Like a monopoly, each monopolistic competitor faces a downward-sloping demand curve and, as a result, charges a price above marginal cost.. Because there are many other firms selling app
Trang 1Goldman notes that “these arguments are clear enough and sound as if they
might have been written by a bourgeois apologist.”
Q U I C K Q U I Z : How might advertising make markets less competitive?
How might it make markets more competitive? ◆ Give the arguments for
and against brand names
C O N C L U S I O N
Monopolistic competition is true to its name: It is a hybrid of monopoly and
com-petition Like a monopoly, each monopolistic competitor faces a
downward-sloping demand curve and, as a result, charges a price above marginal cost As in
a competitive market, however, there are many firms, and entry and exit drive the
profit of each monopolistic competitor toward zero Because monopolistically
competitive firms produce differentiated products, each firm advertises in order to
attract customers to its own brand To some extent, advertising manipulates
con-sumers’ tastes, promotes irrational brand loyalty, and impedes competition To a
larger extent, advertising provides information, establishes brand names of
reli-able quality, and fosters competition
The theory of monopolistic competition seems to describe many markets in
the economy It is somewhat disappointing, therefore, that the theory does not
yield simple and compelling advice for public policy From the standpoint of the
economic theorist, the allocation of resources in monopolistically competitive
mar-kets is not perfect Yet, from the standpoint of a practical policymaker, there may
be little that can be done to improve it
◆ A monopolistically competitive market is characterized
by three attributes: many firms, differentiated products,
and free entry.
◆ The equilibrium in a monopolistically competitive
market differs from that in a perfectly competitive
market in two related ways First, each firm has excess
capacity That is, it operates on the downward-sloping
portion of the average-total-cost curve Second, each
firm charges a price above marginal cost.
◆ Monopolistic competition does not have all the
desirable properties of perfect competition There is the
standard deadweight loss of monopoly caused by the
markup of price over marginal cost In addition, the number of firms (and thus the variety of products) can
be too large or too small In practice, the ability of policymakers to correct these inefficiencies is limited.
◆ The product differentiation inherent in monopolistic competition leads to the use of advertising and brand names Critics of advertising and brand names argue that firms use them to take advantage of consumer irrationality and to reduce competition Defenders of advertising and brand names argue that firms use them
to inform consumers and to compete more vigorously
on price and product quality.
S u m m a r y
monopolistic competition, p 378
K e y C o n c e p t s
Trang 21 Describe the three attributes of monopolistic
competition How is monopolistic competition like
monopoly? How is it like perfect competition?
2 Draw a diagram depicting a firm in a monopolistically
competitive market that is making profits Now show
what happens to this firm as new firms enter the
industry.
3 Draw a diagram of the long-run equilibrium in a
monopolistically competitive market How is price
related to average total cost? How is price related to
marginal cost?
4 Does a monopolistic competitor produce too much or too little output compared to the most efficient level? What practical considerations make it difficult for policymakers to solve this problem?
5 How might advertising reduce economic well-being? How might advertising increase economic well-being?
6 How might advertising with no apparent informational content in fact convey information to consumers?
7 Explain two benefits that might arise from the existence
of brand names.
Q u e s t i o n s f o r R e v i e w
1 Classify the following markets as perfectly competitive,
monopolistic, or monopolistically competitive, and
explain your answers.
a wooden #2 pencils
b bottled water
c copper
d local telephone service
e peanut butter
f lipstick
2 What feature of the product being sold distinguishes a
monopolistically competitive firm from a monopolistic
firm?
3 The chapter states that monopolistically competitive
firms could increase the quantity they produce and
lower the average total cost of production Why don’t
they do so?
4 Sparkle is one firm of many in the market for
toothpaste, which is in long-run equilibrium.
a Draw a diagram showing Sparkle’s demand curve, marginal-revenue curve, average-total-cost curve, and marginal-cost curve Label Sparkle’s profit-maximizing output and price.
b What is Sparkle’s profit? Explain.
c On your diagram, show the consumer surplus derived from the purchase of Sparkle toothpaste Also show the deadweight loss relative to the efficient level of output.
d If the government forced Sparkle to produce the efficient level of output, what would happen
to the firm? What would happen to Sparkle’s customers?
5 Do monopolistically competitive markets typically have the optimal number of products? Explain.
6 Complete the table below by filling in YES, NO, or MAYBE for each type of market structure.
P r o b l e m s a n d A p p l i c a t i o n s
Make differentiated products?
Have excess capacity?
Advertise?
Pick Q so that MR ⫽ MC?
Pick Q so that P ⫽ MC?
Earn economic profits in long-run equilibrium?
Face a downward-sloping demand curve?
Have MR less than price?
Face the entry of other firms?
Exit in the long run if profits are less than zero?
Trang 37 The chapter says that monopolistically competitive
firms may send Christmas cards to their customers.
What do they accomplish by this? Explain in words and
with a diagram.
8 If you were thinking of entering the ice-cream business,
would you try to make ice cream that is just like one of
the existing brands? Explain your decision using the
ideas of this chapter.
9 Describe three commercials that you have seen on TV.
In what ways, if any, were each of these commercials
socially useful? In what ways were they socially
wasteful? Did the commercials affect the likelihood of
your buying the product, and why?
10 For each of the following pairs of firms, explain which
firm would be more likely to engage in advertising.
a a family-owned farm or a family-owned restaurant
b a manufacturer of forklifts or a manufacturer
of cars
c a company that invented a very reliable watch or a
company that invented a less reliable watch that
costs the same amount to make
11 Twenty years ago the market for chicken was perfectly competitive Then Frank Perdue began marketing chicken under his name.
a How do you suppose Perdue created a brand name for chicken? What did he gain from doing so?
b What did society gain from having brand-name chicken? What did society lose?
12 The makers of Tylenol pain reliever do a lot of advertising and have very loyal customers In contrast, the makers of generic acetaminophen do no advertising, and their customers shop only for the lowest price Assume that the marginal costs of Tylenol and generic acetaminophen are the same and constant.
a Draw a diagram showing Tylenol’s demand, marginal-revenue, and marginal-cost curves Label Tylenol’s price and markup over marginal cost.
b Repeat part (a) for a producer of generic acetaminophen How do the diagrams differ? Which company has the bigger markup? Explain.
c Which company has the bigger incentive for careful quality control? Why?
Trang 5I N T H I S C H A P T E R
Y O U W I L L
E x a m i n e h o w a
c h a n g e i n t h e
s u p p l y o f o n e f a c t o r
a l t e r s t h e e a r n i n g s
o f a l l t h e f a c t o r s
L e a r n w h y
e q u i l i b r i u m w a g e s
e q u a l t h e v a l u e o f
t h e m a r g i n a l
p r o d u c t o f l a b o r
A n a l y z e t h e l a b o r
d e m a n d o f
c o m p e t i t i v e , p r o f i t
-m a x i -m i z i n g f i r -m s
C o n s i d e r t h e
h o u s e h o l d d e c i s i o n s
t h a t l i e b e h i n d
l a b o r s u p p l y
C o n s i d e r h o w t h e
o t h e r f a c t o r s o f
p r o d u c t i o n — l a n d
a n d c a p i t a l — a r e
c o m p e n s a t e d
When you finish school, your income will be determined largely by what kind of
job you take If you become a computer programmer, you will earn more than if
you become a gas station attendant This fact is not surprising, but it is not obvious
why it is true No law requires that computer programmers be paid more than gas
station attendants No ethical principle says that programmers are more
deserv-ing What then determines which job will pay you the higher wage?
Your income, of course, is a small piece of a larger economic picture In 1999
the total income of all U.S residents was about $8 trillion People earned this
in-come in various ways Workers earned about three-fourths of it in the form of
wages and fringe benefits The rest went to landowners and to the owners of
capi-tal—the economy’s stock of equipment and structures—in the form of rent, profit,
and interest What determines how much goes to workers? To landowners? To the
owners of capital? Why do some workers earn higher wages than others, some
T H E M A R K E T S F O R T H E
F A C T O R S O F P R O D U C T I O N
Trang 6landowners higher rental income than others, and some capital owners greater profit than others? Why, in particular, do computer programmers earn more than gas station attendants?
The answers to these questions, like most in economics, hinge on supply and demand The supply and demand for labor, land, and capital determine the prices paid to workers, landowners, and capital owners To understand why some peo-ple have higher incomes than others, therefore, we need to look more deeply at the markets for the services they provide That is our job in this and the next two chapters
This chapter provides the basic theory for the analysis of factor markets As
you may recall from Chapter 2, the factors of production are the inputs used to
produce goods and services Labor, land, and capital are the three most important factors of production When a computer firm produces a new software program, it uses programmers’ time (labor), the physical space on which its offices sit (land), and an office building and computer equipment (capital) Similarly, when a gas station sells gas, it uses attendants’ time (labor), the physical space (land), and the gas tanks and pumps (capital)
Although in many ways factor markets resemble the goods markets we have analyzed in previous chapters, they are different in one important way: The
de-mand for a factor of production is a derived dede-mand That is, a firm’s dede-mand for a
factor of production is derived from its decision to supply a good in another mar-ket The demand for computer programmers is inextricably tied to the supply of computer software, and the demand for gas station attendants is inextricably tied
to the supply of gasoline
In this chapter we analyze factor demand by considering how a competitive, profit-maximizing firm decides how much of any factor to buy We begin our analysis by examining the demand for labor Labor is the most important factor of production, for workers receive most of the total income earned in the U.S econ-omy Later in the chapter, we see that the lessons we learn about the labor market apply directly to the markets for the other factors of production
The basic theory of factor markets developed in this chapter takes a large step toward explaining how the income of the U.S economy is distributed among workers, landowners, and owners of capital Chapter 19 will build on this analysis
to examine in more detail why some workers earn more than others Chapter 20 will examine how much inequality results from this process and then consider what role the government should and does play in altering the distribution of income
T H E D E M A N D F O R L A B O R
Labor markets, like other markets in the economy, are governed by the forces of supply and demand This is illustrated in Figure 18-1 In panel (a) the supply and demand for apples determine the price of apples In panel (b) the supply and de-mand for apple pickers determine the price, or wage, of apple pickers
As we have already noted, labor markets are different from most other mar-kets because labor demand is a derived demand Most labor services, rather than
f a c t o r s o f p r o d u c t i o n
the inputs used to produce goods and
services
Trang 7being final goods ready to be enjoyed by consumers, are inputs into the
produc-tion of other goods To understand labor demand, we need to focus on the firms
that hire the labor and use it to produce goods for sale By examining the link
be-tween the production of goods and the demand for labor, we gain insight into the
determination of equilibrium wages
T H E C O M P E T I T I V E P R O F I T - M A X I M I Z I N G F I R M
Let’s look at how a typical firm, such as an apple producer, decides the quantity of
labor to demand The firm owns an apple orchard and each week must decide
how many apple pickers to hire to harvest its crop After the firm makes its hiring
decision, the workers pick as many apples as they can The firm then sells the
ap-ples, pays the workers, and keeps what is left as profit
We make two assumptions about our firm First, we assume that our firm is
competitive both in the market for apples (where the firm is a seller) and in the
market for apple pickers (where the firm is a buyer) Recall from Chapter 14 that a
competitive firm is a price taker Because there are many other firms selling apples
and hiring apple pickers, a single firm has little influence over the price it gets for
apples or the wage it pays apple pickers The firm takes the price and the wage as
given by market conditions It only has to decide how many workers to hire and
how many apples to sell
Second, we assume that the firm is profit-maximizing Thus, the firm does not
directly care about the number of workers it has or the number of apples it
pro-duces It cares only about profit, which equals the total revenue from the sale of
Quantity of Apples 0
Price of
Apples
P
Q
Demand
Supply
Demand Supply
Quantity of Apple Pickers 0
Wage of Apple Pickers
L W
(a) The Market for Apples (b) The Market for Apple Pickers
F i g u r e 1 8 - 1
T HE V ERSATILITY OF S UPPLY AND D EMAND The basic tools of supply and demand
apply to goods and to labor services Panel (a) shows how the supply and demand
for apples determine the price of apples Panel (b) shows how the supply and demand for
apple pickers determine the wage of apple pickers.
Trang 8apples minus the total cost of producing them The firm’s supply of apples and its demand for workers are derived from its primary goal of maximizing profit
T H E P R O D U C T I O N F U N C T I O N A N D T H E
M A R G I N A L P R O D U C T O F L A B O R
To make its hiring decision, the firm must consider how the size of its workforce affects the amount of output produced In other words, it must consider how the number of apple pickers affects the quantity of apples it can harvest and sell Ta-ble 18-1 gives a numerical example In the first column is the number of workers
In the second column is the quantity of apples the workers harvest each week These two columns of numbers describe the firm’s ability to produce As we
noted in Chapter 13, economists use the term production function to describe the
relationship between the quantity of the inputs used in production and the quan-tity of output from production Here the “input” is the apple pickers and the “out-put” is the apples The other inputs—the trees themselves, the land, the firm’s trucks and tractors, and so on—are held fixed for now This firm’s production function shows that if the firm hires 1 worker, that worker will pick 100 bushels
of apples per week If the firm hires 2 workers, the two workers together will pick
180 bushels per week, and so on
Figure 18-2 graphs the data on labor and output presented in Table 18-1 The number of workers is on the horizontal axis, and the amount of output is on the vertical axis This figure illustrates the production function
One of the Ten Principles of Economics introduced in Chapter 1 is that rational
people think at the margin This idea is the key to understanding how firms decide what quantity of labor to hire To take a step toward this decision, the third column
in Table 18-1 gives the marginal product of labor, the increase in the amount of
output from an additional unit of labor When the firm increases the number of workers from 1 to 2, for example, the amount of apples produced rises from 100 to
180 bushels Therefore, the marginal product of the second worker is 80 bushels
Ta b l e 1 8 - 1
V ALUE OF THE
H OW THE C OMPETITIVE F IRM D ECIDES H OW M UCH L ABOR TO H IRE
p r o d u c t i o n f u n c t i o n
the relationship between the quantity
of inputs used to make a good and
the quantity of output of that good
m a r g i n a l p r o d u c t
o f l a b o r
the increase in the amount of output
from an additional unit of labor
Trang 9Notice that as the number of workers increases, the marginal product of labor
declines As you may recall from Chapter 13, this property is called diminishing
marginal product.At first, when only a few workers are hired, they pick apples
from the best trees in the orchard As the number of workers increases, additional
workers have to pick from the trees with fewer apples Hence, as more and more
workers are hired, each additional worker contributes less to the production of
apples For this reason, the production function in Figure 18-2 becomes flatter as
the number of workers rises
T H E VA L U E O F T H E M A R G I N A L P R O D U C T
A N D T H E D E M A N D F O R L A B O R
Our profit-maximizing firm is concerned more with money than with apples As a
result, when deciding how many workers to hire, the firm considers how much
profit each worker would bring in Because profit is total revenue minus total cost,
the profit from an additional worker is the worker’s contribution to revenue minus
the worker’s wage
To find the worker’s contribution to revenue, we must convert the marginal
product of labor (which is measured in bushels of apples) into the value of the
mar-ginal product (which is measured in dollars) We do this using the price of apples
To continue our example, if a bushel of apples sells for $10 and if an additional
worker produces 80 bushels of apples, then the worker produces $800 of revenue
The value of the marginal product of any input is the marginal product of
that input multiplied by the market price of the output The fourth column in
Ta-ble 18-1 shows the value of the marginal product of labor in our example,
assum-ing the price of apples is $10 per bushel Because the market price is constant for a
competitive firm, the value of the marginal product (like the marginal product
it-self) diminishes as the number of workers rises
d i m i n i s h i n g m a r g i n a l
p r o d u c t
the property whereby the marginal product of an input declines as the quantity of the input increases
Quantity of Apple Pickers 0
Quantity
of Apples
300
280
240
180
100
Production function
F i g u r e 1 8 - 2
T HE P RODUCTION F UNCTION The production function is the relationship between the inputs into production (apple pickers) and the output from production (apples) As the quantity of the input increases, the production function gets flatter, reflecting the property of diminishing marginal product.
v a l u e o f t h e m a r g i n a l
p r o d u c t
the marginal product of an input times the price of the output
Trang 10Now consider how many workers the firm will hire Suppose that the market wage for apple pickers is $500 per week In this case, the first worker that the firm hires is profitable: The first worker yields $1,000 in revenue, or $500 in profit Sim-ilarly, the second worker yields $800 in additional revenue, or $300 in profit The third worker produces $600 in additional revenue, or $100 in profit After the third worker, however, hiring workers is unprofitable The fourth worker would yield only $400 of additional revenue Because the worker’s wage is $500, hiring the fourth worker would mean a $100 reduction in profit Thus, the firm hires only three workers
It is instructive to consider the firm’s decision graphically Figure 18-3 graphs the value of the marginal product This curve slopes downward because the mar-ginal product of labor diminishes as the number of workers rises The figure also includes a horizontal line at the market wage To maximize profit, the firm hires workers up to the point where these two curves cross Below this level of employ-ment, the value of the marginal product exceeds the wage, so hiring another worker would increase profit Above this level of employment, the value of the marginal product is less than the wage, so the marginal worker is unprofitable
Thus, a competitive, profit-maximizing firm hires workers up to the point where the value
of the marginal product of labor equals the wage.
Having explained the profit-maximizing hiring strategy for a competitive firm, we can now offer a theory of labor demand Recall that a firm’s labor demand curve tells us the quantity of labor that a firm demands at any given wage We have just seen in Figure 18-3 that the firm makes that decision by choosing the quantity of labor at which the value of the marginal product equals the wage As a
result, the value-of-marginal-product curve is the labor demand curve for a competitive, profit-maximizing firm.
Apple Pickers 0
Value
of the Marginal Product
Market wage
Profit-maximizing quantity
Value of marginal product (demand curve for labor)
F i g u r e 1 8 - 3
T HE V ALUE OF THE M ARGINAL
P RODUCT OF L ABOR This figure
shows how the value of the
marginal product (the marginal
product times the price of the
output) depends on the number
of workers The curve slopes
downward because of
diminishing marginal product.
For a competitive,
profit-maximizing firm, this
value-of-marginal-product curve is also
the firm’s labor demand curve.