Product and Resource Markets: Points of Symmetry

By Weber, David W. | Academic Exchange Quarterly, Winter 2004 | Go to article overview

Product and Resource Markets: Points of Symmetry


Weber, David W., Academic Exchange Quarterly


Abstract

For an introductory-level course, one useful teaching strategy is to regularly make students aware of the connections and symmetries between results established in different parts of the course. For example, in the introductory microeconomics course, it is straightforward to connect the behavior of a product price-maker and a resource price-maker. After identifying a number of general points of symmetry between them, this paper more carefully examines the connection between the mark-up pricing behavior of a product seller and the mark-down pricing behavior of a resource hirer. It then illustrates the connection between third-degree price and wage discrimination for one particular case.

Introduction

For an introductory-level course, one useful teaching strategy for greater understanding is to regularly make students aware of the connections and symmetries between results established in different parts of the course. [1] For example, in the introductory microeconomics course, an understanding of firm behavior in resource markets can be enhanced by reminding students of the results established for firm behavior in product markets. Because the logic of marginal reasoning developed in order to explain the latter is quite similar to that used to explain the former, by making such connections clear, not only may understanding resource market results be easier to achieve, understanding product market results is reinforced. After identifying a number of general points of symmetry between them, this paper more carefully examines the close connection between the mark-up pricing of a product seller and the mark-down pricing behavior of a resource hirer. It then illustrates the connection between third-degree price and wage discrimination for one particular case.

General Points of Symmetry

It is straightforward to connect the behavior of a product price-taker (ppt), a firm that is assumed powerless to affect the market-determined product price, and a resource price-taker (rpt), a firm that is assumed powerless to affect the market-determined resource price, or wage; whereas the former faces a horizontal product demand schedule, the latter confronts a horizontal resource (labor) supply schedule, both suggesting the absence of price-making ability. While the market-determined product price for a ppt equals marginal revenue regardless of quantity sold (because the firm can sell as much as it chooses at that price), the market-determined wage for a rpt equals marginal labor cost regardless of amount of labor hired (because the firm can hire as much labor as it chooses at that wage).

In addition, while the market-determined product price equals marginal cost at the profit-maximizing quantity of output for a ppt, the market-determined wage equals marginal revenue product at the profit-maximizing amount of labor for a rpt, with the logic of marginal reasoning behind these results quite similar for either decision. That is, over the range of output for which product price exceeds marginal cost for a ppt, increased production will increase total profit since total revenue will increase by more than total cost; similarly, over the range of labor for which marginal revenue product exceeds labor's wage for a rpt, the hire of additional labor will increase total profit for the same reason. Over the range of output for which product price is less than marginal cost for a ppt, decreased production will increase total profit since total cost will fall by more than total revenue; similarly, over the range of labor for which marginal revenue product is less than labor's wage, the hire of less labor will increase total profit for the same reason.

A final point of symmetry regarding price-takers is that just as the market-determined product price must at least equal the value of minimum average variable cost to insure an incentive for a loss-minimizing ppt to remain open, the market-determined wage must be no greater than the value of maximum average revenue product to insure the same for a loss-minimizing rpt; only if these conditions hold will the firm--ppt or rpt--be able to cover its total variable cost and thus be able to insure its loss (or negative total profit) is less by remaining open than shutting down. …

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