Chapter 14: Oligopoly

The foundation of factor market analysis rests on the value of marginal product, which measures the revenue gain when a firm employs an additional unit of any productive input. Firms operating in competitive factor markets maximize profit by hiring inputs until the value of marginal product equals the input's price. The labor market receives particular attention, with the chapter analyzing how labor demand responds to changes in output prices, worker productivity, and the availability of complementary or substitute inputs. Labor supply is shaped by demographic trends, individual preferences about work and leisure time, and wage opportunities in competing occupations. Wage disparities across and within occupations stem from multiple sources: compensating wage differentials that reward workers for undesirable job characteristics, differences in accumulated human capital reflected in education and training, employer discrimination, and the market power wielded by workers through union representation or by employers with monopsony influence. The capital market operates through the equilibration of savings supply—determined by household preferences for current versus future consumption—with investment demand driven by firm profit expectations and interest rates. Interest rate movements signal the relative scarcity of capital funds and influence investment decisions throughout the economy. The land market presents a unique case where supply remains essentially fixed, causing rental prices to adjust entirely to shifts in demand. The chapter integrates these three factor markets to illustrate how they collectively determine income distribution and resource allocation, using real-world applications such as occupational wage gaps, interest rate fluctuations, and escalating urban property values to demonstrate practical significance.