If marginal cost is greater than marginal revenue, the firm can increase its profit by decreasing output. At the profit-maximizing level of output, marginal revenue is equal to marginal cost. A monopoly is a firm that is the sole seller in its market. A monopoly arises when a single firm owns a key resource, when the government gives a firm the exclusive right to produce a good, or when a single firm can supply the entire market at a smaller cost than many firms could.
Because a monopoly is the sole producer in its market, it does not have a constant price like the perfect competitor. Like a competitive firm, a monopoly firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost. Policymakers can respond to the inefficiency of monopoly behavior in four ways. They can use the antitrust laws to try to make the industry more competitive. They can regulate the prices that the monopoly charges. They can turn the monopolist into a government-run enterprise.
Or, if the market failure is deemed small compared to the inevitable imperfections of policies, they can do nothing at all. A competitive firm is a price taker; a monopoly firm is a price maker. Definition of monopoly : a firm that is the sole seller of a product without close substitutes.
The fundamental cause of monopoly is barriers to entry. Monopoly Resources. A monopoly could have sole ownership or control of a key resource that is used in the production of the good. The DeBeers Diamond Monopoly —this firm controls about 80 percent of the diamonds in the world. Government-Created Monopolies.
Monopolies can arise because the government grants one person or one firm the exclusive right to sell some good or service. Patents are issued by the government to give firms the exclusive right to produce a product for 20 years.
Monopolies because of high fixed costs. Monopoly Versus Competition. Decreases in the real wage lead firms to produce more output and hire more workers, thus creating jobs. Increases in the real wage cause firms to produce less output and lay off workers. Going deeper, we can ask why the real wage might change. The answer comes from looking back at Figure 8. The real wage changes, causing a change in the quantity of labor demanded, if the labor supply curve shifts.
Population growth is one source of a shift in labor supply. As the number of workers in the economy grows, then total labor supply will shift. At a given wage, there will be more workers and hence the labor supply curve will shift to the right.
Other things equal, this causes a decrease in the real wage. Changes in labor market participation also shift the labor supply curve. A leading example of this is the increased participation of women in the labor market.
In the United States, the fraction of women in the labor force rose from about 20 percent in to about 70 percent in Changes in productivity—more precisely, in the marginal product of labor—work exactly like changes in the real wage. Remember that marginal cost depends on both real wages and productivity.
If productivity increases, perhaps because a firm has upgraded its capital equipment, then marginal cost decreases. Firms will produce more output and hire more labor.
The opposite is true if productivity decreases: in this case, firms will produce less and destroy jobs. Over long periods of time, productivity in an economy increases. This increase in productivity is driven largely by technological advances: firms get better at producing goods and services and so are able to produce them more cheaply. This shift in demand typically leads to an outward shift in marginal revenue, inducing a firm to produce more output and demand more labor.
An increase in demand typically leads to an increase in marginal revenue, which in turn induces firms to produce more output and create jobs. Show how you can use these three equations to derive the condition in the text that. Previous Section. Table of Contents. Next Section. Learning Objectives What is a production function? How does a firm decide how much to produce? The Decisions of a Firm Firms hire labor to help them produce output. Of these, the most fundamental decisions are the following: Should a firm be in business at all?
How much should a firm produce, and what price should its managers set? How should a firm produce its desired level of output? A firm is fundamentally constrained by the desires of the market. If managers choose the price of output, they must accept whatever sales are demanded by consumers at that price. If they choose the level of output, they can only charge the price that the market will bear for that quantity.
An existing firm can stay in the market or exit, thus destroying jobs. Potential new firms can enter the market and create jobs. The Production Function A firm possesses a means of turning inputs into outputs. A Production Function That Uses Only Labor We summarize the technological possibilities of a firm using a production function A description of how much output a firm can produce as it varies its inputs. Typically, we suppose that the production function exhibits the following: Positive marginal product of labor Diminishing marginal product of labor The first property means that adding more labor into production means more output—that is, the slope of the production function is positive.
Marginal Cost The cost function in Figure 8. The Choice of Inputs There is one issue that we are ignoring here. Changes in Employment We can now connect our understanding of the labor market with the data on net job creation that we showed in Figure 8. Changes in the Real Wage Changes in the cost of labor are one reason firms create or destroy jobs. Changes in Productivity Changes in productivity—more precisely, in the marginal product of labor—work exactly like changes in the real wage.
Key Takeaways A firm produces a quantity such that the marginal cost of producing an extra unit of output equals the marginal revenue from selling that extra unit of output.
Checking Your Understanding Suppose the production function exhibits increasing marginal product of labor. What would it look like? What would the cost function look like in this case? Using Figure 8. We show this by the P term in the demand for labor. If the employer does not sell its output in a perfectly competitive industry, they face a downward sloping demand curve for output, which means that in order to sell additional output the firm must lower its price. Thus, the demand for labor is the marginal product times the marginal revenue.
Everything else remains the same as we described above in the discussion of the labor demand in perfectly competitive labor markets. Given the market wage, profit-maximizing firms will hire workers up to the point where the market wage equals the marginal revenue product, as Figure shows.
Every other worker brings in more revenue than the firm pays him or her. This has sometimes led to the claim that employers exploit workers because they do not pay workers what they are worth. It is because of the capital and technology with which they work. The firm may be earning excessive profits, but that is a different topic of discussion. In the chapter on Labor and Financial Markets , we learned that the labor market has demand and supply curves like other markets.
The demand for labor curve is a downward sloping function of the wage rate. The supply for labor curve is an upward sloping function of the wage rate. This is because if wages for a particular type of labor increase in a particular labor market, people with appropriate skills may change jobs, and vacancies will attract people from outside the geographic area.
Like all equilibrium prices, the market wage rate is determined through the interaction of supply and demand in the labor market. Thus, we can see in Figure for competitive markets the wage rate and number of workers hired.
The FRED database has a great deal of data on labor markets, starting at the wage rate and number of workers hired. The United States Census Bureau for the Bureau of Labor Statistics publishes The Current Population Survey , which is a monthly survey of households link is on that page , which provides data on labor supply, including numerous measures of the labor force size disaggregated by age, gender and educational attainment , labor force participation rates for different demographic groups, and employment.
It also includes more than 3, measures of earnings by different demographic groups. The Current Employment Statistics , which is a survey of businesses, offers alternative estimates of employment across all sectors of the economy. In a competitive labor market, we determine market wage through the interaction between the market supply and market demand for labor.
Figure shows levels of employment Labor , the marginal product at each of those levels, and the price at which the firm can sell output in the perfectly competitive market where it operates. Figure shows the quantity demanded and supplied in the labor market for driving city buses in the town of Unionville, where all the bus drivers belong to a union.
Do unions typically oppose new technology out of a fear that it will reduce the number of union jobs? Why or why not? Unions have sometimes opposed new technology out of a fear of losing jobs, but in other cases unions have helped to facilitate the introduction of new technology because unionized workers felt that the union was looking after their interests or that their higher skills meant that their jobs were essentially protected.
And the new technologies meant increased productivity. Possible Answers: wage equals marginal revenue. Correct answer: wage equals marginal revenue product of labor. Explanation : Like any market, the profit maximization level is the point at which marginal cost equals marginal revenue. Refer to the following chart for this question:. Explanation : The marginal revenue product of labor for the fourth unit of labor is its marginal product multiplied by the cost of the product.
Possible Answers: four. Correct answer: three. Explanation : The firm will hire three units of labor, because it will continue to hire until the wage exceeds the marginal revenue product of labor MRPL.
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