Welcome back. In the last session we looked at the supply curve for an input like labor. And how it very much depends on if we're looking at the aggregate market, or the supply in particular industry or particular firm. What we'll do in this session is look at how the price and employment of inputs gets determined in a particular industry setting. And then if a variety of industries are bidding for the same input. And we're assuming no difference across inputs, and that wage is the only determining factor of where this input is willing to be supplied to one industry versus the other. How input prices get equalized and employment levels get determined across industries. So let's turn to figure 16.6. And what we're looking at in panel A is one firm with its domain for labor, and in panel B the entire industry. Now across the industry the demand curve is the horizontal summation of the individual firms' demand curves. The marginal value product of labor curves, which we found out in last week's sessions. And just like in output markets, the equilibrium price and quantity get determined by the intersection of supply and demand. So in this particular case, a wage of $300 and an overall employment level of 10,000. And that price for the input, that wage rate is essentially the price that the supply curve, that an individual firm if accounts for only a small share it's stuck with. It is a price taker in input markets. And notice what would happen if the price of labor was lower than 300 per day. Let's say the wage was $250, we'd have a higher quantity demand of labor, L1, versus quantity supplied at that lower wage rate of L0, of L naught. So there'd be excess demand, there'd be pressure on the wage rate to rise if the wage was too low. Notice another thing, that the wage rate that prevails, ends up being determined by the productivity of the input. So, people, in this case, laborers get paid what their marginal value product is. And that price then ends up being again, the price that individual firms are stuck with. Now, how do prices of inputs higher levels get determined with multiple industries within for the same input? To see this, we're going to turn to figure 16.7. And let's say we had software engineers that could go work either in the aerospace industry or the telecommunications industry. And let's assume initially that the wage rate prevailing in aerospace for these engineers, was higher, WA $400, than the wage rate telecommunications for the same engineers. The engineers again, there is no difference between the quality from one engineer to the other. And the only thing that matters to them is the wage rate they get paid, whether it's in telecommunications or aerospace. If there's such a difference, and if initially the employment level in telecommunications of 1,000 workers, and 500 in the aerospace industry. And we're assuming those wage rates get determined by what we call a momentary supply curve. So in the case of aerospace, this is an unusual short run supply curve. It's just at the moment, the amount of workers being supplied to this aerospace industry, the engineers. And similarly the momentary supply curve is SS subscript t in the telecommunications industry. What'll happen if there's this wage gap? There's an arbitrage opportunity in this input market. One solution will be workers engineers realizing, look, I can earn more in aerospace. Enough of them will start moving from telecommunications to aerospace until that arbitrage opportunity gets extinguished. And we're in this particular setting that happens, is at a common way trade of $350 per day. Notice what's happened, the momentary supply curve 200 worker have shifted from telecommunication to aerospace, enough so that the wage rates are equalized. Now, needn't be that laborers do the moving, it could be that firms do the moving. If there's a difference in what engineers are getting paid in aerospace. If it's higher, it could be that aerospace firms move to locations where currently workers are working in the telecommunications at a lower wage rate. Labor doesn't necessarily have to do the moving, the rest of the production process could come to labor. But those movements will occur so long as there's this arbitrage opportunity. What do I want to say? And now we see this in cases like Citigroup a few years ago, moved a lot of its credit card processing facilities to South Dakota, to be closer to where there were workers that were previously working at a lower wage rate. Currently we're seeing this in the shale oil businesses, construction workers move from other states into places like North Dakota, to take into account the higher wage rates that are prevailing in those markets. Bottom line, industries when they're interconnected through inputs, we'll see arbitrage opportunities lead to a movement of the input, or movement of hiring of the input from one location to the other. Until the input price for the same input is brought into line across the two different, or the multiple different industries.
