Factors of production – inputs used to make goods and services1. Labor (time)2. Land (space)3. Capital (computer equipment, buildings, etc)I. The Demand for Labor (derived demand)The Competitive Profit-Maximizing Firm:Assume its competitive in both the market for apples (seller) and for apple pickers (buyer)Price taker; firm takes the price and wage as given by market conditionsAssume it is profit-maximizingFirm 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 LaborProduction 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)Marginal product of labor – the increase in the amount of output from an additional unit of labor (MPL = ^Q / ^L)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 LaborValue 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 productionA competitive, profit-maximizing firm hires workers up to the point where the value of the MPL = the wageThe VMPL curve is the labor-demand curve for a competitive, profit-maximizing firmWhat causes the labor demand curve to shift?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)Technological changeSupply of other factors (fall in supply of ladders reduces marginal product of apple pickers and thus the demand for apple pickers)II. The Supply of LaborTrade-off between work and leisureSubstitution effect – how a person responds to an increasing opportunity cost of leisure by reducing the amount of leisure and increasing the Q of labor suppliedIncome effect – person w/ higher wage rate increases their Q of leisure and decreases Q of labor suppliedWhat causes the labor-supply curve to shift?Changes in Tastes (attitudes towards work – women not staying home anymore)Changes in Alternative Opportunities (wage rises, people may switch occupations)ImmigrationIII. Equilibrium in the Labor MarketAny 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 equalShifts in Labor SupplyIncrease – shifts to rightShifts in Labor DemandIncrease – shifts to rightWage moves with the VMPLIV. The Other Factors of Production: Land and CapitalCapital – the stock of equipment and structures used for productionEx: ladders, trucks to transport, buildings for storage, etcEquilibrium in the Markets for Land and CapitalPurchase price – price a person pays to own that factor of productionRental price – price the person pays to use for a limited timeLabor, land, and capital earn the value of the their marginal contribution to the production processLinkages Among the Factors of ProductionChange in the supply of any one factor alters the earnings of all the other factorsCh. 19 – Earnings and DiscriminationI. Some Determinants of Equilibrium WagesCompensating differentials – difference in wages that arises from nonmonetary characteristics of different jobs such as:Coal miners are paid more than other workers w/ similar levels of education (their work is dangerous to their health)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 peopleEx: educationWorkers with more human capital on average earn more than those with lessWhen international trade expands, the demand for skilled labor rises, and demand for unskilled labor fallsChanges in technology have altered the relative demand for skilled and unskilled labor (computers need people who know how to use them)Ability, Effort, and ChanceNatural ability – MLB baseball playersEffort – some people work hard, some are lazyChance – 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 themSignalingWhen people earn a college degree, they do not become more productive, but they SIGNAL their high ability to prospective employersThe Superstar PhenomenonEvery customer in the market wants to enjoy the good supplied by the best producerThe good is produced w/ a technology that makes it possible for the best producer to supply every customer at a low costIf 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 millionsAbove Equilibrium Wages: Minimum Wage Laws, Unions, and Efficiency WagesMarket power of labor unionsUnion – worker association that bargains with employers over wages and working conditionsRaise wages above equill. Level b/c they can threaten to withhold labor from the firm by calling a strikeEfficiency wages – holds that a firm can find it profitable to pay high wages b/c doing so increases the productivity of its workersII. The Economics of DiscriminationDiscrimination – the offering of different opportunities to similar individuals who differ only by race, ethnic group, sex, age, or other personal characteristicsMeasuring Labor-Market DiscriminationHuman capital differencesCompensating 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 aroundCh. 20 – Income Inequality and PovertyI. The Measurement of InequalityUS Income InequalityUS 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)In 2007, the poverty level calculated by the Social Security Administration for a four-person family was $21,203.The Poverty RateThe percentage of the population whose family income falls below the poverty line$ amount defined as “poverty line” is more like an “absolute” standard than
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