DOC PREVIEW
WMU ECON 2010 - The Markets for the Factors of Production

This preview shows page 1-2-17-18-19-36-37 out of 37 pages.

Save
View full document
View full document
Premium Document
Do you want full access? Go Premium and unlock all 37 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 37 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 37 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 37 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 37 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 37 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 37 pages.
Access to all documents
Download any document
Ad free experience
Premium Document
Do you want full access? Go Premium and unlock all 37 pages.
Access to all documents
Download any document
Ad free experience

Unformatted text preview:

Slide 0In this chapter, look for the answers to these questions:Factors of Production and Factor MarketsDerived DemandTwo AssumptionsOur Example: Farmer JackSlide 7Farmer Jack’s Production FunctionMarginal Product of Labor (MPL)The Value of the Marginal ProductA C T I V E L E A R N I N G 1: Computing MPL and VMPLA C T I V E L E A R N I N G 1: AnswersSlide 13Farmer Jack’s Labor DemandVMPL and Labor DemandShifts in Labor DemandThings that Shift the Labor Demand CurveThe Connection Between Input Demand & Output SupplySlide 19Slide 20Labor SupplyThe Labor Supply CurveThings that Shift the Labor Supply CurveEquilibrium in the Labor MarketA C T I V E L E A R N I N G 2: Changes in labor-market equilibriumA C T I V E L E A R N I N G 2A: AnswersA C T I V E L E A R N I N G 2B: AnswersA C T I V E L E A R N I N G 2C: AnswersProductivity and Wage Growth in the U.S.The Other Factors of ProductionHow the Rental Price of Land Is DeterminedHow the Rental Price of Capital Is DeterminedRental and Purchase PricesLinkages Among the Factors of ProductionCONCLUSIONCHAPTER SUMMARYSlide 37© 2007 Thomson South-Western, all rights reservedN. G R E G O R Y M A N K I WPowerPoint® Slidesby Ron Cronovich The Markets for the Factors of The Markets for the Factors of ProductionProduction18P R I N C I P L E S O FF O U R T H E D I T I O NCHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION2In this chapter, look for the answers to these questions:What determines a competitive firm’s demand for labor? How does labor supply depend on the wage? What other factors affect labor supply? How do various events affect the equilibrium wage and employment of labor?How are the equilibrium prices and quantities of other inputs determined?CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION3Factors of Production and Factor MarketsFactors of production: the inputs used to produce goods and services.•Labor•Land•Capital: the equipment and structures used to produce goods and services.Prices and quantities of these inputs are determined by supply & demand in factor markets.CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION4Derived DemandMarkets for the factors of production are like markets for goods & services, except:Demand for a factor of production is a derived demand – derived from a firm’s decision to supply a good in another market.CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION5Two Assumptions1. We assume all markets are competitive.The typical firm is a price taker•in the market for the product it produces•in the labor market2. We assume that firms care only about maximizing profits. •Each firm’s supply of output and demand for inputs are derived from this goal.CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION6Our Example: Farmer JackFarmer Jack sells wheat in a perfectly competitive market. He hires workers in a perfectly competitive labor market. When deciding how many workers to hire, Farmer Jack maximizes profits by thinking at the margin:•If the benefit from hiring another worker exceeds the cost, Jack will hire that worker.CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION7Our Example: Farmer JackCost of hiring another worker:the wage – the price of labor Benefit of hiring another worker:Jack can produce more wheat to sell,increasing his revenue.The size of this benefit depends on Jack’s production function: the relationship between the quantity of inputs used to make a good and the quantity of output of that good.CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION805001,0001,5002,0002,5003,0000 1 2 3 4 5No. of workers Quantity of outputFarmer Jack’s Production Function300052800424003180021000100Q (bushels of wheat per week)L(no. of workers)CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION9Marginal Product of Labor (MPL)Marginal product of labor: the increase in the amount of output from an additional unit of laborwhere ∆Q = change in output ∆L = change in labor∆Q∆LMPL =CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION10The Value of the Marginal ProductProblem: •cost of hiring another worker (wage) is measured in dollars •benefit of hiring another worker (MPL) is measured in units of output Solution: convert MPL to dollarsValue of the marginal product: the marginal product of an input times the price of the output VMPL = value of the marginal product of labor = P x MPLAA CC TT II VV E LE L EE AA RR NN II NN G G 11: : Computing MPL and VMPLComputing MPL and VMPLP = $5/bushel.Find MP L and VMPL, fill them in the blank spaces of the table. Then graph a curve with VMPL on the vertical axis, L on horiz axis.11300052800424003180021000100VMPLMPLQ (bushels of wheat)L (no. of workers)AA CC TT II VV E LE L EE AA RR NN II NN G G 11: : AnswersAnswersFarmer Jack’s production function exhibits diminishing marginal product: MPL falls as L increases.This property is very common.12300052800424003180021000100VMPL = P x MPLMPL = ∆Q/∆L Q (bushels of wheat)L (no. of workers)1,0002002,0004003,0006004,000800$5,0001000AA CC TT II VV E LE L EE AA RR NN II NN G G 11: : AnswersAnswersFarmer Jack’s VMPL curve is downward sloping, due to diminishing marginal product. 13L (number of workers)The VMPL curve01,0002,0003,0004,0005,000$6,0000 1 2 3 4 5CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION14At any larger L, can increase profit by hiring one fewer worker. Farmer Jack’s Labor DemandSuppose wage W = $2500/week. How many workers should Jack hire?Answer: L = 3L (number of workers)The VMPL curve01,0002,0003,0004,0005,000$6,0000 1 2 3 4 5$2,500At any smaller L, can increase profit by hiring another worker.CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION15VMPL and Labor DemandFor any competitive, profit-maximizing firm:•To maximize profits, hire workers up to the point where VMPL = W. •The VMPL curve is the labor demand curve. WLVMPLW1L1CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION16Shifts in Labor DemandLabor demand curve = VMPL curve. VMPL = P x MPLAnything that increases P or MPL at each L will increase VMPL and shift labor demand curve upward. WLD1D2CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION17Things that Shift the Labor Demand CurveChanges in the output price, PTechnological change (affects MPL)The supply of other factors (affects


View Full Document

WMU ECON 2010 - The Markets for the Factors of Production

Download The Markets for the Factors of Production
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view The Markets for the Factors of Production and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view The Markets for the Factors of Production 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?