Resource markets: long-term inputs

Firm's response to input price changes can get complicated. The main conclusion is:
Input demand curves always slope down

    DPL--> 2 effects:
    (1) the resource substitution effect
    (2) the output effect
    Both increase Qd,L

(1) the resource substitution effect

MRTS = PL/PK

-PL => at initial optimum, value of L > new cost of L => substitute L for K

    These 2 effects together get us our result: -PL always => +QdL
    Why? Resource substitution and output effects always reinforce each other.
    => inputs are never Giffen goods

General MRP and MFC formulas
MRPL	MFCL
TR = P^.Q For all firms: MRPL = d(P^.Q)/dL = (P^.dQ/dL + Q^.dP/dQ^.dQ/dL) = (P + Q^.dP/dQ)^.MPL MRPL = MR^.MPL If output market is PC, this simplifies to: MRPL = P_Q^.MPL = VMPL If firm has market power in output market: MRPL < VMPL, since MR < P_output	TFCL = PL^.L MFCL = dTFCL/dL For all firms MFCL = PL + L^.dPL/dL If input market is PC, this simplifies to: MFCL = PL

Example: patented bicycle tire (wind-resistant)

PL = $20

QL Q   P   TR MPL MRPL
3   8 60 480
4 10 50 500  2   20

VMPL4 = PxMPL
= $50x2=$100

    Main conclusion: monopoly equilibrium:
    MRPL = PL < VMPL =>
    A monopolist pays a resource less than the value of its MP =>
    A form of economic exploitation because PL < VMPL
    Paying PL = VMPL => workers could buy back everything they contributed to total output.
    In restricting Q, monopolist stops hiring inputs at a point at which vmp ($100) exceeds wage ($20)--workers can't buy back all they contributed.
    Monopolist restricts output by underhiring inputs.

? Are college athletes exploited?
To economists, workers are exploited if they are paid less than the value of their contribution to society. College athletes fall into this group

    (Doug Flutie, FB: $3M MRP for Boston College / Wayman Tisdale, BKB: $550K to U of OK)
    These numbers reflect their value.
    ? What were they paid?
   Few of them ever get the bigger payoff from becoming professionals (MIT yell)

?Why does this happen?
NCAA recruiting rules make Div 1A schools act like a monopsony

Monopolist restricts sales to charge more
Monopsonist restricts purchases to pay less

    Other possible examples where firm is the only employer of a particular input:
    Mining town / university town
    Intern policy of AMA: get law on their side. Hospitals lose "class a" certification if they bid on intern wages. Restricts nursing market as well.
    Reserve clause in baseball--ties player to one team

Draw upward-sloping SL

QL	PL	TFCL	MFCL
3	8		______
4	9		______

? Why is MFCL4 > PL4?

A=PL4
A+B = MFCL4

    Monopsony's profit-maximizing process:
    Step 1: Calculate MRPL = MR^.MPL
    Step 2: Calculate MFCL = dTFCL/dL
    Step 3: Hire more L as long as MRPL > MFCL --> Lm
    Step 4: Pay Lm as little as possible

    An attempt to organize the supply side of the market.
    Tries to be a monopolist: the only seller of a resource to an industry
    The difference: Not one firm, but a collection of separate agents.
    Each would like max wage possible, but must act collectively.
    So, we don't know what their objective function is and so we aren't sure exactly where they will want to set PL.

Result in competitive markets: technical inefficiency--PL's not equal in all industries

    Application here: a union can raise wages and efficiency when there is a monopsony employer.
    Usually a price floor reduces Q bought and causes inefficiency
    With a monoposony, a price floor can raise Q bought and reduce inefficiency.

Suppose the result of collective bargaining is a wage floor. Draw the MFCL curve and note the new optimum.

Summary: lack of PC on either side of a market, selling or buying side, results in inefficiency

PC markets: MR=P => MRPL = VMPL
Output monopoly: MR<P =>	MR^.MPL	< P^.MPL
	MRPL	< VMPL

TFCL = PL^.L
MFCL =	PL +	L^.dPL/dL
	wage paid to extra L ---------------------	raise for everyone else ----------------------