UNIVERSITY OF BUEA

DEPARTMENT OF ECONOMICS AND MANAGEMENT

MANAGERIAL ECONOMICS - PhD

TOPIC: PRICING AND EMPLOYMENT OF INPUTS

By

Vincent Nzoge Kang

SM14P141

Lecturer: Prof. Tabi

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Introduction

Input prices are determined by the interaction of supply and demand. The demand
for input is derived from the demand for the outputs that those input are used to
produce. The marginal revenue product function computed by multiplying
marginal revenue and marginal product is the firms input demand function. Input
prices are used in deciding on the optimal mix of labour, capital and natural
resources to be employed by the firm. The approach to input price determination
that a firm adopts depends on the input and output markets.

Input pricing and employment

In general an efficient production requires that an input should be employed until
the input price equals the marginal revenue product of the input. If capital and
labour are the only inputs, the efficiency condition is:
MPk = MPL
r w
where:

MPk and MPL are the marginal products for capital and labour and r and w are the
prices of those inputs.

If one input for example capital is held constant, it can be shown that the ratio of
input price to marginal product is equal to the marginal cost. Thus for labour

W = MC
MPL

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 Wage rate
$

20

10
Marginal revenue product

0 15 30 Units of labour

The marginal revenue product function is the firms input demand function. The
MRP function above can be used to determine the rate of labour input that will be
hired at any wage rate. From when wage rate is $10, 30 units of labour is hired as
oppose to 15 units at a wage rate of $20.

Firms sell goods and services in the product market and buy inputs in the factor
market. The market structure will influence the price of the input and the amount
employed. The circumstances of the firm on the output side of the market whether
the firm is a perfect competitor, oligopolist or monopolist will affect the firms
input demand function, whereas the market structure on the supply side will
influence the input supply curve facing the firm.

Market structure

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The case of a monopolist in the product market and a perfect competitor in the
input market.

If the firm is a monopolist or has some degree of market power, it faces a

downward-sloping demand function for its output. The marginal revenue curve lies
below the demand function. In this case the firm’s demand for labour will decline
more rapidly than if price equaled marginal revenue. The supply curve is
horizontal because the firm is a perfect competitor in the input market

Price of inputs
Supply (monopsonist)

Supply (perfect competition)

Qty of output

The case of a monopolist in product market and monopsonist in input market

Consider a firm that is a monopolist in the market product market and also the only
buyer of labour in the area. If the firm’s output rate is to increase it must hire
labour. But because the firm faces an upward sloping supply curve, hiring more of
an input will require that the price of that input be increased for all its workers.
Economic rent

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Rent is defined as the payment of any factor of production that has relatively fixed
supply. It is often used to describe the return to land and reflects the notion that
there is fixed amount of land available. When the supply of an input is fixed, the
supply function is vertical. As a result the price of that input or its rent is entirely
determined by demand.

Wage and income differentials

There are large variations among the wage rates paid to different kinds of labour.
Many unskilled workers are paid the minimum wage rate and others apparently
have so little to offer employers that they are unable to find employment even at
this low wage rate.

Today we have large differentials in wage rates especially in the private sector in
Cameroon. Are they the results of market imperfections, such as a lack of
information about prices and availability of competing services, or are there
economic reasons that explain this phenomenon?
There are some important forces on both the demand and the supply sides of the
input market that explains most of the differences.

Demand side considerations

Differences in aptitude, intellectual ability, strength and other individual attributes

mean that some workers are more productive than others. The more productive
workers add more to output and to the revenue of the firm, that is their marginal
revenue product is higher than for other workers. Therefore they are able to
command higher wage rates.
Some workers such as sales persons are paid in direct proportion to their output.
Thus their compensation is tied directly to their marginal revenue product and the
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more productive workers will receive higher wages than the less productive
counterparts.
Some firms have industrywide wage rate schedules that prescribe that for all
workers in a certain job category to be paid at the same rate. Thus one might find
differences in productivity among workers who are paid the same wage rate. Even
in these cases, it is expected that the more productive workers will earn more in the
long run.

Supply side considerations

Adjustments in the supply of workers will also result in differential wage rates
among jobs e.g training requirements

Another factor that results in the adjustments in wage rates include risk of death or
injury, working conditions, job content and hours of work. Jobs that involve health
risks, poor working condition, must pay a higher wage rate than jobs with more
desirable characteristics.

Labour Unions and collective bargaining

Labour unions represent workers in negotiation with management concerning wage

rates, fringe benefits and working conditions. Where the workers of a firm are
members of a union, wages are not set by management in response to market
conditions but rather are determined by negotiations between management and the
union representatives.

In some industries, collective bargaining is done on an industrywide basis.

Representative from the major companies form an industry bargaining team and
the labour union has a bargaining team that represents the workers.

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Practical illustration: the national collective convention of agriculture and
related activities signed on 06/03/2015.

Extract of the industrywide Basic salary table

Echelon
Category A B C D E F
7 99,0 105,7 112,4 118,8 125,8 132,6
33 43 39 65 33 61
129,0 143,0 157,5 171,7 186,0 200,2
8 43 32 36 87 34 74
190,6 204,1 217,6 230,9 244,4 257,7
9 63 08 81 97 49 65
208,4 225,6 242,7 259,9 277,4 294,2
10 57 22 87 57 30 87
294,2 308,8 323,7 338,4 353,1 367,8
11 87 83 18 38 42 63
367,8 382,5 397,2 412,0 426,7 441,4
12 63 79 94 08 23 33

Other allowances in the collective convention in the agricultural includes:

Paid leave is determined at 1/16 of the annual salary

Maternity leave

Seniority bonus

Basket allowance

Housing

Social insurance

Reading list

Convention Collective Nationale de l’Agriculture et Activites Connexes

H.Craig Petersen, W. Cris Lewis (2004). Managerial Economics, 4th Edition

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