Factor Markets

A factor market 要素市场 is where firms buy the factors of production – labor, land, capital. The roles reverse: firms demand and households supply. The most-tested factor is labor.

A competitive labour market sets the wage where labour demand meets labour supply

Factor demand is a derived demand 派生需求 – firms want labor not for itself but for the output (and revenue) it produces. So the demand for workers depends on the demand for the product they make.

Labor demand shifts when:

• the product price or product demand changes (more valuable output $\Rightarrow$ more labor demanded),
• worker productivity changes (better training or capital),
• the price of other inputs changes (a substitute input like machines, or a complement).

Labor supply shifts with the number of qualified workers, immigration, workers' preferences (wages needed to attract them), and the wages available in other jobs. The market wage is set where labor demand meets labor supply.

A firm decides how many workers to hire with the same marginal logic as everything else – compare the marginal benefit and marginal cost of one more worker.

• The marginal benefit of a worker is the marginal revenue product 边际收益产品 (MRP): the extra revenue from one more worker, $MRP = MP \times$ product price (in a competitive product market, where $P=MR$). MRP falls as more workers are hired, because of diminishing marginal product.
• The marginal cost of a worker is the wage (in a competitive labor market the firm is a wage taker, so marginal factor cost $=$ the wage).
• Hiring rule: hire workers up to where $MRP = \text{wage}$ (more generally, $MRP = MFC$). The MRP curve is the firm's labor demand curve.

Worked example. A worker's marginal product is $8$ units and the firm sells each in a competitive market for $\$5$, so $MRP=8\times\$5=\$40$. If the wage is $\$30$, the firm hires this worker because $MRP>\text{wage}$. As more workers join, diminishing marginal product pulls MRP down; the firm keeps hiring until a worker whose $MP=6$ gives $MRP=6\times\$5=\$30$, exactly the wage – the profit-maximizing stopping point.

To choose the least-cost combination of two inputs, set the MP-per-dollar equal across inputs: $\dfrac{MP_L}{P_L}=\dfrac{MP_K}{P_K}$ – the same equal-bang-per-buck rule as consumer choice.

Exam skill: compute MRP from a table (marginal product $\times$ price) and find how many workers to hire at a given wage – a common free-response task.

A monopsony 买方垄断 is a market with a single buyer of a factor – for example, the only large employer in a town.

• Because it is the whole market, the monopsonist faces an upward-sloping labor supply curve: to hire more workers it must raise the wage for everyone.
• So the marginal factor cost 边际要素成本 (MFC) is above the wage (like $MR for a monopoly, in reverse), and the MFC curve lies above the supply curve.
• The monopsonist hires where $MRP = MFC$, then pays the lower wage the supply curve allows at that quantity.
• Result: compared with a competitive labor market, a monopsony hires fewer workers at a lower wage – the mirror image of monopoly.

A monopsony hires where MFC = MRP and pays a lower wage than a competitive market

Exam skill: draw the monopsony graph (supply, MFC above it, MRP as demand), mark quantity at $MRP=MFC$ and the wage down on the supply curve, and contrast it with the competitive wage and quantity.

• Factor demand is derived demand; hire labour up to where MRP = wage (MRP = marginal product × price).
• MRP falls as more workers are hired (diminishing marginal product).
• For least-cost input use, equalise the marginal product per dollar across inputs.
• A monopsony faces an upward supply, so its marginal factor cost is above the wage; it hires fewer workers at a lower wage.
• Draw the monopsony graph (supply, MFC above it, MRP as demand) and contrast with the competitive outcome.