Slide 1After studying this chapter, you will be able to:Slide 3The Anatomy of Factor MarketsThe Anatomy of Factor MarketsThe Anatomy of Factor MarketsThe Anatomy of Factor MarketsThe Anatomy of Factor MarketsThe Demand for a Factor of ProductionSlide 10The Demand for a Factor of ProductionThe Demand for a Factor of ProductionThe Demand for a Factor of ProductionThe Demand for a Factor of ProductionThe Demand for a Factor of ProductionThe Demand for a Factor of ProductionThe Demand for a Factor of ProductionThe Demand for a Factor of ProductionThe Demand for a Factor of ProductionThe Demand for a Factor of ProductionLabor MarketsLabor MarketsLabor MarketsLabor MarketsLabor MarketsLabor MarketsSlide 27Labor MarketsLabor MarketsLabor MarketsLabor MarketsLabor MarketsLabor MarketsLabor MarketsLabor MarketsLabor MarketsLabor MarketsLabor MarketsLabor MarketsCapital and Natural Resource MarketsCapital and Natural Resource MarketsCapital and Natural Resource MarketsCapital and Natural Resource MarketsCapital and Natural Resource MarketsCapital and Natural Resource MarketsCapital and Natural Resource MarketsCapital and Natural Resource MarketsCapital and Natural Resource MarketsCapital and Natural Resource MarketsCapital and Natural Resource MarketsCapital and Natural Resource MarketsCapital and Natural Resource Markets18MARKETS FOR FACTORS OF PRODUCTION© 2014 Pearson Addison-WesleyAfter studying this chapter, you will be able to:¨Describe the anatomy of factor markets¨Explain how the value of marginal product determines the demand for a factor of production¨Explain how wage rates and employment are determined and how labor unions influence labor markets¨Explain how capital and land rental rates and natural resource prices are determined© 2014 Pearson Addison-WesleyYour college basketball coach earns much more than your economics professor. Why? What determines the wages that people earn? Wages are important, but finding a job is important too.Why are so many manufacturing jobs disappearing and what new jobs are being created?What determines the prices of the natural resources that we use to produce goods and services?© 2014 Pearson Addison-WesleyThe Anatomy of Factor MarketsFour factors of production are Labor Capital Land (natural resources) EntrepreneurshipLet’s take a look at the markets in which these factors of production are traded.© 2014 Pearson Addison-WesleyThe Anatomy of Factor MarketsMarkets for Labor ServicesLabor services are the physical and mental work effort that people supply to produce goods and services.A labor market is a collection of people and firms who trade labor services. The price of labor services is the wage rate.Most labor markets have many buyers and many sellers and are competitive. In these labor markets, the wage rate is determined by supply and demand.© 2014 Pearson Addison-WesleyThe Anatomy of Factor MarketsMarkets for Capital ServicesCapital consists of the tools, instruments, machines, buildings, and other constructions that have been produced in the past and that businesses now use to produce goods and services. These physical objects are capital goods, which are traded in goods markets. This market is not a market for capital services.A market for capital services is a rental market—a market in which the services of capital are hired.© 2014 Pearson Addison-WesleyThe Anatomy of Factor MarketsMarkets for Land Services and Natural ResourcesLand consists of all the gifts of nature—natural resources. The market for land as a factor of production is the market for the services of land—the use of land. The price of the services of land is a rental rate.Nonrenewable natural resources are resources that can be used only once, such as oil, natural gas, and coal.The prices of nonrenewable natural resources are determined in global commodity markets.© 2014 Pearson Addison-WesleyThe Anatomy of Factor MarketsEntrepreneurshipEntrepreneurship services are not traded in markets.Entrepreneurs receive the profit or bear the loss that results from their business decisions.© 2014 Pearson Addison-WesleyThe Demand for a Factor of ProductionThe demand for a factor of production is a derived demand—it is derived from the demand for the goods that it is used to produce.The quantities of factors of production demanded are a consequence of firms’ output decisions.A firm hires the quantities of factors of production that maximize its profit.The value to the firm of hiring one more unit of a factor of production is called the value of marginal product.© 2014 Pearson Addison-WesleyValue of Marginal Product The value to the firm of hiring one more unit of a factor is called its value of marginal product.Value of marginal product of a factor = Price of a unit of output × Marginal product of the factorThe Demand for a Factor of Production© 2014 Pearson Addison-WesleyThe Demand for a Factor of ProductionTable 18.1 shows the calculation of VMP.From the firm’s total product schedule, calculate the marginal product of labor.© 2014 Pearson Addison-WesleyThe Demand for a Factor of ProductionVMP equals marginal product of labor multiplied by the market price of the good produced, which in this example is $2 a loaf.© 2014 Pearson Addison-WesleyThe Demand for a Factor of ProductionA Firm’s Demand for LaborThe value of the marginal product of labor (VMP) tells us what an additional worker is worth to a firm. VMP tells us the revenue that the firm earns by hiring one more worker. The wage rate tells us what an additional worker costs a firm. VMP and the wage rate together determine the quantity of labor demanded by a firm.© 2014 Pearson Addison-WesleyThe Demand for a Factor of ProductionThe firm maximizes its profit by hiring the quantity of labor at which VMP = the wage rate.If VMP exceeds the wage rate, the firm can increase profit by employing one more worker.If VMP is less than the wage rate, the firm can increase profit by firing one worker.Only if VMP equals the wage rate is the firm maximizing profit.© 2014 Pearson Addison-WesleyThe Demand for a Factor of ProductionFigure 18.1 shows the relationship between a firm’s value of marginal product and its demand for labor.The bars show the value of marginal product, which diminishes as the quantity of labor employed increases.© 2014 Pearson Addison-WesleyThe Demand for a Factor of ProductionThe value of marginal product curve passes through the midpoints of the bars.The VMP of the 3rd