Factor Markets

Input Markets & Labour Demand

Factor markets for labour, capital, and land are the flip side of product markets: firms are buyers and households are sellers.

Labour demand relies on profit maximisation. A firm hires workers until the value of the last worker's output equals the wage:

$$VMP_L = P \times MP_L = w$$

The value of marginal product ($VMP_L$) curve is the firm's labour demand curve. It slopes downward due to diminishing marginal returns.

Market wage determination occurs where labour supply and demand intersect. In competitive labour markets, workers earn their marginal product.

Monopsony & Wage Differentials

A monopsonist is a single buyer of labour. Because it faces an upward-sloping labour supply, hiring more workers requires raising wages for all current workers. Thus, marginal cost exceeds the wage:

$$MC_L > w$$

Human capital (skills/education) increases productivity. Wage differentials also stem from compensating differentials, discrimination, unions, and efficiency wages.