MARKETS FOR FACTOR INPUTS

COMPETITIVE FACTOR MARKET

A competitive factor market is one in which there are a large number of sellers and buyers of a
factor of production, such as labor or raw materials. Because no single seller or buyer can affect
the price of a given factor, each is a price taker. For example, if individual firms that buy lumber to
construct homes purchase a small share of the total volume of lumber available, their purchasing
decision will have no effect on price. Likewise, if each supplier of lumber controls only a small
share of the market, no individual suppliers decision will affect the price of the lumber that he sells.
Instead, the price of lumber (and the total quantity produced) will be determined by the aggregate
supply and demand for lumber.

Demand For A Factor Input When Only One Input Is Variable

derived demand : Demand for an input that depends on, and is derived from, both the firms
level of output and the cost of inputs.
marginal revenue product : Additional revenue resulting from the sale of output created by the
use of one additional unit of an input.

Like demand curves for the final goods that result from the production process, demand curves for
factors of production are downward sloping. Unlike consumers demands for goods and services,
however, factor demands are derived demands: They depend on, and are derived from, the firms
level of output and the costs of inputs.E.g., the demand of the Microsoft Corporation for computer
programmers is a derived demand that depends not only on the current salaries of programmers,
but also on how much software Microsoft expects to sell.

We will assume that the firm produces its output using two inputs, capital K and labor L, that can
be hired at the prices r (the rental cost of capital) and w (the wage rate), respectively. We will also
assume that the firm has its plant and equipment in place (as in a short-run analysis) and must
only decide how much labor to hire.
Suppose that the firm has hired a certain number of workers and wants to know whether it is
profitable to hire one additional worker. This will be profitable if the additional revenue from the
output of the workers labor is greater than its cost. The additional revenue from an incremental
unit of labor, the marginal revenue product of labor, is denoted MRPL. The cost of an incremental
unit of labor is the wage rate, w. Thus, it is profitable to hire more labor if the MRPL is at least as
large as the wage rate w.

How do we measure the MRPL?

Its the additional output obtained from the additional unit of this labor, multiplied by the
additional revenue from an extra unit of output. The additional output is given by the marginal
product of labor MPL and the additional revenue by the marginal revenue MR.
Formally, the marginal revenue product is R/ L, where L is the number of units of labor input and
R is revenue. The additional output per unit of labor, the MPL, is given by Q/ L, and marginal
revenue, MR, is equal to R/ Q. Because R/ L = ( R)/( Q)( Q/ L), it follows that

MRPL = (MR)(MPL) (1)

This important result holds for any competitive factor market, whether or not the output
market is competitive.
However, to examine the characteristics of the MRPL :

CASE 1 : Perfectly Competitive output (and input) market

In a competitive output market, a firm will sell all its output at the market price P. The MR from the
sale of an additional unit of output is then equal to P. In this case, the MRPL is equal to the MPL
times the price of the product:

MRPL = (MPL)(P) - (2)

CHAPTER 14 Markets for Factor Inputs 531
The higher of the two curves in
Figure1 represents the MRPL
Wage
curve for a firm in a competitive (dollars per
hour)
output market.
Note that because there are
diminishing marginal returns to
labor, the marginal product of
labor falls as the amount of Competitive Output Market

labor increases. The marginal

revenue product curve thus
slopes downward, even though the
price of the output is constant.
MRPL ! MPL P
Monopolistic Output
Market MRPL ! MPL MR

Figure1. Marginal Revenue

Hours of work
Product
F IGURE
CASE 2 : Monopoly Output Market (not 14.1
input)
MARGINAL REVENUE PRODUCT
In a competitive factor market in which the producer is a price taker, the buyers demand for
The lower curve in Figure1 is the MRP curve
an inputLis given by thewhen the firm
marginal revenue producthas monopoly
curve. The MRP curve fallspower
because thein mar-the output
ginal product of labor falls as hours of work increase. When the producer of the product has
market. When firms have monopoly monopoly
power,power, they face for
the demand a the
downward-sloping
input is also given by the MRPdemand curve
curve. In this case, how- and must
therefore lower the price of all unitsever,
of the
theMRP curve falls because both the marginal product of labor and marginal revenue fall.
product in order to sell more of it. As a result, marginal
revenue is always less than price (MR < P). This explains why the monopolistic curve lies below
the competitive curve and why marginalThe lower revenue falls14.1as
curve in Figure output
is the MRP curveincreases. Thus
when the firm
L
the MRPL curve
has monop-
oly power in the output market. When firms have monopoly power, they face a
slopes downward in this case because the MR curve and the MPL curve slope downward.
downward-sloping demand curve and must therefore lower the price of all units
Note that the MRPL tells us howofmuch
the productthein firm should
order to sell morebe of it.willing
As a result,tomarginal
pay torevenue
hire isan additional unit
always
of labor. less than price (MR < P). This explains why the monopolistic curve lies below
the competitive curve and why marginal revenue falls as output increases. Thus
the marginal revenue product curve slopes downward in this case because the
marginal
As long as the MRPL is greater than therevenue
wagecurve
rate, the marginal
andthe product curve
firm should hireslope
more downward.
labor. If the MRPL is
Note that the marginal revenue product tells us how much the firm should be
less than the wage rate, the firm should
willing to pay to hire an additional unit of labor. As long as the MRPL equal
lay off workers. Only when the MRP L is is greaterto the wage
rate will the firm have hired thethanprofit-maximising
the wage rate, the firm shouldamount
hire more labor.
ofIf the marginal
labor. revenue
The prod-
profit-maximising
uct is less than the wage rate, the firm should lay off workers. Only when the
condition is therefore marginal revenue product is equal to the wage rate will the firm have hired the
profit-maximizing amount of labor. The profit-maximizing condition is therefore
MRPL = w (3)
MRPL = w (14.3)

Figure2 illustrates this condition. The demand for labor curve DL is the MRPL.
Figure 14.2 illustrates this condition. The demand for labor curve D is the
Note that the quantity of labor demanded increases as the wage rate falls.
MRP . Note that the quantity of labor demanded increases as the wage rate falls.
L

Because the labor market is perfectly competitive, the firm can hire as many workers as it wants at
the market wage w* and is not able to affect the market wage. The supply of labor curve facing the
firm SL is thus a horizontal line. The profit-maximising amount of labor that the firm hires, L*, is at
the intersection of the supply and demand curves.
 ers as it wants at a wage rate w*. The firms demand
for labor DL is given by its marginal revenue product
of labor MRPL. The profit-maximizing firm will hire L*
532 PART 3 Market Structure and Competitive Strategy
units of labor at the point where the marginal rev-
enue product of labor is equal to the wage rate. MRPL ! DL

Price of
Figure2. Hiring By A Firm In The Labor labor
L* Quantity of labor
Market (With Fixed Capital)
F IGURE 14.2
HIRING BY A FIRM IN THE LABOR MARKET
(WITH FIXED CAPITAL) Because the labor market is perfectly competitive, the firm can hire as many
w* SL the market
In a competitive labor market, a firm faces workers as it wants at the market wage w* and is not able to affect
a perfectly
Figure3 shows
elastic supply of laborhow
SL and the
can quantity
hirewage.
as many ofwork-
The labor of labor curve facing the firm SL is thus a horizontal line. The
supply
demanded
ers as it wantschanges in response
at a wage rate to demand
a drop in amount of labor that the firm hires, L*, is at the intersection of
w*. Theprofit-maximizing
firms
for labor
the DL is given
market wageby rateits marginal
from revenue
the to product
w1 supply w2. andThedemand curves.
of
wagelabor MRP
rate . The profit-maximizing firm will
Figure hire L*
14.3 shows how the quantity of labor demanded changes in response
In 8.3, we might
L decrease if more people
explain that
units of labor at the pointawhere the to marginal
a drop rev-the market wage rate from w to w . The wage rate might decrease
in
firm maximizes
entering the labor its profit
forceby are looking for jobs 1 2 MRPL ! DL
enue productanofoutput
labor isatequal
whichto theifwage
more rate.
people entering the labor force are looking for jobs for the first time (as
for choosing
the first time
marginal revenue equals
(as happened, e.g., when
themarginal
baby cost. boomers came of age). The happened, for example, when the baby boomers came of age). The quantity of
labor demanded by the firm is initially L1, at the intersection of MRPL and S1.
quantity of labor demanded by the firm is
L* Quantity of labor
initially L1, at the intersection of MRPL and
S1.
Price of
Figure3. A Shift In The Supply Of Labor labor
Because the labor market is perfectly competitive, the firm can hire as many
workers as it wants at the market wage w* and is not able to affect the market
However, when the supply wage. of labor curve of labor curve facing the firm S is thus a horizontal line. The
The supply L
shifts from S1 to S2, the wage falls from
profit-maximizing w1 amount of labor that the firm hires, L*, is at the intersection of
F IGURE 14.3
to w2 and the quantity of labor demanded
A SHIFT IN THE SUPPLY OF LABOR the supply and demand curves.
increases from L1 to L2. Figure 14.3 shows how w1the quantity of labor demanded changes S1 in response
In 8.3,
When thewesupply
explainof that
labora facing the firms is S1, the
firm maximizes its profit by to a drop in the market wage rate from w1
to w 2
. The wage rate might decrease
firm hires L1 units of labor at wage w1. But when the
choosing
Factor an output
markets are which to ifoutput
at similar more people
markets entering the labor force are looking for jobs for the first time (as
market
marginalwage rate decreases
revenue equals and the supply of labor
inshifts
many , the firm maximizes its happened,
to ways.
Scost. for example, w
profit by moving when
2 the baby boomers came of age). The S2 quantity of
marginal 2
along thedemandE.g., forthe laborfactor labor
market
curve until demanded
profit-
the new wage by the firm is initially L 1
, at the intersection of MRPL and S1.
rate w2 is equal
maximising to the marginal
condition revenue
that the MRP product
L = W of is
labor. As a result, L2 units of labormarket
are hired.condition MRPL = DL
analogous to the output
that MR = MC. To see why this is true, recall
Price of
that MRPL = (MPL)(MR) and divide both labor
sides of equation (3) by the marginal L1 L2 Quantity
of labor
product of labor. Then,

F IGURE 14.3 MR = w MPL (4)

A SHIFT IN THE SUPPLY OF LABOR
w1 S
When the supply
Because MPL of labor facingadditional
measures the firms is Soutput
1
, the per unit of input, the right-hand side of equation
1
(4)
firm hires L units of labor at
measures1 the MC of an additional wage w 1
. But when the
unit of output (the wage rate multiplied by the labor needed to
market wage rate decreases and the supply of labor
produce
shifts to Sone
, the unit of output,itsi.e.,
firm maximizes profitwL Q).
by moving
w2 S2
2
along the demand for labor curve until the new wage
rate w2 is equal
Equation to the marginal
(4) shows revenue
that both theproduct
hiring of
and
output choices of the firm follow the same rule: Inputs
labor. As a result, L2 units of labor are hired. MRPL = DL
or outputs are chosen so that MR (from the sale of output) is equal to MC (from the
purchase of inputs). This principle holds in both competitive and noncompetitive markets.

Demand For A Factor Input When Several Inputs Are Available L1 L2 Quantity
of labor

When the firm simultaneously chooses quantities of two or more variable inputs, the hiring problem
becomes more difficult because a change in the price of one input will change the demand for
others.
Example : Suppose that both labor and assembly-line machinery are variable inputs for producing
farm equipment. Lets say that we wish to determine the firms demand for labor curve. As the w
falls, more labor will be demanded even if the firms investment in machinery is unchanged. But as
labor becomes less expensive, the MC of producing the farm equipment falls. Consequently, it is
profitable for the firm to increase its output. In that case, the firm is likely to invest in additional
 534 PART 3 Market Structure and Competitive Strategy
machinery to expand production
capacity. Expanding the use of Wage
F IGUREcauses
machinery 14.4 the MRPL curve to (dollars per
FIRMS DEMAND CURVE FOR hour)
shift LABOR
to the(WITH
right;VARIABLE
in turn, CAPITAL)
the quantity
of labor demanded increases.
When two or more inputs are variable,
a firms demand for one input depends
Figure4. Firmsrevenue
on the marginal Demand Curve
product of bothFor 20
A
Labor (With
inputs. Variable
When the wage Capital)
rate is $20, A rep-
resents one point on the firms demand C
15
for labor curve. When the wage rate falls B
Figure4 illustrates this. Suppose that
to $15, the marginal product of capital
whenrises,
theencouraging
wage rate DL
theisfirm
$20 permore
to rent hour, 10
the machinery
firm hires and 100 worker-hours,
hire more labor. As a result,as MRPL1 MRPL2
the by
shown MRPpoint
curve A
shifts
onfrom
the MRPMRP to MRPL2, 5
L1 L1 curve.

Nowgenerating
consider a new
what pointhappens
C on the firms
when
demand for labor curve. Thus A and C are 40 80 120 160 Hours
the wage rate falls
on the demand tocurve,
for labor $15but per
B is hour.
not. of work
Because the MRPL is now greater
than the w, the firm will demand more
labor. But the MRPL1 curve describes the demand for labor when the use of machinery is fixed. In
fact, a greater amount of labor causes the marginal product of capital to rise, which encourages the
firm to rent more machinery as The well asMarket
hire moreDemand Curvethere is more machinery, the MPL
labor. Because
When we aggregated the
will increase. (With more machinery, workers can be more productive.) individual demand curvesThe of consumers
marginaltorevenue
obtain the
market demand curve for a product, we were concerned
product curve will therefore shift to the right (to MRPL2). Thus, when the wage rate falls, the firm with a single industry.
will
Recall from 4.3 that the However, a factor input such as skilled labor is demanded by firms in many
use 140 hours of labor. This is shown by a new point on the demand curve, C, rather than 120
market demand curve for a different industries. Moreover, as we move from industry to industry, we are
hoursproduct
as givenshows by
howB.muchA of
and Clikely
are toboth
findonthatthe firms
firms demand
demands for labor
for labor (which curve (with machinery
are derived in part from
variable) DL; B consumers
the product is not. are the demands for the firms output) vary substantially. Therefore, to obtain the
Notewilling
thattoasbuy as the price of
constructed, the
the product changes.
demand
total for labor
market demand forcurve is more
labor curve, elastic
we must firstthan eithereach
determine of the two
industrys
marginal product of labor curves demand for labor,
(which and then
presume add the industry
no change demandofcurves
in the amount horizontally.
machinery). The
Thus,
when capital inputs are variable second step is straightforward.
in the long run, there Adding
is a industry
greater demand curves
elasticity for labor to
of demand
because firms can substitute obtain a market
capital demand
for labor in curve for labor is just
the production like adding individual product
process.
demand curves to obtain the market demand curve for that product. So lets
concentrate our attention on the more difficult first step.
The Market Demand Curve
DETERMINING INDUSTRY DEMAND The first stepdetermining industry
When we aggregated the individual demandinto
demandtakes curves of the
account consumers to obtain
fact that both the levelthe marketproduced
of output demandby
curve for a product, we were concerned with a single industry.
the firm and its product price change as the prices of the inputs to production
change. It is easiest to determine market demand when there is a single producer.
However, a factor input such as In that case,labor
skilled the marginal revenue by
is demanded product
firmscurve is the different
in many industry demand curve
industries.
for the input.
Moreover, as we move from industry When there
to industry, we arearelikely
many tofirms,
findhowever, thedemands
that firms analysis is for
more com-
labor
plex because of the possible interaction among the
(which are derived in part from the demands for the firms output) vary substantially. firms. Consider, for instance,
the demand for labor when output markets are perfectly competitive. Then,
the marginal revenue product of labor is the product of the price of the good and
Therefore, to obtain the totalthe market demand
marginal product offorlabor
labor
(see curve,
equationwe must
14.2), first determine
as shown by the curveeachMRPL1
industrys demand for labor, and then add the
in Figure 14.5 (a). industry demand curves horizontally. The second
step is straightforward. Adding industry
Supposedemand curves
initially that for labor
the wage to labor
rate for obtain a market
is $15 per hourdemand
and that curve
the firm
demandsproduct
for labor is just like adding individual 100 worker-hours
demand of labor. to
curves Now the wage
obtain the rate for this
market firm falls
demand to $10
curve
for that product. per hour. If no other firms could hire workers at the lower wage, then our firm
would hire 150 worker-hours of labor (by finding the point on the MRPL1 curve
STEP 1 that corresponds to the $10-per-hour wage rate). But if the wage rate falls for
all firms in an industry, the industry as a whole will hire more labor. This will
Determining Industry Demand

The first stepdetermining industry demandtakes into account the fact that both the level of
output produced by the firm and its product price change as the prices of the inputs to production
change.

It is easiest to determine market demand when there is a single producer. In that case, the
marginal revenue product curve is the industry demand curve for the input.
When there are many firms, however, the analysis is more complex because of the possible
interaction among the firms. Consider, for instance, the demand for labor when output markets
are perfectly competitive. Then, the marginal revenue product of labor is the product of the price
of the good and the marginal product of labor (see equation 2), as shown by the curve MRPL1 in
Figure5(a). CHAPTER 14 Markets for Factor Inputs 535

Wage Wage
(dollars (dollars
per per
hour) hour)
15 15
Horizontal Sum If
Product Price
Unchanged

10 10
MRPL1
MRPL2

5 5 Industry
Demand
Curve

50 100 120 150 Labor L0 L1 L2 Labor

(a) (worker-hours) (b) (worker-hours)

F IGURE 14.5
THE INDUSTRY DEMAND Figure5.
FOR LABORThe Industry Demand For Labor
The demand curve for labor of a competitive firm, MRPL1 in (a), takes the product price as given. But as the
Suppose wageinitially
rate falls that
from $15the wage
to $10 rate
per hour, thefor labor
product priceis $15
also falls. per hour
Thus the firmsand
demand that the
curve firm
shifts demands 100
down-
worker-hoursward to MRP . As a result,
of labor.
L2 Nowthe theindustry
wage demand
rate curve,
for thisshown in (b),
firm is more
falls to $10inelastic
perthan the demand
hour. curve firms could
If no other
that would be obtained if the product price were assumed to be unchanged.
hire workers at the lower wage, then our firm would hire 150 worker-hours of labor (by finding the
point on the MRPL1 curve that corresponds to the $10-per-hour wage rate). But if the wage rate
falls for all firms in an industry, the industry as a whole will hire more labor. This will lead to more
output lead to more
from theoutput
industry, fromathe industry,
shift to thea shift
righttoofthe theright of the industry
industry supply supply
curve, and a lower market price
for itscurve, and a lower market price for its product.
product.
In Figure5 In Figure
(a), 14.5
when (a), the
when the product
product pricepricefalls,falls,
thetheoriginal
original marginal
marginal rev- revenue product curve shifts
enue product curve shifts downward, from MRPL1 to MRPL2. This shift results
downward, from MRPL1 labor
in a lower quantity of
to MRP L2. This shift results in a lower quantity of labor demanded by the
demanded by the firm120 worker-hours rather
firm120 worker-hours rather
than 150. Consequently, industry demand than 150. Consequently,
for labor will be industry
lower than demand it for labor will be lower
than would
it would be if only one firm were able to hire workers
be if only one firm were able to hire workers at the lower wage. Figure at the lower wage. Figure5 (b) illustrates
this. 14.5
The(b) illustrates
lighter this. Thethe
line shows lighter line shows
horizontal sum theofhorizontal
the individualsum offirms
the indi-demands for labor that would
resultvidual firms price
if product demands did notfor labor
change thataswould
the wageresult falls.
if product price did
The darker linenotshows the industry demand
change as the wage falls. The darker line shows the industry demand
curve for labor, which takes into account the fact that product price will fall as all firms expand their curve
for labor, which takes into account the fact that product price will fall as all
output in response to the lower wage rate. When the wage rate is $15 per hour, industry demand
firms expand their output in response to the lower wage rate. When the wage
for labor
rate isis$15L0 per
worker-hours.
hour, industry When demandit falls
for to $10isper
labor hour, industryWhen
L0 worker-hours. demand increases to L1. Note
that itthis
fallsistoa$10 smaller
per hour, increase
industry than L2, which
demand increases would
to L1. occur
Note thatif the
thisproduct
is a price were fixed. The
aggregation of industry
smaller increase than L demand
2
, which curves
would into
occur the
if the market
product demand
price werecurve
fixed. for labor is the final step: To
The aggregation
complete it, we simply of industry
add the demand curves into the
labor demanded in market demand curve for
all industries.
labor is the final step: To complete it, we simply add the labor demanded in
The all industries.
derivation of the market demand curve for labor (or for any other input) is essentially the same
The derivation of the market demand curve for labor (or for any other input)
whenis the output market
essentially the same is non-competitive.
when Theis only
the output market difference The
noncompetitive. is that
onlyit is more difficult to predict
the change in product price in response to a change in the wage
difference is that it is more difficult to predict the change in product price rate
in because each firm in the
market is likely to be pricing strategically rather than taking price as given.
response to a change in the wage rate because each firm in the market is likely to
be pricing strategically rather than taking price as given.
The Supply Of Inputs To A Firm

Average expenditure curve : Supply curve representing the price per unit that a firm pays for a
good.
 marginal expenditure curve : Curve describing the additional cost of purchasing one additional
unit of a good.

When the market for a factor input is perfectly competitive, a firm can purchase as much of that
input as it wants at a fixed market price, which is determined by the intersection of the market
demand and supply curves, as shown in Figure6 (a). The input supply curve facing a firm is then
perfectly elastic. Thus, in Figure6 (b), a firm is buying fabric at $10 per yard to sew into clothing.
Because the firm is only a small part of the fabric market, it can buy all it wants without affecting
the price.
We explain that the supply curve AE facing the firm in Figure6 (b) is its average expenditure curve
(just as the demand curve facing a firm is its average revenue curve), because it represents the
price per unit that the firm pays for the good. On the other hand, the marginal expenditure curve
represents the firms expenditure on an additional unit that it buys. (The marginal expenditure
curve in a factor market is analogous to the marginal revenue curve in the output market.)

The marginal expenditure depends on whether you are a competitive buyer or a buyer with
monopsony power.

If you are a competitive buyer, the cost of each unit is the same no matter how many units you
purchase; it is the market price of the good. The price paid is the average expenditure per unit, and
the marginal expenditure is equal to the average. Consequently, when the factor market is
competitive, the average expenditure and marginal expenditure curves are identical horizontal
lines, just as the 538
marginal and average revenue curves are identical (and horizontal) for a
PART 3 Market Structure and Competitive Strategy
competitive firm
in the output
Price Price
market. (dollars (dollars
per per
Figure6. A firms yard) yard)
Market Supply
Input Supply In A S
of Fabric
Supply of
competitive Fabric Facing Firm
Factor Market
10 Market Demand 10 ME = AE
As long as the for Fabric
marginal revenue
product curve lies D
Demand
above the MRP
for Fabric
m a r g i n a l
expenditure 100 Yards of 50 Yards of
curve, profit can fabric fabric
(a) (b)
be increased by
purchasing more
F IGURE
of the input because the benefit of an 14.7unit (MRP) exceeds the cost (ME). However, when
additional
A FIRMS INPUT SUPPLY IN A COMPETITIVE FACTOR MARKET
the marginal revenue product curve lies below the marginal expenditure curve, some units yield
In a competitive factor market, a firm can buy any amount of the input it wants without affecting
benefits that are less than cost. Therefore, profit maximisation requires that marginal revenue
the price. Therefore, the firm faces a perfectly elastic supply curve for that input. As a result,
product be equal to marginal expenditure:
the quantity of the input purchased by the producer of the product is determined by the
intersection of the input demand and supply curves. In (a), the industry quantity demanded
and quantity supplied of fabric are equated at a price of $10 per yard. In (b), the firm faces a
ME = MRP -(5)
horizontal marginal expenditure curve at a price of $10 per yard of fabric and chooses to buy
50 yards.
When we considered the special case of a competitive output market, we saw that the firm bought
inputs, such as labor, up to the point at which the marginal revenue product was equal to the price
of the input w, as in equation (3). How In the competitive
much of the inputcase,
shouldtherefore, thea competitive
a firm facing condition for profit
factor mar-
maximisation is that the price of the ket purchase?
input As long
be equal as the marginal
to marginal revenue product curve lies above the
expenditure:
marginal expenditure curve, profit can be increased by purchasing more of the
input because the benefit of an additional unit (MRP) exceeds the cost (ME).
ME = w -(6)
However, when the marginal revenue product curve lies below the marginal
expenditure curve, some units yield benefits that are less than cost. Therefore,
profit maximization requires that marginal revenue product be equal to marginal
expenditure:

ME = MRP (14.5)
 of fabric were purchased, the firm would be forgoing an opportunity
additional profit from clothing sales. If more than 50 yards were purch
cost of the fabric would be greater than the additional revenue from t
the extra clothing.

The isMarket
In the example, the price of the fabric ($10 per yard) determined Supplyin the of Inputs fabric market
competitive
shown in Figure6 (a) at the intersection of the demand and supply curves. Figure6 (b) shows the
The market supply curve for a factor input is usually upward sloping
amount of fabric purchased by a firm at the intersection
in Chapter 8of thetheME
that and supply
market MRP curves. When
for a good sold50in a competitiv
yards of fabric are purchased, the ME of $10 is is usually
equal toupward sloping because the marginal costofof producing
the marginal revenue from the sale
clothing made possible by the increased use of fabric in increasing.
is typically the productionThis isprocess.
also the If less
case forthan
fabric50and other raw
yards of fabric were purchased, the firm would be forgoing
inputs. an opportunity to make additional profit
When the input
from clothing sales. If more than 50 yards were purchased, is labor,
the cost however,
of the fabric people
would rather than firms are ma
be greater
than the additional revenue from the sale of the ply
extradecisions.
clothing.In this case, utility maximization by workers rather th
maximization by firms determines supply. In the discussion that fo
The Market Supply Of Inputs use the analysis of income and substitution effects from Chapter 4 to
although the market supply curve for labor can be upward sloping, it
as in Figure
The market supply curve for a factor input is usually upward14.8, be backward
sloping. bending.
The market In other
supply for words,
a gooda higher wag
lead to less labor being supplied.
sold in a competitive market is usually upward sloping because the marginal cost of producing the
To see why a labor supply curve may be backward bending, divid
good is typically increasing. This is also the caseinto
forhours
fabricofand other raw material inputs.
work and hours of leisure. Leisure is a term that describ
able non-work activities, including sleeping, eating, and househol
When the input is labor, however, people rather Workthan firms the
benefits areworker
making supply
only decisions.
through the incomeIn this
that it generates
case, utility maximisation by workers rather thanassume
profit maximisation by firms determines supply.
that a worker has the flexibility to choose how many hour
to work.
In the discussion that follows, we use the analysis Theof wage
incomerateand
measures the price
substitution that to
effects theshow
workerthatplaces on leis
although the market supply curve for labor canbecause
be upwardhis orsloping,
her wageit measures
may also, theasamount of money
in Figure7, be that the wor
backward bending. In other words, a higher wage
rate can lead to less labor being supplied.
Wage
(dollars per
Figure7. Backward-Bending Supply Of hour)
Supply of Labor
Labor
F IGURE 1
BACKWAR
To see why a labor supply curve may be
When the w
backward bending, divide the day into hours of
increase init
work and hours of leisure. Leisure is a term choose to e
that describes enjoyable non-work activities, ward-bendin
including sleeping, eating, and household the income
chores. Work benefits the worker only through more leisure
the income that it generates. We also assume encourages
that a worker has the flexibility to choose how
many hours per day to work.
Hours of work per day
The wage rate measures the price that the
worker places on leisure time, because his or
her wage measures the amount of money that the worker gives up to enjoy leisure.

As the wage rate increases, therefore, the price of leisure also increases. This price change brings
about both a substitution effect (a change in relative price with utility held constant) and an income
effect (a change in utility with relative prices unchanged). There is a substitution effect because the
higher price of leisure encourages workers to substitute work for leisure.

An income effect occurs because the higher wage rate increases the workers purchasing power.
With higher income, the worker can buy more of many goods, one of which is leisure. If more
leisure was chosen, it is because the income effect has encouraged the worker to work fewer
hours. Income effects can be large because wages are the primary component of most peoples
income. When the income effect outweighs the substitution effect, the result is a backward-
bending supply curve.

Figure8 illustrates how a backward-bending supply curve for labor can result from the workleisure
decision for a typical weekday. The horizontal axis shows hours of leisure per day, the vertical axis
income generated by work. (We assume there are no other sources of income.) Initially the wage
rate is $10 per hour, and the budget line is given by PQ. Point P, for example, shows that if an
 540 PART 3 Market Structure and Competitive Strategy
individual worked a 24-hour day he
would earn an income of $240.
R
720

Figure8. Substitution And

I n c o m e E ff eFSUBSTITUTION
14.9 Income w ! $30
cIGURE
ts O f AANDWa g e (dollars per
day)
Increase INCOME EFFECTS OF
A WAGE INCREASE
When the wage rate increases
The worker maximises utility by
from $10 to $30 per hour, the
choosing pointworkers
A, thus enjoying
budget 16
line shifts
from PQ to RQ. In response,
hours of leisure per day (with
the worker moves from A to B
8
hours of work) and
while earning
decreasing $80.
work hours
from 8 to 5. The reduction in 240 P B
When the wage rate increases
hours worked arises because
to
$30 per hour, the budget line C
the income effect outweighs w ! $10
the substitution effect. In this A
rotates about the horizontal
case, the supply of labor curve
intercept to line RQ.
is backward (Only 24
bending. Q

hours of leisure are possible.) Now 12 16 19 24 Hours of leisure

Substitution Effect
the worker maximises utility at B Income Effect
by choosing 19 hours of leisure per
day (with 5 hours of work), while
earning $150. If only the substitution effect came into play, the higher wage rate would encourage
the worker to work 12 hours (at C) instead up to enjoy
of leisure.
8. As the wage rate increases, therefore, the price of leisure also
increases. This price change brings about both a substitution effect (a change in
relative price with utility held constant) and an income effect (a change in util-
However, the income effect works in ity
thewithopposite direction.
relative prices It overcomes
unchanged). the substitution
There is a substitution effect becauseeffect
the and
lowers the work day from 8 hours to 5.higher price of leisure encourages workers to substitute work for leisure. An
income effect occurs because the higher wage rate increases the workers pur-
chasing power. With higher income, the worker can buy more of many goods,
In real life, a backward-bending laborone
supply
of which curve might
is leisure. apply
If more to awas
leisure college
chosen, student
it is because working
the income during
effect has encouraged the worker to work fewer
the summer to earn living expenses for the school year. As soon as a target level of earnings is hours. Income effects can be
large because wages are the primary component of most peoples income. When
reached, the student stops working the and allocates
income more time
effect outweighs to leisure.
the substitution Antheincrease
effect, in the wage
result is a backward-
rate will then lead to fewer hours worked
bending because
supply curve.it enables the student to reach the target level of
Figure 14.9 illustrates how a backward-bending supply curve for labor can
earnings more quickly. The backward-bending supply curve also applies to taxi drivers; for taxi
result from the workleisure decision for a typical weekday. The horizontal
drivers who have a daily targeted earnings
axis showsgoal,hours of anleisure
increase
per day, inthe
the hourly
vertical axis wage
income will reduce
generated by the
number of hours that the drivers work.work. (We assume there are no other sources of income.) Initially the wage
rate is $10 per hour, and the budget line is given by PQ. Point P, for example,
shows that if an individual worked a 24-hour day he would earn an income
Equilibrium In Competitive Factor of Market
$240.
The worker maximizes utility by choosing point A, thus enjoying 16 hours
of leisure per day (with 8 hours of work) and earning $80. When the wage rate
A competitive factor market is in equilibrium
increases to $30whenper hour,thethe price of rotates
budget line the input
about theequates
horizontalthe quantity
intercept
demanded to the quantity supplied. to line RQ. (Only 24 hours of leisure are possible.) Now the worker maximizes
Figure9 (a) shows such an equilibriumutility
forat aB by choosing
labor 19 hours
market. At of leisure
point A,per
thedayequilibrium
(with 5 hourswage of work),rate is
while earning $150. If only the substitution effect came into play, the higher
wC and the equilibrium quantity supplied
wage is rateLwould
C. Because
encourage they are well
the worker informed,
to work 12 all workers receive
CHAPTER 14 hours (at C)
Markets for instead of
Factor Inputs8.543
the identical wage and
generate the identical
Competitive Output Market Monopolistic Output Market
marginal revenue Wage Wage
product of labor
wherever they are
employed. If any SL
vM
worker had a wage SL
lower than her
marginal product, a wM B
fi r m w o u l d fi n d i t wC A
P MPL
profitable to offer that
worker a higher wage.
DL = MRPL DL = MRPL

Figure9. Labor
Market Equilibrium LC Number of workers LM Number of workers
(a) (b)

F IGURE 14.10
LABOR MARKET EQUILIBRIUM
In a competitive labor market in which the output market is competitive, the equilibrium wage wc
is given by the intersection of the demand for labor (marginal revenue product) curve and the sup-
ply of labor curve. This is point A in part (a) of the figure. Part (b) shows that when the producer has
 CHAPTER 14 Mark

If the output market is also perfectly competitive,Competitive

the demand curve
Output Marketfor an input measures the Monopolistic O
benefit that consumers of the product placeWage
on the additional use of the input in theWage
production
process. The wage rate also reflects the cost to the firm and to society of using an additional unit of
the input. Thus, at A in Figure9 (a), the marginal benefit of an hour of labor (its marginal revenue
product MRPL) is equal to its MC (the wage rate w) MRPL = w.
vM
When output and input markets are both perfectly competitive, resources Sare L used efficiently
because the difference between total benefits and total costs is maximised. Efficiency requires that
the additional revenue generated by employing an additional unit of labor (the marginalwMrevenue B
product of labor, MRPL) equal the benefit to wconsumers
C
of the additional
A
output, which is given by
the price of the product times the marginal product of labor, (P)(MPL).

When the output market is not perfectly competitive, the condition MRPL = (P)(MPL) no longer
holds. DL = MRPL
Note in Figure9 (b) that the curve representing the product price multiplied by the marginal product
of labor [(P)(MPL)] lies above the marginal revenue product curve [(MR)(MPL)]. Point B is the
LC Number of workers LM
equilibrium wage wM and the equilibrium labor supply LM. But because the price of the product is a
(a) (b
measure of the value to consumers of each additional unit of output that they buy, (P)(MPL) is the
value that consumers place on additional units of labor. Therefore, when LM labourers are
employed, the marginal cost to the firm wM is less than the marginal
F IGURE 14.10 benefit to consumers vM.
LABOR MARKET EQUILIBRIUM
Although the firm is maximising its profit, its output is below the efficient level and it uses less than
In a competitive labor market in which the output market is competitive, t
the efficient level of the input. Economic efficiency would
is given be increased
by the intersectionif more labourers
of the demand were(marginal
for labor hired revenue prod
and, consequently, more output produced. (The gains ply oftolabor
consumers
curve. This would
is point Aoutweigh thethefirms
in part (a) of figure.lost
Part (b) shows that
profit.) monopoly power, the marginal value of a worker vM is greater than the wage w
are employed. (Point B determines the quantity of labor that the firm hires an
Economic Rent

of producing
The concept of economic rent helps explain its output.
how factor marketsForwork.
a factor market,
When economicoutput
discussing rent is the differen
between the
markets in the long run, we defined economic rentpayments
as the made to a factor
payments of production
received and the
by a firm overminimum
and amount th
above the minimum cost of producing its output. For a factor market, economic rent is the the concep
must be spent to obtain the use of that factor. Figure 14.11 illustrates
of economic rent as applied to a competitive labor market. The equilibriu
difference between the payments made to a factor of production and the minimum amount that
must be spent to obtain the use of that
factor.
Wage
Figure10. Economic Rent
SL
F IGURE 1
ECONOM
Figure10 illustrates the concept of Economic Rent
economic rent as applied to a A The econom
w* ment of lab
competitive labor market. The
the minimu
equilibrium price of labor is w*, and The equilib
the quantity of labor supplied is L*. section of
B
The supply of labor curve is the curves. Bec
DL ! MRPL
upward-sloping curve, and the ing, some w
demand for labor is the downward- wage less t
is the econo
sloping MRPL curve. Because the sup-
ply curve tells us how much labor will 0 L* Number of workers
be supplied at each wage rate, the
minimum expenditure needed to
employ L* units of labor is given by the tan-shaded area AL*0B, below the supply curve to the left
of the equilibrium labor supply L*.
In perfectly competitive markets, all workers are paid the wage w*. This wage is required to get
the last marginal worker to supply his or her labor, but all other workers earn rents because their
wage is greater than the wage that would be needed to get them to work. Because total wage
payments are equal to the rectangle 0w*AL*, the economic rent earned by labor is given by the
area ABw*.
 agriculture) is fixed, at least in the short run. With land inelastically supplied,
its price is determined entirely by demand. The demand for land is given by
D1, and its price per unit is s1. Total land rent is given by the green-shaded rect-
angle. But when the demand for land increases to D2, the rental value per unit
of land increases to s2; in this case, total land rent includes the blue-shaded
area as well. Thus, an increase in the demand for land (a shift to the right
Note that if the supply curve in the
were demand curve)
perfectly elastic,leads both to a higher
economic price per
rent would beacre and to
zero. a higher
There are
economic rent.
rents only when supply is somewhat inelastic. And when supply is perfectly inelastic, all payments
to a factor of production are economic rents because the factor will be supplied no matter what
price is paid.

Figure11. Land Rent

Price
(dollars per
As Figure11 shows, one example of an acre)

inelastically supplied factor is land. The

Supply of Land
supply curve is perfectly inelastic because
F IGURE 14.12
land for housing (or for agriculture) is
LAND RENT s2
fixed, at least in the short run. With land
When the supply of land is perfectly inelas-
inelasticallytic, thesupplied,
market price of landitsis determined
price is
determinedat the entirely by demand.
point of intersection with the demandThe
curve. The entire value of the land is then an D2
demand foreconomic
land rent.
is given by D1, and its
When demand is given by
s1

price per unit is S

D1, the 1. Total
economic land
rent rentis is
per acre given
given by
s1, and when demand
by the green-shaded increasesBut
rectangle. to D2,when
rent
per acre increases to s2.
the demand for land increases to D2, the D1
rental value per unit of land increases to
S2; in this case, total land rent includes
the blue-shaded area as well. Thus, an Number of acres
increase in the demand for land (a shift to
the right in the demand curve) leads both
to a higher price per acre and to a higher economic rent.

FACTOR MARKETS WITH MONOPSONY POWER

In some factor markets, individual buyers have buyer power that allows them to affect the prices
they pay. Often this happens either when one firm is a monopsony buyer or there are only a few
buyers, in which case each firm has some monopsony power. For example, we saw that
automobile companies have monopsony power as buyers of parts and components. GM and
Toyota, for example, buy large quantities of brakes, radiators, and other parts and can negotiate
lower prices than those charged smaller purchasers. In other cases, there might be only two or
three sellers of a factor and a dozen or more buyers, but each buyer nonetheless has bargaining
powerit can negotiate low prices because it makes large and infrequent purchases and can play
the sellers off against each other when bargaining over price.
Throughout this section, we will assume that the output market is perfectly competitive. In
addition, because a single buyer is easier to visualise than several buyers who all have some
monopsony power, we will restrict our attention at first to pure monopsony.

Monopsony Power : Marginal And Average Expenditure

When you are deciding how much of a good to purchase, you keep increasing the number of units
purchased until the additional value from the last unit purchasedthe marginal valueis just equal
to the cost of that unitthe marginal expenditure. In perfect competition, the price that you pay for
the goodthe average expenditureis equal to the marginal expenditure. However, when you
have monopsony power, the marginal expenditure is greater than the average expenditure, as
Figure12 shows.

The factor supply curve facing the monopsonist is the market supply curve, which shows how
much of the factor suppliers are willing to sell as its price increases. Because the monopsonist
pays the same price for each unit, the supply curve is its average expenditure curve. The average
expenditure curve is upward sloping because the decision to buy an extra unit raises the price that
must be paid for all units, not just the last one. For a profit-maximising firm, however, the marginal
expenditure curve is relevant in deciding how much to buy. The marginal expenditure curve lies
 expenditure, as Figure 14.14 shows.

above the average expenditure

curve: When the firm increases the 20 Marginal
Price
price of the factor to hire more units, Expenditure (ME)
(per unit
it must pay all units that higher price, of input)
Fnot
IGURE 14.14
just the lastAVERAGE
unit hired.
MARGINAL AND 15
C SL ! Average
EXPENDITURE wC
Expenditure (AE)
Figure12. Marginal & Average
When the buyer of an input has monopsony w* ! 13
Expenditure
power, the marginal expenditure curve lies
10
above the average expenditure curve because D ! MRPL ! MV
the decision to buy an extra unit raises the price
that must be paid for all units, not just for the last
one. The number of units of input purchased is 5
given by L*, at the intersection of the marginal
revenue product and marginal expenditure
curves. The corresponding wage rate w* is lower
than the competitive wage wc.
1 2 3 4 5 6 Units of input
L* LC

Purchasing Decision With Monopsony Power

How much of the input should the firm buy? As we saw earlier, it should buy up to the point where
ME = MRP. Here the benefit from the last unit bought (MRP) is just equal to the cost (ME).
Figure12 illustrates this principle for a labor market. Note that the monopsonist hires L* units of
labor; at that point, ME = MRPL. The wage rate w* that workers are paid is given by finding the
point on the average expenditure or supply curve with L* units of labor.
As we showed earlier, a buyer with monopsony power maximises net benefit (utility less
expenditure) from a purchase by buying up to the point where marginal value (MV) is equal to
marginal expenditure:
MV = ME

For a firm buying a factor input, MV is just the marginal revenue product of the factor MRP. Thus,
we have (as in the case of a competitive factor market)

ME = MRP -(7)

Note from Figure12 that the monopsonist hires less labor than a firm or group of firms with no
monopsony power. In a competitive labor market, LC workers would be hired: At that level, the
quantity of labor demanded (given by the marginal revenue product curve) is equal to the quantity
of labor supplied (given by the average expenditure curve). Note also that the monopsonistic firm
will be paying its workers a wage w* that is less than the wage wC that would be paid in a
competitive market.

Monopsony power can arise in different ways.

One source can be the specialised nature of a firms business. If the firm buys a component
that no one else buys, it is likely to be a monopsonist in the market for that component.
Another source can be a businesss locationit may be the only major employer within an
area.
Monopsony power can also arise when the buyers of a factor form a cartel to limit purchases
of the factor, in order to buy it at less than the competitive price. (But this is a violation of the
antitrust laws.)

Few firms in our economy are pure monopsonists. But many firms (or individuals) have some
monopsony power because their purchases account for a large portion of the market. The
government is a monopsonist when it hires volunteer soldiers or buys missiles, aircraft, and other
specialised military equipment. A mining firm or other company that is the only major employer in a
community also has monopsony power in the local labor market. Even in these cases, however,
monopsony power may be limited because the government competes to some extent with other
firms that offer similar jobs. Likewise, the mining firm competes to some extent with companies in
nearby communities.

Bargaining Power

In some factor markets, there are a small number of sellers and a small number of buyers. In such
cases, an individual buyer and an individual seller will negotiate with each other to determine a
price. The resulting price might be high or low, depending on which side has more bargaining
power.

The amount of bargaining power that a buyer or seller has is determined in part by the number of
competing buyers and competing sellers. But it is also determined by the nature of the purchase
itself.
If each buyer makes large and infrequent purchases, it can sometimes play the sellers off
against each other when negotiating a price and thereby amass considerable bargaining power.
An example of this kind of bargaining power occurs in the market for commercial aircraft. Airplanes
are clearly key factor inputs for airlines, and airlines want to buy planes at the lowest possible
prices. There are dozens of airlines, however, and only two major producers of commercial aircraft
Boeing and Airbus.

One might think that as a result, Boeing and Airbus would have a considerable advantage when
negotiating prices. The opposite is true. It is important to understand why.
Airlines do not buy planes every day, and they do not usually buy one plane at a time. A
company like American Airlines will typically order new planes only every three or four years, and
each order might be for 20 or 30 planes, at a cost of several billion dollars. As big as Boeing and
Airbus are, this is no small purchase, and each seller will do all it can to win the order. American
Airlines knows this and can use it to its advantage. If, for example, American is choosing between
20 new Boeing 787s or 20 new Airbus A380s (which are similar airplanes), it can play the two
companies off against each other when negotiating a price. Thus if Boeing offers a price of, say,
$300 million per plane, American might go to Airbus and ask it to do better. Whatever Airbus offers,
American will then go back to Boeing and demand a bigger discount, claiming (truthfully or
otherwise) that Airbus is offer- ing large discounts. Then back to Airbus, back to Boeing, and so on,
until American has succeeded in obtaining a large discount from one of the two companies.

FACTOR MARKETS WITH MONOPOLY POWER

Just as buyers of inputs can have monopsony power, sellers of inputs can have monopoly power.
In the extreme, the seller of an input may be a monopolist, as when a firm has a patent to produce
a computer chip that no other firm can duplicate. Because the most important example of monop-
oly power in factor markets involves labor CHAPTER 14 Mark
unions, we will concentrate most of our
attention there. In the subsections that
Wage
follow, we show how a labor union, which is per
a monopolist in the sale of labor services, worker F IGURE 14
might increase the well-being of its MONOPOLY
members and substantially affect non- w1 When a labor un
unionised workers. points on the b
seller can maxim
w2 SL L*, by agreeing
Figure13. Monopoly power Of Sellers Of A
quantity of labo
Labour w* employees is d
marginal revenu
members will re
Monopoly Power Over The Wage Rate union wishes to
it should allow
DL a wage rate of w
MR to the union wil

L1 L2 L* Number of workers
Figure13 shows a demand for labor curve in a market with no monopsony power: It aggregates
the marginal revenue products of firms that compete to buy labor. The labor supply curve describes
how union members would supply labor if the union exerted no monopoly power. In that case, the
labor market would be competitive, and L* workers would be hired at a wage of w*, where
demand DL equals supply SL.

Because of its monopoly power, however, the union can choose any wage rate and the
corresponding quantity of labor supplied, just as a monopolist seller of output chooses price and
the corresponding quantity of output. If the union wanted to maximise the number of workers hired,
it would choose the competitive outcome at A. However, if the union wished to obtain a higher than
competitive wage, it could restrict its membership to L1 workers. As a result, the firm would pay a
wage rate of w1. Although union members who work would be better off, those who cannot find
jobs would be worse off.

Is a policy of restrictive union membership worthwhile?

If the union wishes to maximise the economic rent that its workers receive, the answer is yes.
By restricting membership, the union would be acting like a monopolist, which restricts output in
order to maximise profit. To a firm, profit is the revenue that it receives less its opportunity costs. To
a union, rent represents the wages that its members earn as a group in excess of their opportunity
cost. To maximise rent, the union must choose the number of workers hired so that the marginal
revenue to the union (the additional wages earned) is equal to the extra cost of inducing workers to
work. This cost is a marginal opportunity cost because it is a measure of what an employer has to
offer an additional worker to get him or her to work for the firm. However, the wage that is
necessary to encourage additional workers to take jobs is given by the supply of labor curve SL.

The rent-maximising combination of wage rate and number of workers is given by the intersection
of the MR and SL curves. We have chosen the wage-employment combination of w1 and L1 with
the rent-maximisation premise in mind. The shaded area below the demand for labor curve, above
the supply of labor curve and to the left of L1, represents the economic rent that all workers
receive.
A rent-maximising policy might benefit nonunion workers if they can find non-union jobs.
However, if these jobs are not available, rent maximisation could create too sharp a distinction
between winners and losers. An alternative objective is to maximise the aggregate wages that all
union members receive. Look again at the example in Figure13. To achieve this goal, the number
of workers hired is increased from L1 until the marginal revenue to the union is equal to zero.
Because any further employment decreases total wage payments, aggregate wages are
maximised when the wage is equal to w2 and the number of workers is equal to L2.

Unionised And Non-unionised Workers

When the union uses its monopoly power to increase members wages, fewer unionised workers
are hired. Because these workers either move to the non-union sector or choose initially not to join
the union, it is important to understand what happens in the nonunionised part of the economy.

Figure14. Wage Discrimination In Unionised & Nonunionised Sectors

Assume that the total supply of unionised and nonunionised workers is fixed. In Figure14, the
market supply of labor in both sectors is given by SL. The demand for labor by firms in the
unionised sector is given by DU, the demand in the nonunionised sector by DNU. Total market
demand is the horizontal sum of the demands in the two sectors and is given by DL.
Suppose the union chooses to increase the wage rate of its workers above the competitive wage
w*, to wU. At that wage rate, the number of workers hired in the unionised sector falls by an
amount LU, as shown on the horizontal axis. As these workers find employment in the
nonunionised sector, the wage rate in that sector adjusts until the labor market is in equilibrium. At
 improve working conditions and provide useful information to workers and
management. But when the demand for labor is not perfectly inelastic, union
workers are helped at the expense of nonunion workers.

the new wage rate in the nonunionised

sector, wNU, the additional number of SL
Wage
workers hired in that sector, LNU, is per
equal to the number of workers who left worker
the unionised sector.
Figure14 shows an adverse
RE 14.16consequence of a union strategy
E DISCRIMINATION
directed IN UNIONIZED
toward raising union wages:
NONUNIONIZED SECTORS
Nonunionised wages fall. Unionisation
a monopolisticcanunion raises the
improve wage in conditions
working the unionizedand wU
of the economy from w*useful
provide to wU, employment
information in that
to sector
workers
s shown by the andmovement along the demand
management. curve DUthe
But when . w*
e total supply of labor, given
demand forbylabor
SL, to remain
is notunchanged,
perfectly w NU
ge in the nonunionized
inelastic,sector
unionmust fall from are
workers w* tohelped
wNU, as at
by the movement along the demand curve
the expense of nonunion workers. D NU
.
DU DNU DL

L U L NU Number of
workers