Ch 18 Markets for the Factors of Production 12 10 2011 Factors of production inputs used to make goods and services 1 Labor time 2 Land space 3 Capital computer equipment buildings etc I The Demand for Labor derived demand The Competitive Profit Maximizing Firm o Assume its competitive in both the market for apples seller and for Price taker firm takes the price and wage as given by market apple pickers buyer conditions o Assume it is profit maximizing Firm doesn t care about the number of workers it has or of apples it produces it only wants profit TR TC The Production Function and the Marginal Product of Labor o Production function the relationship between the quantity of inputs used to make a good and the quantity of output of that good input apple pickers output apples o Marginal product of labor the increase in the amount of output from an additional unit of labor MPL Q L o Diminishing marginal product as the of workers increase marginal product decreases when apple pickers have to climb higher and higher b c all the apples have been picked The Value of the Marginal Product and Demand for Labor o Value of the marginal product marginal product of that input x the market price of the output VMPL P x MPL Marginal revenue product extra revenue the firm gets from hiring an additional unit of a factor of production o A competitive profit maximizing firm hires workers up to the point where the value of the MPL the wage o The VMPL curve is the labor demand curve for a competitive profit maximizing firm What causes the labor demand curve to shift o The output price increase in the price of apples raises the VMPL of each worker who picks apples therefore increasing labor demand from the firms that supply apples o Technological change o Supply of other factors fall in supply of ladders reduces marginal product of apple pickers and thus the demand for apple pickers o II The Supply of Labor Trade off between work and leisure o Substitution effect how a person responds to an increasing opportunity cost of leisure by reducing the amount of leisure and increasing the Q of labor supplied o Income effect and decreases Q of labor supplied What causes the labor supply curve to shift person w higher wage rate increases their Q of leisure o Changes in Tastes attitudes towards work women not staying home o Changes in Alternative Opportunities wage rises people may switch anymore occupations o Immigration III Equilibrium in the Labor Market Any event that changes the supply or demand for labor must change the equilibrium wage and VMPL by the same amount because VMPL and wage always have to be equal Shifts in Labor Supply o Increase shifts to right Shifts in Labor Demand o Increase shifts to right o Wage moves with the VMPL IV The Other Factors of Production Land and Capital Capital the stock of equipment and structures used for production o Ex ladders trucks to transport buildings for storage etc Equilibrium in the Markets for Land and Capital o Purchase price price a person pays to own that factor of production o Rental price price the person pays to use for a limited time o Labor land and capital earn the value of the their marginal contribution to the production process Linkages Among the Factors of Production o Change in the supply of any one factor alters the earnings of all the other factors Ch 19 Earnings and Discrimination I Some Determinants of Equilibrium Wages Compensating differentials difference in wages that arises from nonmonetary characteristics of different jobs such as o Coal miners are paid more than other workers w similar levels of education their work is dangerous to their health o Professors are paid less than lawyers and doctors who have similar education Professor s lower wages compensate them for the great intellectual and personal satisfactory their jobs offer Human capital accumulations of investments in people o Ex education o Workers with more human capital on average earn more than those with less o When international trade expands the demand for skilled labor rises and demand for unskilled labor falls o Changes in technology have altered the relative demand for skilled and unskilled labor computers need people who know how to use them Ability Effort and Chance o Natural ability MLB baseball players o Effort some people work hard some are lazy o Chance person attends trade school to learn how to repair TV s and then their skill is made useless by a new technology that does it for them Signaling o When people earn a college degree they do not become more productive but they SIGNAL their high ability to prospective employers The Superstar Phenomenon best producer o Every customer in the market wants to enjoy the good supplied by the o The good is produced w a technology that makes it possible for the best producer to supply every customer at a low cost If Johnny Depp is the best actor everyone will want to see his move b c it is easy to make many copies of a film he can provide his film to millions Above Equilibrium Wages Minimum Wage Laws Unions and Efficiency Wages o Market power of labor unions Union worker association that bargains with employers over wages and working conditions Raise wages above equill Level b c they can threaten to withhold labor from the firm by calling a strike o Efficiency wages holds that a firm can find it profitable to pay high wages b c doing so increases the productivity of its workers II The Economics of Discrimination Discrimination the offering of different opportunities to similar individuals who differ only by race ethnic group sex age or other personal characteristics Measuring Labor Market Discrimination o Human capital differences o Compensating differentials men and women choose different work Entry into the market of firms that only care about profit eliminates discrimination customers that are willing to pay the discriminatory price or gov t mandates it keeps discrimination around Ch 20 Income Inequality and Poverty I The Measurement of Inequality US Income Inequality o US Census Bureau defines a household s income as money income market income before taxes cash payment to households by the gov t but not non cash payments o In 2007 the poverty level calculated by the Social Security Administration for a four person family was 21 203 The Poverty Rate poverty line than inequality o The percentage of the population whose family income falls below the o amount defined as poverty line is more like an absolute standard The poverty
View Full Document
Unlocking...