Elasticity of supply- this is the seller's reaction to a price change

Since the relationship between price and quantity of products supplied is always direct, the elasticity of supply is always greater than 0.

Es = 1– supply is elastic (the seller responds noticeably to price changes)

E S > 1– highly elastic ( Q sales are growing - rapid price changes)

E S< 1 – inelastic (the seller reacts poorly to price changes)

Es = 0– perfectly inelastic supply

Market equilibrium

A joint analysis of supply and demand makes it possible to determine in the economic “space” a certain point for optimizing the interests of consumers and producers. This coincidence of interests is characterized by education market price- this is the price at which the volumes of supply and demand are equal, i.e. consumers can buy as many goods and services as producers want to sell.

So, at any price lower than the market price, for example P 1 there is an excess of demand over supply and, as a consequence, a commodity shortage in volume Q 1 Q 2. Competition from a large number of buyers with a limited quantity of a product will force sellers to raise prices and increase production of the product. At the same time, competition between consumers weakens, the amount of demand decreases, and the system gravitates toward an equilibrium point T(Fig. 5).

At a higher price, e.g. R 2, there is an excess of supply over demand and, as a consequence, a commodity surplus in the same volume Q 1 Q 2. Here, a large number of sellers compete with each other for favorable sales conditions, which, with a small number of buyers, can only arise if manufacturers reduce prices while simultaneously reducing product output. Consumers will respond by increasing purchases, and the system will again rush to the equilibrium point T.

Consumer surplus- the difference between the market price at which the consumer purchased the product and the maximum price he is willing to pay for this product.

Producer surplus- the difference between the current market value of a product and the minimum price at which the manufacturer is willing to sell its product.

The slope of the market demand curve for labor is directly proportional to the price elasticity of demand for the final good that the labor produces.

The price elasticity of demand for labor reflects the price elasticity of demand for a product.

Elasticity of demand relative to labor(E D w) shows the relative change in the volume of labor demand under the influence of a 1% change in the wage rate: E D w = (ΔQ/Qd)/(ΔW/W) where ΔQ/Qd is the relative change in labor demand;
ΔW/W is the relative change in the wage rate.

or E D W = %Qd/%W %Qd is the change in labor demand as a percentage, %W is the change in the wage rate as a percentage.

The meaning and essence of the elasticity of demand for labor: by what percentage will the market demand for labor change if the wage rate changes by 1%.

Types of labor demand according to elasticity.

1. E D W = 0. Completely inelastic demand for labor - the labor of narrow specialists, unique individual professions;
2. E D W< 1. Неэластичный спрос на труд - при изменении заработной платы на 1% спрос на труд изменяется менее, чем на 1% (труд виноделов, труд государственных служащих);
3. E D W = 1. Unit elasticity for labor. When wages change by 1%, the demand for labor also changes by 1% (labor of engineers, builders);
4. E D W > 1. Elastic demand for labor. When the price changes by 1%, the demand for labor changes by more than 1% (labor of service personnel);
5. E D W = ∞. Perfectly elastic demand for labor;

Elasticity of demand for labor(relative to changes in wages) the more than:

1. higher price elasticity of demand for the final good that this labor creates;
2. labor is more easily replaced by other factors of production;
3. higher elasticity of supply of other factors;
4. higher share of wages in total costs;
5. longer time period.

Elasticity of market labor supply

Labor supply elasticity(E S W) shows the relative change in labor supply under the influence of a 1% change in the wage rate: E S W = (ΔQ/Qs)/(ΔW/W) where ΔQ/Qs is the relative change in labor supply;
ΔW/W is the relative change in the wage rate.

or E S W = %Qs/%W %Qs - change in labor supply as a percentage, %W - change in the wage rate as a percentage.

The meaning and essence of elasticity of labor supply: by what percentage will labor supply change if the wage rate changes by 1%.

Types of labor supply according to elasticity.

1. E S W ≤ 1. Inelastic supply - pop stars, famous athletes;
2. E S W = 1. Unit elasticity. When wages change by 1%, supply also changes by 1% (labor of ordinary professions);
3. E S W > 1. Elastic supply. When wages change by 1%, supply changes by more than 1% (low-medium skilled labor);

The elasticity of the market supply curve (labor mobility) for a certain type of labor depends on the following factors:

1. difficulties and costs of changing employment;
2. time.

A perfectly competitive market is characterized by the following features:

The firms' products are homogeneous, so consumers don’t care which manufacturer they buy it from. All goods in the industry are perfect substitutes, and the cross price elasticity of demand for any pair of firms tends to infinity:

This means that any, no matter how small, increase in price by one manufacturer above the market level leads to a reduction in demand for its products to zero. Thus, the difference in prices may be the only reason for preferring one or another company. There is no non-price competition.

The number of economic entities on the market is unlimited, and their share is so small that the decisions of an individual company (individual consumer) to change the volume of its sales (purchases) do not affect the market price product. This, of course, assumes that there is no collusion between sellers or buyers to obtain monopoly power in the market. The market price is the result of the joint actions of all buyers and sellers.

Freedom of entry and exit on the market. There are no restrictions or barriers - there are no patents or licenses limiting activities in this industry, significant initial capital investments are not required, the positive effect of scale of production is extremely insignificant and does not prevent new firms from entering the industry, there is no government intervention in the mechanism of supply and demand (subsidies , tax benefits, quotas, social programs, etc.). Freedom of entry and exit presupposes absolute mobility of all resources, freedom of their movement geographically and from one type of activity to another.

Perfect knowledge all market entities. All decisions are made with certainty. This means that all firms know their revenue and cost functions, the prices of all resources and all possible technologies, and all consumers have complete information about the prices of all firms. It is assumed that information is distributed instantly and free of charge.

These characteristics are so strict that there are practically no real markets that fully satisfy them.

However, the perfect competition model:

• allows you to explore markets in which a large number of small firms sell homogeneous products, i.e. markets similar in terms of conditions to this model;

• clarifies the conditions for maximizing profits;
• is the standard for assessing the performance of the real economy.

Short-run equilibrium of a firm under perfect competition

Demand for a perfect competitor's product

Under conditions of perfect competition, the prevailing market price is established through the interaction of market demand and market supply, as shown in Fig. 1, and determines the horizontal demand curve and average revenue (AR) for each individual firm.

Rice. 1. Demand curve for a competitor’s products

Due to the homogeneity of products and the presence of a large number of perfect substitutes, no firm can sell its goods at a price even slightly higher than the equilibrium price, Pe. On the other hand, an individual firm is very small compared to the total market, and it can sell all its output at the price Pe, i.e. she has no need to sell the goods at a price below Re. Thus, all firms sell their products at the market price Pe, determined by market supply and demand.

The income of a firm that is a perfect competitor

The horizontal demand curve for the products of an individual firm and a single market price (P=const) predetermine the shape of income curves under conditions of perfect competition.

1. Total income () - the total amount of income received by the company from the sale of all its products,

represented on the graph by a linear function that has a positive slope and originates at the origin, since any unit of output sold increases volume by an amount equal to the market price!!Re??.

2. Average income () - income from the sale of a unit of production,

is determined by the equilibrium market price!!Re??, and the curve coincides with the firm's demand curve. A-priory

3. Marginal income () - additional income from the sale of one additional unit of output,

Marginal revenue is also determined by the current market price for any volume of output.

A-priory

All income functions are presented in Fig. 2.

Rice. 2. Income of a competing company

Determining the optimal output volume

In perfect competition, the current price is set by the market, and an individual firm cannot influence it because it is price taker. Under these conditions, the only way to increase profits is to regulate output.

Based on the market and technological conditions existing at a given time, the company determines optimal output volume, i.e. volume of output providing the company profit maximization(or minimization if making a profit is impossible).

There are two interrelated methods for determining the optimum point:

1. Total cost - total income method.

The firm's total profit is maximized at the level of output where the difference between and is as large as possible.

n=TR-TC=max

Rice. 3. Determination of the optimal production point

In Fig. 3, the optimizing volume is located at the point where the tangent to the TC curve has the same slope as the TR curve. The profit function is found by subtracting TC from TR for each volume of production. The peak of the total profit curve (p) shows the level of output at which profit is maximized in the short run.

From the analysis of the total profit function it follows that total profit reaches its maximum at the volume of production at which its derivative is equal to zero, or

dп/dQ=(п)`= 0.

The derivative of the total profit function has a strictly defined economic sense is the marginal profit.

Marginal profit ( MP) shows the increase in total profit when the volume of output changes by one unit.

• If Mn>0, then the total profit function increases, and additional production can increase the total profit.
• If MP<0, то функция совокупной прибыли уменьшается, и дополнительный выпуск сократит совокупную прибыль.
• And finally, if Mn=0, then the value of the total profit is maximum.

From the first condition of profit maximization ( MP=0) the second method follows.

2. Marginal cost-marginal revenue method.

• Мп=(п)`=dп/dQ,
• (n)`=dTR/dQ-dTC/dQ.

And since dTR/dQ=MR, A dTC/dQ=MC, then total profit reaches its greatest value at such a volume of output at which marginal costs are equal to marginal revenue:

If marginal costs are greater than marginal revenue (MC>MR), then the enterprise can increase profits by reducing production volume. If marginal cost is less than marginal revenue (MC<МR), то прибыль может быть увеличена за счет расширения производства, и лишь при МС=МR прибыль достигает своего максимального значения, т.е. устанавливается равновесие.

This equality valid for any market structure, but in conditions of perfect competition it is slightly modified.

Since the market price is identical to the average and marginal revenues of a firm - a perfect competitor (PAR = MR), the equality of marginal costs and marginal revenues is transformed into the equality of marginal costs and prices:

The firm operates in conditions of perfect competition. Current market price P = 20 USD The total cost function has the form TC=75+17Q+4Q2.

It is necessary to determine the optimal output volume.

To find the optimal volume, we calculate MC and MR and equate them to each other.

• 1. МR=P*=20.
• 2. MS=(TS)`=17+8Q.
• 3. MC=MR.
• 20=17+8Q.
• 8Q=3.
• Q=3/8.

Thus, the optimal volume is Q*=3/8.

The optimal volume can also be found by equating the marginal profit to zero.

• 1. Find the total income: TR=Р*Q=20Q
• 2. Find the total profit function:
• n=TR-TC,
• n=20Q-(75+17Q+4Q2)=3Q-4Q2-75.
• 3. Define the marginal profit function:
• MP=(n)`=3-8Q,
• and then equate MP to zero.
• 3-8Q=0;
• Q=3/8.

Solving this equation, we got the same result.

Condition for obtaining short-term benefits

The total profit of an enterprise can be assessed in two ways:

• P=TR-TC;
• P=(P-ATS)Q.

If we divide the second equality by Q, we get the expression

characterizing the average profit, or profit per unit of output.

It follows from this that whether a firm obtains profits (or losses) in the short term depends on the ratio of its average total costs (ATC) at the point of optimal production Q* and the current market price (at which the firm, a perfect competitor, is forced to trade).

The following options are possible:

if P*>ATC, then the firm has positive economic profit in the short term;

In the presented figure, the volume of total profit corresponds to the area of ​​the shaded rectangle, and the average profit (i.e. profit per unit of output) is determined by the vertical distance between P and ATC. It is important to note that at the optimum point Q*, when MC = MR, and the total profit reaches its maximum value, n = max, the average profit is not maximum, since it is determined not by the ratio of MC and MR, but by the ratio of P and ATC.

if P*<АТС, то фирма имеет в краткосрочном периоде отрицательную экономическую прибыль (убытки);

if P*=ATC, then economic profit is zero, production is break-even, and the firm receives only normal profit.

Condition for cessation of production activities

In conditions when the current market price does not bring positive economic profit in the short term, the company faces a choice:

• or continue unprofitable production,
• or temporarily suspend its production, but incur losses in the amount of fixed costs ( F.C.) production.

The company makes a decision on this issue based on the ratio of its average variable cost (AVC) and market price.

When a firm decides to close, its total revenues ( TR) fall to zero, and the resulting losses become equal to its total fixed costs. Therefore, until price is greater than average variable cost

P>АВС,

company production should continue. In this case, the income received will cover all variables and at least part of the fixed costs, i.e. losses will be less than at closure.

If price equals average variable cost

then from the point of view of minimizing losses to the company indifferent, continue or cease its production. However, most likely the company will continue to operate in order not to lose its customers and preserve the jobs of its employees. At the same time, its losses will not be higher than at closure.

And finally, if prices are less than average variable costs then the company should cease operations. In this case, she will be able to avoid unnecessary losses.

Let us prove the validity of these arguments.

A-priory, n=TR-TC. If a firm maximizes its profit by producing the nth number of products, then this profit ( pn) must be greater than or equal to the profit of the company in conditions of closure of the enterprise ( By), because otherwise the entrepreneur will immediately close his enterprise.

In other words,

Thus, the firm will continue to operate only as long as the market price is greater than or equal to its average variable cost. Only under these conditions will the company minimize its losses in the short term by continuing its activities.

Equality MS=MR, as well as equality MP=0 show the optimal output volume (i.e., the volume that maximizes profits and minimizes losses for the company).

The relationship between price ( R) and average total costs ( ATS) shows the amount of profit or loss per unit of output if production continues.

The relationship between price ( R) and average variable costs ( AVC) determines whether it is necessary or not to continue activities in the event of unprofitable production.

Short-run supply curve of a competing firm

A-priory, supply curve reflects the supply function and shows the quantity of goods and services that producers are willing to offer to the market at given prices, at a given time and place.

To determine the shape of the short-run supply curve for a perfectly competitive firm,

Suppose the market price is Ro, and the average and marginal cost curves look like in Fig. 4.8.

Because the Ro(closing point), then the firm’s supply is zero. If the market price rises to a higher level, then the equilibrium output will be determined by the relationship M.C. And M.R.. The very point of the supply curve ( Q;P) will lie on the marginal cost curve.

By successively increasing the market price and connecting the resulting dots, we get the short-run supply curve. As can be seen from the presented Fig. 4.8, for a perfect competitor firm, the short-run supply curve coincides with its marginal cost curve ( MS) above the minimum level of average variable costs ( AVC). At lower than min AVC level of market prices, the supply curve coincides with the price axis.

It is known that a perfect competitor firm has total (TC) and total variable (TVC) costs represented by the following equations:

• TS=10+6 Q-2 Q 2 +(1/3) Q 3 , Where TFC=10;
• TVC=6 Q-2 Q 2 +(1/3) Q 3 .

Determine the supply function of a firm under perfect competition.

1. Find MS:

MS=(TS)`=(VC)`=6-4Q+Q 2 =2+(Q-2) 2 .

2. Let us equate MC to the market price (condition of market equilibrium under perfect competition MC=MR=P*) and obtain:

2+(Q-2) 2 = P or

Q=2(P-2) 1/2 , If R2.

However, from the previous material we know that the volume of supply Q = 0 at P

Q=S(P) at Pmin AVC.

3. Determine the volume at which average variable costs are minimal:

• min AVC=(TVC)/ Q=6-2 Q+(1/3) Q 2 ;
• (AVC)`= dAVC/ dQ=0;
• -2+(2/3) Q=0;
• Q=3,

those. Average variable costs reach their minimum at a given volume.

4. Determine what min AVC is equal to by substituting Q=3 into the min AVC equation.

• min AVC=6-2(3)+(1/3)(3) 2 =3.

5. Thus, the firm’s supply function will be:

• Q=2+(P-2) 1/2 ,If P3;
• Q=0 if R<3.

Long-run market equilibrium under perfect competition

Long term

So far we have considered the short-term period, which assumes:

• the existence of a constant number of firms in the industry;
• the presence of enterprises with a certain amount of permanent resources.

In the long term:

• all resources are variable, which means that it is possible for a company operating in the market to change the size of production, introduce new technology, or modify products;
• change in the number of enterprises in the industry (if the profit received by the company is lower than normal and negative forecasts for the future prevail, the enterprise may close and leave the market, and vice versa, if the profit in the industry is high enough, an influx of new companies is possible).

Basic assumptions of the analysis

To simplify the analysis, let us assume that the industry consists of n typical enterprises with same cost structure, and that a change in the output of existing firms or a change in their number do not affect resource prices(we will remove this assumption later).

Let the market price P1 determined by the interaction of market demand ( D1) and market supply ( S1). The cost structure of a typical company in the short term looks like curves SATC1 And SMC1(Fig. 4.9).

Rice. 9. Long-run equilibrium of a perfectly competitive industry

Mechanism for the formation of long-term equilibrium

Under these conditions, the firm's optimal output in the short run will be q1 units. Production of this volume provides the company with positive economic profit, since the market price (P1) exceeds the firm's average short-term costs (SATC1).

Availability short-term positive profit leads to two interrelated processes:

• on the one hand, a company already operating in the industry strives expand your production and receive economies of scale in the long term (according to the LATC curve);
• on the other hand, external firms will begin to show interest in penetration into this industry(depending on the amount of economic profit, the penetration process will proceed at different speeds).

The emergence of new firms in the industry and the expansion of the activities of old ones shifts the market supply curve to the right to the position S2(as shown in Fig. 9). The market price decreases from P1 before P2, and the equilibrium volume of industry production will increase from Q1 before Q2. Under these conditions, the economic profit of a typical firm falls to zero ( P=SATC) and the process of attracting new companies to the industry is slowing down.

If for some reason (for example, the extreme attractiveness of initial profits and market prospects) a typical firm expands its production to level q3, then the industry supply curve will shift even further to the right to the position S3, and the equilibrium price will fall to the level P3, lower than min SATC. This will mean that firms will no longer be able to make even normal profits and a gradual decline will begin. outflow of companies into more profitable areas of activity (as a rule, the least effective ones go).

The remaining enterprises will try to reduce their costs by optimizing sizes (i.e. by slightly reducing the scale of production to q2) to the level at which SATC=LATC, and it is possible to obtain a normal profit.

Shift of the industry supply curve to the level Q2 will cause the market price to rise to P2(equal to the minimum value of long-term average costs, Р=min LAC). At a given price level, a typical firm makes no economic profit ( economic profit is zero, n=0), and is only capable of extracting normal profit. Consequently, the motivation for new firms to enter the industry disappears and a long-term equilibrium is established in the industry.

Let's consider what happens if the equilibrium in the industry is upset.

Let the market price ( R) has established itself below the long-term average costs of a typical firm, i.e. P. Under these conditions, the company begins to incur losses. There is an outflow of firms from the industry, a shift in market supply to the left, and while market demand remains unchanged, the market price rises to the equilibrium level.

If the market price ( R) is set above the average long-term costs of a typical firm, i.e. P>LAТC, then the firm begins to receive positive economic profit. New firms enter the industry, market supply shifts to the right, and with constant market demand, the price drops to the equilibrium level.

Thus, the process of entry and exit of firms will continue until a long-run equilibrium is established. It should be noted that in practice the regulatory forces of the market work better to expand than to contract. Economic profit and freedom to enter the market actively stimulate an increase in industry production volumes. On the contrary, the process of squeezing firms out of an overexpanded and unprofitable industry takes time and is extremely painful for the participating firms.

Basic conditions for long-term equilibrium

• Operating firms make the best use of the resources at their disposal. This means that each firm in the industry maximizes its profit in the short run by producing the optimal output at which MR=SMC, or since the market price is identical to marginal revenue, P=SMC.
• There are no incentives for other firms to enter the industry. The market forces of supply and demand are so strong that firms are unable to extract more than is necessary to keep them in the industry. those. economic profit is zero. This means that P=SATC.
• Firms in the industry cannot reduce total average costs in the long run and make a profit by expanding the scale of production. This means that to earn normal profits, a typical firm must produce a level of output that corresponds to the minimum of long-run average total costs, i.e. P=SATC=LATC.

In long-term equilibrium, consumers pay the minimum economically possible price, i.e. the price required to cover all production costs.

Market supply in the long run

The long-run supply curve of an individual firm coincides with the increasing portion of LMC above min LATC. However, the market (industry) supply curve in the long run (as opposed to the short run) cannot be obtained by horizontally summing the supply curves of individual firms, since the number of these firms varies. The shape of the market supply curve in the long run is determined by how prices for resources in the industry change.

At the beginning of the section, we introduced the assumption that changes in industry production volumes do not affect resource prices. In practice, there are three types of industries:

• with fixed costs;
• with increasing costs;
• with decreasing costs.

The market price will rise to P2. The optimal output of an individual firm will be Q2. Under these conditions, all firms will be able to earn economic profits, inducing other companies to enter the industry. The sectoral short-term supply curve moves to the right from S1 to S2. The entry of new firms into the industry and the expansion of industry output will not affect resource prices. The reason for this may be that resources are abundant, so that new firms will not be able to influence resource prices and increase the costs of existing firms. As a result, the LATC curve of a typical firm will remain the same.

Restoring equilibrium is achieved according to the following scheme: the entry of new firms into the industry causes the price to fall to P1; profits are gradually reduced to the level of normal profits. Thus, industry output increases (or decreases) following changes in market demand, but the supply price in the long run remains unchanged.

This means that a fixed cost industry looks like a horizontal line.

If an increase in industry volume causes an increase in resource prices, then we are dealing with the second type of industry. The long-term equilibrium of such an industry is shown in Fig. 4.9 b.

A higher price allows firms to make an economic profit, which attracts new firms to the industry. The expansion of aggregate production necessitates an ever-increasing use of resources. As a result of competition between firms, prices for resources increase, and as a result, the costs of all firms (both existing and new) in the industry increase. Graphically, this means an upward shift in the marginal and average cost curves of a typical firm from SMC1 to SMC2, from SATC1 to SATC2. The firm's short-run supply curve also shifts to the right. The process of adaptation will continue until economic profit runs out. In Fig. 4.9, the new equilibrium point will be the price P2 at the intersection of the demand curves D2 and supply S2. At this price, a typical firm chooses a production volume at which

P2=MR2=SATC2=SMC2=LATC2.

The long-run supply curve is obtained by connecting the short-run equilibrium points and has a positive slope.

The analysis of long-term equilibrium of industries with decreasing costs is carried out according to a similar scheme. Curves D1, S1 are the initial curves of market demand and supply in the short term. P1 is the initial equilibrium price. As before, each firm reaches equilibrium at point q1, where the demand curve - AR-MR touches min SATC and min LATC. In the long run, market demand increases, i.e. the demand curve shifts to the right from D1 to D2. The market price increases to a level that allows firms to make an economic profit. New companies begin to flow into the industry, and the market supply curve shifts to the right. Expanding production volumes leads to lower prices for resources.

This is a rather rare situation in practice. An example would be a young industry emerging in a relatively undeveloped area where the resource market is poorly organized, marketing is at a primitive level, and the transport system functions poorly. An increase in the number of firms can increase the overall efficiency of production, stimulate the development of transport and marketing systems, and reduce the overall costs of firms.

Due to the fact that an individual company cannot control such processes, this kind of cost reduction is called external economy(eng. external economies). It is caused solely by industry growth and forces beyond the control of the individual firm. External economies should be distinguished from the already known internal economies of scale, achieved by increasing the scale of the firm’s activities and completely under its control.

Taking into account the factor of external savings, the total cost function of an individual firm can be written as follows:

TCi=f(qi,Q),

Where qi- volume of output of an individual company;

Q— the volume of output of the entire industry.

In industries with constant costs, there are no external economies; the cost curves of individual firms do not depend on the industry's output. In industries with increasing costs, negative external diseconomies take place; the cost curves of individual firms shift upward with increasing output. Finally, in industries with decreasing costs, there are positive external economies that offset the internal diseconomies due to diminishing returns to scale, so that the cost curves of individual firms shift downward as output increases.

Most economists agree that in the absence of technological progress, the most typical industries are those with increasing costs. Industries with decreasing costs are the least common. As industries grow and mature, industries with decreasing and constant costs are likely to become industries with increasing costs. On the contrary, technological progress can neutralize the rise in resource prices and even lead to their fall, resulting in the emergence of a downward-sloping long-term supply curve. An example of an industry in which costs are reduced as a result of scientific and technical progress is the production of telephone services.

In a highly competitive labor market, an enterprise is one of many buyers of labor services, which are offered by many sellers (employees). Therefore, an individual enterprise cannot influence the price of labor and perceives it as being set by the market. This means that the labor supply curve 5 b in a precompetitive labor market has the form of a horizontal line that passes through the market wage rate, since the supply of labor in these conditions is completely elastic in price (Fig. 13.4).

Under perfect competition in the labor market, the average cost per unit of labor (AC £) and the marginal cost of an additional unit of labor coincide with a constant wage rate. This means that if the wage rate remains unchanged, the enterprise will be able to hire as many workers as it needs. The same thing happens in a separate industry, If this industry is not the main employer in the region or in a particular specialty. But for a particular industry, a horizontal labor supply curve is the exception rather than the rule.

Labor supply for the industry

As a rule, large sectors of the economy are the main consumers of hired labor of a certain qualification or specialty. Thus, the coal industry in Ukraine is the only employer for miners, and the metallurgical industry is in demand for foundry workers.

Rice. 13.4. Supply curve for a firm in a highly competitive labor market

puddle Under such conditions, the labor supply curve will have a positive (upward) slope (Figure 13.5).

Reasons for the upward slope of the industry's labor supply curve:

1) the excess of the strength of the effect of substituting leisure time with work over the effect of income, caused by a change (growth) in the wage rate, turns out to be that as the wage rate increases, the supply of labor increases not only for those who are already employed in the production process, but also for those who refused to participate in the production process at the lowest wage rate (students, apprentices, pensioners, women caring for children, the old and sick, etc.);

2) industries with high wage rates become attractive to workers in other industries with lower wage rates. Since the total number of economically active population (labor force) in the short term is not

variable, then the “overflow” of workers into high-paid industries causes a shortage of hired labor compared to the amount of capital in low-paid industries. The consequence of this is an increase in the marginal product of labor in low-wage industries, which forces enterprises in these industries to increase wages;

3) an increase in the opportunity cost of using labor for workers in other industries.

Economy-wide labor supply

World experience shows that an increase in the wage rate causes an increase in labor supply, i.e. the curve B 1 for the economy as a whole has a positive (upward) slope. If we assume that the growth of wage rates will have a steady upward trend in the future, then, with other conditions remaining unchanged, the supply curve would have the form (Fig. 13.36), because wage growth is several times with a constant (saturated) volume of economic consumption benefits would lead to worker discomfort and an increase in free time. But during this time, scientific and technological progress will obviously offer us many new material goods and services, the existence of which we are not even aware of today. To satisfy these needs, wage earners will increase the supply of labor.

Labor supply at the level of the economy as a whole is the subject of macroeconomics research.

The problem of pricing resources is a microeconomic problem. Therefore, let's return to the micro level again.

Labor supply for an enterprise under conditions of perfect competition

In a perfectly competitive labor market, an enterprise is one of many buyers of labor services offered by many sellers (employees). Therefore, an individual enterprise cannot influence the price of labor and perceives it as determined by the market.

This means that the labor supply curve £, in a perfectly competitive market, looks like a horizontal line passing through the market wage rate, since the supply of labor in these conditions is absolutely price elastic (Fig. 13.5).

In conditions of perfect competition in the labor market, the average labor cost (ACL) and the marginal cost of an additional unit of labor coincide with a constant wage rate. At a constant wage rate, a company can hire as many workers as

Rice. 13.5. Supply curve for a firm in a perfectly competitive labor market

as much as he needs. The same applies to a particular industry, if this industry is not the main employer in the region or in a particular specialty. Although for a particular industry, a horizontal SL curve is the exception rather than the rule.

Labor supply for the industry

As a rule, large sectors of the economy are the main consumers of hired labor of a certain qualification or specialty. For example, the coal industry is the only employer for miners, and the metallurgical industry is in demand for steelworkers. Under such conditions, the labor supply curve will have a positive (ascending) slope (Figure 13.6).

Reasons for the upward slope of the industry supply curve:

1) the excess of the strength of the effect of replacing free time with workers (labor) over the income effect due to

Fig, 13.6. Industry Labor Supply Curve

a change (increase) in the wage rate, which manifests itself in the fact that as the wage rate increases, the supply of labor increases not only from those already employed, but also from those who refused to work at a lower wage rate (students, pupils, pensioners , women who look after children, the elderly, the sick, etc.);

• 2) industries with high wage rates become attractive to workers in other industries with lower wages. Since the total size of the economically active population (labor force) remains constant in the short term, the “overflow” of workers into high-paying industries causes a shortage of hired labor compared to the amount of capital in low-wage industries. The consequence of this is an increase in the marginal product of labor in low-paid industries, which forces enterprises in these industries to increase wages;
• 3) an increase in the opportunity cost of using labor for workers in other industries.

Economy-wide labor supply

World experience shows that an increase in the wage rate causes an increase in labor supply, i.e. the SL curve for the economy as a whole has a positive (ascending) slope. If we assume that the increase in the wage rate will have a steady upward trend in the future, then, other conditions remaining unchanged, the supply curve would have the form SL, (Fig. 13.4, b), since the increase in wages is several times with a constant (saturated) the volume of consumption of economic goods would lead to a reduction in working time and an increase in free time. But during this time, NTP will most likely offer many new economic benefits, the existence of which we had no idea about. To obtain these new benefits, wage earners will again increase the supply of labor.

Labor supply at the level of the economic system as a whole is the subject of macroeconomics research.

The problem of pricing a resource is a microeconomic problem. Therefore, let's return to the micro level.

Market equilibrium and enterprise equilibrium in a competitive labor market

Market equilibrium in the labor market is established at the intersection point of the curves of market demand for labor (DL) and market supply of labor (SL) (Fig. 13.7, a).

From Fig. 13.7a it is clear that the equilibrium point E corresponds to the equilibrium wage rate ω and the equilibrium level of employment L. Equilibrium in Fig. 13.7, b reflects the state of full and effective employment.

Full employment- a situation in the economy in which everyone who wants to offer a certain amount of labor at the equilibrium price (wage rate) established by the labor market can realize their desires. Even if the labor force exceeds the equilibrium volume of employment V, the economy will remain at full employment. This is explained by the fact that an excess of the labor force in excess of L will form a natural level of unemployment, meaning that the number of owners of labor resources who remain voluntarily unemployed do not want to offer more labor than L at the equilibrium rate ω.

Effective in volume L, employment is because at this level of employment the marginal product of labor equals the marginal cost of the last unit of labor, i.e. MRPL = MRCL.

It is clear that the demand of an individual enterprise in the labor market is insignificant compared to the market one. Therefore, due to the fact that neither the enterprise nor the employee can influence the equilibrium wage rate ω, they must adapt to it.

As mentioned above, in a competitive market, the labor supply curve L for an enterprise has the form of a horizontal line passing through the equilibrium wage rate, which, in turn, is the result of the interaction of the SL and DL curves.

The equilibrium volume of labor of an enterprise (Fig. 13.7, b) is determined by the optimization rule, which for a competitive enterprise has the form VMPL = MRPL = ω.

As can be seen from Figure 13.7, b, if the revenue curve from the sale of the marginal product of labor (MRPL) is above the marginal labor cost curve, the enterprise is interested in increasing the amount of hired labor, which will provide it with an increase in profit, since each additional unit of labor will bring more income, than costs.

If the curve DL = MRPL is below the curve SL -MRCL, then the enterprise’s costs for each additional unit of labor will exceed the increase in income from the use of an additional unit of labor. Under these conditions, the enterprise will fire workers until it reaches an equilibrium state at the intersection point of the SL and DL curves, where MRCL = MRPL.

Equilibrium in the sectoral labor market. The role of sectoral labor markets in the economy

Equilibrium in sectoral labor markets is established at the intersection point of the sectoral labor demand curves DL and labor supply SL.

Due to the fact that some industries are developing rapidly, while others are slower or are declining, it is necessary to consider the mechanism of “transfer” of employees from one industry to another and understand the consequences of such changes in the structure of employment.

• - firstly, the labor market connects and makes interdependent even those sectors of the economy that are not technologically connected;
• - secondly, an increase in wages in some industries causes, in the short term, a decrease in employment and production volumes in other industries;
• - thirdly, the transition of hired workers from one industry to another becomes possible thanks to the mobility of the resource “labor”.