Factor Markets, Labor Unions, and International Trade
Factor Markets
Factor Price Searcher
A firm that faces an upward-sloping supply curve for resources or factors is a factor price searcher.
Marginal Revenue Product (MRP)
MRP is calculated as Marginal Revenue (MR) multiplied by Marginal Physical Product (MPP). MRP = MR x MPP
Marginal Factor Cost (MFC)
MFC is the additional cost generated by employing an additional factor unit.
Factor Demand
A firm’s factor demand curve is its marginal revenue product (MRP) curve. The MRP curve slopes downward for a product price taker because, after some point, as more of a factor is employed, the lower its MPP, thus MRP declines.
A firm will maximize its profits by hiring factors up to the point at which MRP equals MFC.
If MRP > MFC, the firm should produce more output by increasing the quantity of factors employed.
A firm minimizes costs by purchasing factors such that the ratio of MPP to factor price is the same for all factors.
Labor Unions
A public employee union’s membership comprises workers employed by local, state, or federal governments.
For an industrial union to be successful, it must unionize all workers within all firms in a given industry.
Labor Movement History
In the early days of the labor movement, labor unions were often treated as illegal conspiracies.
- Sherman Antitrust Act: Interpreted to mean that some labor union practices were illegal and bordered on conspiracy to restrain trade.
- Norris-La Guardia Act: Restrained the use of injunctions against labor unions.
- Taft-Hartley Act: Prohibited certain union practices.
Union Practices
A closed shop is an organization in which an employee must belong to the union before they can be employed.
Collective bargaining involves negotiations between union members and employers to determine wages, working conditions, and other terms of employment.
Union Types
- Craft Union: Represents workers with a specific skill or trade (e.g., electricians’ union).
- Industrial Union: Represents all workers in a particular industry, regardless of their specific job.
To increase wages, a labor union might try to increase demand for labor or decrease its elasticity.
International Trade
Absolute and Comparative Advantage
A country has an absolute advantage in the production of a good if it can produce more of that good with the same quantity of resources than another country.
A country has a comparative advantage in the production of a good if it can produce that good at a lower opportunity cost than another country.
If there is no comparative advantage in the production of goods in either country, there are no gains from trade.
Trade Barriers
- Tariff: A tax on imported goods.
- Quota: A legal limit on the amount of a good that can be imported.
- Voluntary Export Restraint (VER): An agreement between two countries where the exporting country agrees to limit the quantity of a good it exports to the importing country.
- Dumping: The sale of goods abroad at a price below cost.
Arguments for Trade Restrictions
The infant-industry argument suggests that new industries need to be protected from foreign competition until they are mature enough to compete.
The national defense argument suggests that a country should produce certain goods domestically, even if it is more expensive, to ensure its security.
Effects of Tariffs
A tariff on imported cheese would likely increase the domestic price of cheese, decrease imports of cheese, and increase domestic production of cheese.