a price taker in the capital and labor market then it can always hire an extra unit of capital at the prevailing rate (v) and an extra unit of labor at the wage rate (w).,6,Marginal Revenue Product,
4、Marginal product is how much output the additional input can produce. Marginal revenue (MR) is the extra revenue obtained from selling an additional unit of output. Thus, the profit maximizing rules are:,7,A Special Case-Marginal Value Product,If the firm is also a price taking in the goods market,
5、marginal revenue equals the price (P) at which the output sells. The profit maximizing conditions become,8,Marginal Value Product,The marginal value product (MVP) of capital and labor, respectively, are special cases of marginal revenue product in which the firm is a price taker for its output.,9,Re
6、sponses to Changes in Input Prices: Single Variable input Case,Assume the firm has fixed capital and can only vary its labor input in the short run. Labor will exhibit diminishing marginal physical productivity so labors MVP will decline as more labor is hired. In Figure 15-1, the profit maximizing
7、firm will hire L1 labor hours when the wage rate is w1.,10,MVP,Wage,MVPL,w1,Labor hours,0,L1,L2,w2,FIGURE 15-1: Change in Labor Input When Wage Falls: Single Variable Case,11,Responses to Changes in Input Prices: Single Variable input Case,If the wage rate falls to w2 the firm hires increased labor
8、out to L2. If the firm continued to hire L1 it would not be maximizing profit since labor would be capable of producing more in additional revenue than hiring additional labor would cost. With one variable input, diminishing marginal productivity results in a downward sloping demand curve.,12,TABLE
9、15-1: Hamburger Heavens Profit-Maximizing Hiring Decision,13,The Substitution Effect,The substitution effect, in the theory of production, is the substitution of one input for another while holding output constant in response to a change in the inputs price. In Figure 15-2(a), a fall in w will cause
10、 the firm to change from input combination A to B to equate RTS to the new w/v. Diminishing RTS leads to more labor hired.,14,Capital per week,MC,K1,K2,A,q1,Labor hours per week,0,L1,L2,(a) Input Choice,Price,P,Output per week,0,q1,(b) Output Decision,FIGURE 15-2: Substitution and Output Effects of
11、A Decrease in Price of Labor,15,Capital per week,MC,K1,K2,A,q1,B,Labor hours per week,0,L1,L2,(a) Input Choice,Price,P,Output per week,0,q1,(b) Output Decision,FIGURE 15-2: Substitution and Output Effects of A Decrease in Price of Labor,16,The Output Effect,The output effect is the effect of an inpu
12、t price change on the amount of the input that the firm hires that results from a change in the firm;s output level. In Figure 15-2(b), the lower w causes the marginal cost curve to shift to MC. The profit maximizing output raises to q2 resulting in more labor hired.,17,Capital per week,MC,MC,K1,K2,
13、A,q1,B,Labor hours per week,0,L1,L2,(a) Input Choice,Price,P,Output per week,0,q1,q2,(b) Output Decision,FIGURE 15-2: Substitution and Output Effects of A Decrease in Price of Labor,18,Capital per week,MC,MC,K1,K2,A,C,q2,q1,B,Labor hours per week,0,L1,L2,(a) Input Choice,Price,P,Output per week,0,q1
14、,q2,(b) Output Decision,FIGURE 15-2: Substitution and Output Effects of A Decrease in Price of Labor,19,Responsiveness of Input Demand to Price Changes,Ease of Substitution The size of the substitution effect will depend upon how easy it is to substitute other factors of production for labor. The si
15、ze of the substitution effect will also depend upon the length of time as it becomes easier to find substitutes in a longer period of time.,20,Costs and the Output Effect,The size of the output effect will depend upon How large the increase in marginal costs brought about by the wage rate increase i
16、s, and How much quantity demanded will be reduced by a rising price. The first depend upon how important labor is in production while the latter depends upon the price elasticity of demand for the final product.,21,Input Supply,Resources come from three major sources: Labor is provided by individuals. Capital equipment is produced which other firms can buy outright or rent. Natural resources are extracted from land and can
