Labor supply for an enterprise under perfect competition. Elasticity of supply Short-run equilibrium of a firm under perfect competition
In conditions of perfect competition, as noted above, marginal revenue is equal to the price of the product prevailing in the market: МR = Р. A profit-maximizing firm hires workers until the marginal profitability of labor is equal to wages (МРЛ = W), t .e. until the marginal income from the use of labor is equal to the costs associated with its purchase, which are wages (W).
If in the MRP formula L is replaced by wage W, and marginal income MR by price P, we obtain:
W = P * MP L ; MP L = W/P,
where W is the nominal wage;
P - issue price;
W/P - real wage.
From the resulting formula we can make conclusion, that the condition for maximizing profit is equality between the marginal product of labor and real wages.
How should a company behave? If marginal revenue exceeds marginal cost, total profit can increase with the number of employees (MRL > MC), then the number of employees should increase.
If MR L< МС, то следует уменьшить число занятых, поскольку прибыль уменьшается с каждым дополнительным рабочим.
If MR L = MC, then the number of employees should not be changed since profit is maximized.
All the above discussions about the conditions for maximizing the profit of a company that hires a certain amount of labor to obtain additional income from its hiring allow us to draw another conclusion - the demand curve for labor D L coincides with the MRP L curve and reflects the change in the value of the marginal (marginal) product of labor ( MRP L).
The demand for labor increases as the wage rate decreases. Changes in the price of a resource, all other things being equal, lead to movement along the curve.
Law of demand in the labor market: the higher the wage rate, the less number of workers the company (employer) wants to hire.
Rice. 20. Change in the demand for labor when its payment changes (a), shifts in the demand curve for labor (b)
To the factors determining the change in position (shift) of the labor demand curve, relate:
price of manufactured products. The value of the marginal product is equal to the product of the marginal product and the price (MRP L = MP L * P). A change in the price of a product leads to a change in the value of the marginal product, and at the same time there is a shift in the demand curve for labor:
With an increase in price (Product) => МРР L = МР L * P→ D L 1 → up to D L 2;
When the price decreases (Product ↓) => МРР L ↓ = МР L * P→ D L 1 →→ to D L 3;
technology changes. The marginal productivity of labor will increase with an increase in the means of production and their improvement. For example, the labor of a digger who uses an excavator, and a digger with a simple shovel; the work of an economist equipped with a personal computer and an economist with simple stone abacus;
proposal of other factors. The quantity of a factor of production available can affect the marginal product provided by other factors.
In addition to demand, the labor market is characterized by its supply.
Labor supply - this is the amount of working time that the population wants and can spend on income-generating work.
The peculiarity of the market labor supply curve is that it can slope not only up, but also down.
Rice. 21. Individual labor supply curve
The decision about how much labor can be offered on the market is associated with the possibility of alternative use of the time available to the bearer of labor power. By bringing our labor force to the market, we make a kind of “compromise”, choosing between two goods: leisure and income, with which we can buy consumer goods. Leisure is necessary to recuperate, perform household duties, improve skills, and relax. Therefore, the labor seller ultimately chooses how many hours to work per day.
This choice is associated with two main limitations:
Limited time in a day to twenty-four hours, which can be distributed between work and leisure;
The hourly wage rate, which determines the possible income of the labor seller.
The hourly rate can thus be considered as the opportunity cost of labor. It is the monetary equivalent of those goods and services that the employee sacrifices to obtain the benefits of leisure.
The wage rate and its changes influence the choice between work and leisure.
Firstly, there is a substitution effect; higher wage rates, increasing real income, encourage people to work more. Since every hour of free time has also become more expensive, there is an incentive to replace leisure with work.
Second, the substitution effect is counteracted by the income effect. With higher wages, income is higher and the owner of the labor force can buy more normal goods and fewer low-quality goods. At the same time, one of the normal goods is rest. If you spend more on leisure, then the income effect encourages you to work less. Thus, the income effect from increasing wages will be expressed in a reduction in the amount of labor offered on the market. When an increase in wages causes a worker to reduce his or her working hours due to a large income effect, the labor supply curve slopes downward.
In general, in labor markets, labor supply is formed under the influence of a combination of the following conditions:
Total population;
Number of active working population;
Amount of time worked per year;
Qualitative parameters of labor (its qualifications, productivity, specialization).
The market supply of labor consists of the offers of individual workers.
Law of supply: the higher the wage rate, the more workers are willing to work.
For different workers, the level of remuneration at which a person agrees to work will be different. As a result of the horizontal summation of individual labor supply curves, with an increase in the wage rate, the supply of labor will increase.
The labor supply curve of an individual firm in a competitive market is absolutely elastic, since the employer can buy any required amount of labor at a fixed price (Fig. Labor market under conditions of perfect competition a) for the firm). In the short run, in a perfectly competitive labor market, an individual firm has no influence on the market wage level due to the small share of the firm's labor supply in the total labor market. In the market as a whole, the labor supply curve has a positive slope (Fig. Labor market under conditions of perfect competition b) for the market).
Rice. 22. Labor market under conditions of perfect competition:
a) for the company; b) for the market
In reality, within the framework of the national labor market, there are many labor markets that differ by profession, region, etc. They interact with each other and mutually influence each other.
Equilibrium in perfectly competitive labor markets is characterized by the fact that the equilibrium wage rate is equal to the marginal return on the resource W = MRP L and is the same for all firms in a given industry. Regardless of the number of employed workers, the wage rate remains unchanged (Fig. Labor market under conditions of perfect competition a) for the company). Since the supply of labor is perfectly elastic, a profit-maximizing firm will hire workers until the marginal revenue from a resource equals its marginal cost: MRP L = MRC L .
The demand for a factor (labor) is derived - it depends on the demand for the product produced in the industry.
In a competitive labor market, the equilibrium wage and employment level are determined by the point of intersection of the supply and demand curves (Fig.
Rice. 8.2. Equilibrium in a competitive labor market
Labor supply and labor demand of an individual competitive firm
For an individual firm, the market wage rate appears as a horizontal direct supply of labor (Figure 8.3).
Rice. 8.3. Equilibrium in the labor market for an individual firm
Since the wage rate for a particular firm hiring workers in the labor market acts as a given value, the supply curve S l = MRC l is perfectly elastic. Here the MRP l curve acts as its labor demand curve.
The company will receive maximum profit if it hires the number of workers such that MRP l = MRC l.
The firm hires new workers only until its marginal revenue from the product (MRP l) equals the marginal cost of the resource (MRC l), in this case labor.
Determinants of labor demand
1. Changes in demand for a product: All other things being equal, an increase in the demand for a product increases the demand for the resources used to produce that product, while a decrease in the demand for a product leads to a decrease in the demand for the resources required for its production.
2. Changes in productivity: ceteris paribus, a change in the productivity of resources also causes a change in the demand for the resource, and the derived change goes in the same direction as the original one that causes it. Performance may be affected by:
Amount of other resources used;
Technical progress;
Improving the quality of resources.
3. Changes in prices of other resources.
If the substitution effect outweighs the output effect, then a change in the price of the resource causes an equal change in the demand for the substitute resource.
If the volume effect exceeds the substitution effect, then a change in the price of a resource causes an opposite change in the demand for the substitute resource.
The marginal return of a product by factor (labor), or marginal factor revenue, is the additional income that the firm will receive from the use of one more, additional unit of resource:
This value determines the demand for labor.
Market demand for labor is the sum of industry demands of various sectors of the economy.
The elasticity of market (industry) demand with respect to the wage rate is determined by the formula
The supply of labor is determined by the wage rate, which is equal to the marginal cost of labor (this is the additional cost of hiring an additional unit of labor). The firm, maximizing its profit, will hire new workers as long as each new worker brings additional revenue exceeding his wage rate, i.e. MRP l > w and MRP l = MRC l .
The profit will be maximum under the condition of MRP l = w.
The hiring decision will be determined by the equilibrium of labor demand and labor supply at given market wage rates.
Elasticity offers-- the degree of change in the quantity of goods and services supplied in response to changes in their price. The process of increasing elasticity of supply in the long and short term is revealed through the concepts of instantaneous, short-term and long-term equilibrium.
Supply elasticity coefficient-- a numerical indicator reflecting the degree of change in the quantity of goods and services offered in response to changes in their price.
- 1. Supply is elastic when firms can easily and quickly change the quantity supplied of a product in response to a change in its price (ES > 1).
- 2. Supply is inelastic when it is impossible to quickly and easily change the volume of goods supplied due to changes in its price (ES
- 3. Unit elasticity supply is formed in the case when the percentage change in price and the subsequent percentage change in the quantity of products supplied are equal in value (ES = 1).
- 4. Perfectly inelastic supply. (ES = 0, the curve is vertical). That is, for any change in price, firms can supply a fixed quantity of goods.
- 5. Absolutely elastic offer. Firms are ready to offer such a quantity of goods that can satisfy the entire demand, if necessary - an infinite quantity (ES = ?, the curve is horizontal).
Factors influencing elasticity of supply
- 1. Availability of reserve production capacity. When an industry is not operating at full capacity, equipment sits idle and workers remain unemployed or underemployed. In this case, supply will be elastic. Increased demand can be met fairly quickly by hiring more workers and bringing idle equipment into operation. However, if industry is operating at full capacity, supply will be inelastic, at least in the short term. It may take a long time to build new plants or expand old ones. And even in conditions of unemployment, supply may be inelastic if there is a shortage of labor of a certain qualification.
- 2. Inventory level. If the industry has large inventories, the increased demand can be met by putting them into circulation. Until stocks are depleted, supply will remain elastic.
- 3. Difference between agricultural and industrial goods. For agricultural products, the elasticity of supply is affected by the length of the crop's growing season. There are no changes in the supply of vegetables and grain crops during the year. The supply of some plantation crops (natural rubber, coffee and cocoa) will be inelastic for even longer periods of time because it takes several years for new trees and bushes to begin bearing fruit. The supply of industrial goods is more elastic than that of agricultural products. The industry has options to cope with the drop in demand: fire some workers or transfer them to part-time work and turn off machines. As demand increases, idle equipment can be reactivated, more workers hired, or overtime worked.
- 4. Time factor. - in the shortest market period, producers do not have time to respond to changes in demand and price, and supply is completely inelastic (ES = 0), therefore an increase (decrease) in demand leads to an increase (decrease) in prices, but does not affect the amount of supply; -in the short term, supply will be elastic. This is expressed in the fact that an increase in demand causes not only an increase in prices, but also an increase in production volume, since firms manage to change some factors of production in accordance with demand (raw materials, labor), or use them more intensively; - in long-term conditions, supply is almost completely elastic, so an increase in demand leads to a significant increase in supply at constant prices or an insignificant increase in prices.
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12.4 Perfectly competitive labor market
This market is an “ideal model” and is based on a number of premises that are quite unrealistic.
Characteristics of a competitive labor market:
- Significant number of buyers (firms) and sellers (households)
Each firm contributes a small share of total labor demand, each household contributes a small share of labor supply, and as a result, no market participant can influence the market price. All market participants are price takers. - Labor is homogeneous
This means that workers have the same qualifications, productivity and the same human capital - There are no entry/exit barriers
- Information is fully and symmetrically distributed among market participants
Under these conditions, the equilibrium wage rate is determined by the intersection of the demand and supply curves in the labor market, and the individual firm takes it as given. Any firm present in a given market finds that at the equilibrium wage, an infinite number of workers want to be hired. Therefore, the labor supply for an individual firm will look like a horizontal line at the level of the equilibrium market wage:
The supply of labor for an individual firm is perfectly elastic. If a firm offers a lower wage than the current market wage, no one will want to be hired by that firm. There is no need to offer a higher wage to the firm, since all willing workers already agree to be hired at the equilibrium market wage. Thus, the firm perceives the equilibrium market wage like this.
Let's see how the firm's demand curve for labor is formed.
To do this, remember that the company’s task is to hire the number of workers that will ensure it achieves maximum profits.
π(L) → maxL
π L ′ = 0
TR L ′ - TC L ′ = 0
Where MRP L = MC L
Let's remember that MC L = TC L ′ = VC L ′ = (w * L) L ′
Since in a perfectly competitive labor market w=const., marginal labor costs take the form:
MC L = (w * L) L ′ = w * L L ′ = w
Thus, in a perfectly competitive labor market MC L is a horizontal line and coincides with wages.
In a competitive labor market, a firm continues to hire workers if the marginal product of labor of an additional worker exceeds the wage ( MRP L>w), fires workers if the marginal product of labor is less than wages ( MRP L< w ), and is at optimum if MRP L = w 1
Now let's build graphs MRP L And ARP L. To do this, let us remember what the graphs of labor products looked like, which we built in the chapter “Theory of Production”.
It is not difficult to guess that the graphs MRP L And ARP L have the same character as graphs MP L And AP L.
This is true because MRP L is the marginal product of labor in monetary terms, and ARP L is the average product of labor in monetary terms.
It is easy to establish a connection between them:
Charts MRP L And ARP L look like this:
If we vary the levels of W from zero to infinity and look for the firm's optimum at each value of W, we will find that they lie on the decreasing part of the curve MRP L. Recall that a firm will hire workers only when w< ARP L .
Thus, the location of the points at which the company's profit is maximum is part of the curve MRP L, lying below the curve ARP L, this is the demand curve for a firm's labor in a perfectly competitive labor market.
A firm's demand for labor (in a perfectly competitive labor market) is the decreasing part of the graph MRP L, lying below the graph ARP L.
A firm's demand for labor is a decreasing relationship w(L): the firm is only willing to hire more workers at a lower wage, which is associated with diminishing marginal returns (and thus the diminishing marginal product of labor) from each worker.
The equilibrium of a firm in a perfectly competitive labor market is at the intersection point of the labor demand and labor supply curve for the firm:
1 At the same time, we must check the second-order conditions to make sure that we have found the maximum and not the minimum of profit.
A perfectly competitive labor market is characterized by the following properties:
- in each industry there are a significant number of firms competing with each other for the right to hire a particular specialist;
- there are a large number of specialists in a certain profession with equal qualifications, and each of them, independently of the others, offers their services on the labor market;
- Neither an individual company nor an individual worker is able to influence the level of wages established in the industry.
Based on the general patterns of demand for a resource, in conditions of perfect competition a firm will place demand for a resource until the value marginal product in monetary terms the unit of labor it hires is not equal to at the cost of labor, those. until equality is satisfied
P l =MRP l.
For each firm, the downward portion of the curve MRP is the demand curve.
The labor demand curve for the entire industry is the result of the horizontal summation of the demand curves of individual firms. This means that the values of the magnitude of individual demand are summed up at the same price values.
By definition, the supply curve reflects the relationship between the price and the quantity of a good that will be supplied to the market. In a perfectly competitive labor market, each point on an industry's labor supply curve indicates how much compensation must be paid to a particular worker in order for him to offer his services to the industry. Under conditions of perfect competition, all points on the supply curve correspond to the cost to society as a whole of hiring an additional worker in this industry, or, in other words, industry's marginal cost of labor as a factor of production (M.R.C.).
Therefore, in conditions of perfect competition in the labor market in this industry, equilibrium wage level (W) And equilibrium volume of hired labor resources, determined by the intersection point of the industry labor demand curve (curve MRP) and the labor supply curve (curve M.R.C.):
MRP = MRC.
This equality is a condition for maximizing profits from the use of labor as a factor of production. This situation is clearly presented in Fig. 15.2.
Rice. 15.2.
Each firm in a given industry will hire workers based on the industry wage level.
Differences in wages also play a significant role in market conditions. indicators of labor supply elasticity for different categories of workers: the supply of skilled labor is less elastic compared to the supply of unskilled labor. The more skilled labor is, the less elastic its supply becomes and the supply curve will be steeper, and therefore the equilibrium wage level will be higher.
Demand has a similar effect on the wage level: when demand increases and the curve shifts upward to the right, the wage level rises. When demand decreases, objective conditions appear for a reduction in wages.
In addition to market factors, there are also non-market factors that influence the level of wages. Among them are regional differences and state regulation of the minimum wage, working hours, overtime, age restrictions, etc.
Labor market in conditions of imperfect competition
As mentioned above, the labor market can be monopolized on both the demand and supply sides. Let us first consider an imperfectly competitive labor market that is monopolized on the demand side.
Monopsony, or a labor market in which there is a single employer of labor arises under the following conditions:
- a) in the labor market, on the one hand, a significant number of skilled workers who are not united in a trade union interact, and on the other hand, either one large monopsonist company or several companies united in one group and acting as a single employer of labor;
- b) this company (group of companies) hires the bulk of the total number of specialists in one profession;
- c) this type of labor does not have high mobility (for example, due to certain social conditions, geographical isolation, objective restrictions on obtaining a new specialty, etc.);
- d) the monopsonist firm sets its own wage rate, and workers are forced to either agree to this rate or look for another job.
A labor market with elements of monopsony is not uncommon. Similar situations often arise in small towns where there is only one large company - the employer of labor. For example, it can be a small city with one city-forming enterprise, and it is usually called as single-industry town
What is the peculiarity of monopsony and what will it give to entrepreneurs? In a completely competitive labor market, entrepreneurs have a wide choice of specialists, labor mobility is absolute, any firm hires workers at a constant price, and the labor supply curve in the industry reflects the marginal costs of additional attraction of a resource (labor).
Under monopsony conditions, the monopsonist firm represents the entire industry, so the labor demand curves for the firm and the industry coincide. In this case, for an individual monopsonist firm, the labor supply curve shows not the marginal, but the average costs of hiring labor, i.e. for the monopsonist the labor supply curve is the average cost curve of a resource (ARC), and not the limit ones.
Since the labor supply curve for an industry is upward sloping, since attracting an additional worker from another industry requires an increase in wages for this worker, then for a monopsonist firm, the average resource costs increase.
This means that for her the marginal cost of hiring labor exceeds the average cost (wages).
Example. If a monopsonist firm hires N 1 = 4000 workers at rate W 1, = 400 rubles, then hire ( N 1 + 1)th worker at rate W 2 = 410 rub. will mean that she must pay the same rate to already hired workers, otherwise she will face labor conflicts. Therefore, the marginal cost for a monopsonist firm to hire ( N 1 + 1)th worker will not be 410 rubles, but 40,410 rubles. (10 rubles 4000 – supplement for those already hired N 1 = = 4000 workers, plus 410 rubles paid ( N 1 + 1)th worker).
Taking into account the above, we can conclude that the marginal cost curve for a monopsonist firm is above the labor supply curve.
But any firm maximizes profit when it equalizes the marginal revenue received from hiring an additional unit of a resource with the marginal (rather than average) cost of the resource. Under monopsony conditions, this means that the equilibrium wages W M and number of workers hired N M of the monopsonist firm differ from the values of W) and N x established under a perfectly competitive labor market (Fig. 15.3).
Rice. 15.3.
In a perfectly competitive labor market, the equilibrium values W x and N 1 correspond to point E x intersection of labor demand curves D and labor supply S for the industry.
If a monopsony arises in the labor market, then the supply curve for the industry turns into the supply curve of the monopsonist firm and reflects the firm’s average labor costs, i.e. the level of wages it must pay to each employee. The monopsonist firm equalizes the values MRP And M.R.C. at the point E M, hiring N M workers and paying them a wage rate W M.
Note that under monopsony conditions the curve D is not a labor demand curve, since for a monopsonist firm it is impossible to construct a demand curve(similar to the fact that it is impossible to construct a supply curve for a monopoly).
As follows from Fig. 15.3, the monopsonist will always hire fewer workers ( N M < N 1) and pay them lower wages ( W M< W 1) than in a completely competitive labor market.
Let us evaluate the consequences of monopsonization of the labor market from the point of view of the monopsonist firm, workers and society as a whole. Hiring N M workers, the firm, if it operated under conditions of perfect competition, would have to pay workers a wage rate equal to ; total payments to workers (total costs of the company for hiring labor) would then be determined by the area of the rectangle. Setting the bet W M, the company potentially “wins back” a rectangle from the workers, which goes to pay for other factors of production (profit, interest, rent).
Thus, the monopsonist firm increases its profits. For workers, the emergence of a monopsony will result in a loss N 1–N M jobs and wage reductions from W 1 to W M. Since N 1 –N M workers will not be employed in the industry, then from the point of view of society as a whole, the losses will be the area of the triangle ME m E 1.
Union models. Another option for monopolizing the labor market is a monopoly on the supply side, when a strong trade union is created in the industry, which becomes a monopoly “seller” of labor to entrepreneurs.
Let's first consider a simpler model, where a union in an industry is opposed by many firms that do not act together.
Trade unions resolve many issues related to the protection of the rights of their members, but still the main task of the trade union is to increase wage rates. To imagine how a union achieves higher wages, let's look at a situation typical of a perfectly competitive labor market (Figure 15.4).
With perfect competition in the labor market, the equilibrium wage rate is established W 1, according to which the industry hires N 1 workers.
If a trade union unites only qualified specialists and acts as a single group “selling” the labor of its members, then we can consider such a situation as a classic monopoly. Then the industry demand curve becomes the average revenue curve for the union ( ARP), and its marginal revenue curve ( MRP) passes below the curve D.
Dot T intersections of curves M.R.C. And MRP will determine the number N 2 union members hired by industry at wage rate W 2. In conditions of constant demand for labor in the industry, a decrease in the number of employees is equivalent to a decrease in the supply of labor.
Rice. 15.4.
It should be noted that in developed countries, the method of increasing wages by narrowing supply is quite often used by trade unions. This is achieved in many ways, for example, by adopting legislation introducing special licenses to engage in a certain type of professional activity (medics, lawyers), creating other barriers to entry into the industry (the need for retraining, licensing fees, passing qualifying exams, etc.). In recent years, this process can be periodically observed even in developed European economies, where there are strong closed trade unions.
A slightly different situation will develop on the labor market if a trade union unites all workers in the industry, from highly qualified to semi-skilled. As a rule, in this case, the trade union resorts to the method of establishing a minimum wage W 3 above equilibrium W 1 by threatening to go on strike. If entrepreneurs agree to a wage rate at W 3, then formally for them the labor supply curve turns into a horizontal line W 3V, those. labor supply becomes perfectly elastic to the point V. If the demand for labor expands further, then hiring more workers N V should lead to an increase in wages. Dot E 3 intersections of labor demand and supply curves for an industry will determine the number of employees N 3. At the same time, in Fig. 15.4 values W 2 and W 3 were chosen arbitrarily for clarity of presentation.
The fact that raising wages by reducing labor supply reduces employment and potentially creates unemployment is a concern for trade unions.
A more effective way, leading to both wage growth and increased employment, is expansion of labor demand. This can be achieved if:
- a) the demand for goods manufactured in the industry increases, i.e. using this resource (labor);
- b) labor productivity in the industry increases;
- c) prices for substitute resources rise.
Trade unions can solve the first problem, for example, by using advertising for products in their industry. The solution to the second problem is achievable with appropriate agreements with employers. You can achieve higher prices for substitute inputs by supporting the fight to raise the minimum wage in industries that employ workers who are ready to potentially replace workers in that industry. However, the ability of trade unions to expand the demand for labor is limited, so trade unions more often resort to reducing the supply of labor in order to increase wages.
The negative effect of increasing wages, i.e. the reduction in the number of people employed in the industry can be reduced if the demand for labor will become less elastic. The lower the elasticity of labor demand, the less employment in the industry decreases for the same increase in wages. The elasticity of demand for labor depends on the availability of substitute resources. If a union is powerful enough, it may resist the use of resources that replace labor.
Strictly speaking, the introduction of a minimum wage has a similar impact on the labor market. W min at the state level: by analogy with the “floor” of prices on the commodity market. And in this case, part of the country’s working-age population will be left out of total employment, primarily unskilled workers who agree to offer their labor at wage rates below the minimum established by law W min. In an effort to reduce unemployment, the state will act by the same methods:
- firstly, to initiate an increase in the demand for labor (for example, many countries are adopting government job creation programs);
- secondly, strive to reduce the supply of labor: prohibit the use of child labor, reduce the length of the working week, lower the minimum age and length of service for retirement, etc.
Double monopoly on the labor market. A unique situation may also arise in the labor market when a single trade union (monopolist - seller of labor), uniting workers in the industry, is opposed by a monopsonist firm (buyer of labor).
In other words, The monopoly of labor supply represented by trade unions collides with the monopoly of labor demand represented by the monopsonist firm. Since the main task of the trade union will be the desire to increase wages, and the monopsonist firm, having market power, sets wages below the equilibrium, the real level of wages will be determined by the degree of monopoly power of the trade union and monopsony.
A strong, organized union, supported by other unions, is able to achieve wage levels that exceed monopsonistic and even equilibrium levels. On the contrary, a large monopsonist firm in the conditions of a divided labor movement is able to reduce wage rates below the equilibrium. As a rule, in conditions of a double monopoly, trade unions and entrepreneurs seek to conclude collective agreements that represent a mutual compromise.