Factors of production: the inputs used to produce goods and servicesLabor, land, and capital are the 3 most import factors of productionThe demand for a factor of production is a derived demandA firm’s demand for a factor of production is derived from its decision to supply a good in another market.Ex. The demand for computer programmers is inseparably linked to the supply of computer software, and the demand for gas stations attendants is inseparably linked to the supply of gasolineThe Demand for LaborLabor markets are governed by the forces of supply and demandEx. The supply and demand for apples determine the price of the apples and the supply and demand for apple pickers determine the price, or wage of apple pickersMost labor services, rather than being final goods ready to be enjoyed by consumers, are inputs into the production of other goods.The Competitive Profit-Maximizing FirmEx. Apple producerHow they decide the quantity of labor to demand: firm owns apple orchard and each week must decide how many apple pickers to hire to harvest crop. After firm makes hiring decision, workers pick as many apples as possible. Then firm sells apples, pays workers, and keep leftovers as profit2 assumptions about firmfirm is competitive in market for apples (seller) and market for apple pickers (buyer)Price taker for price of apples and wages of workersFirm is profit-maximizing (firm does not directly care about number for workers it has or number of apples it produces). Only cares about profit (revenue – total cost)The Production Function and the Marginal Product of LaborTo make hiring decision, firm must consider how the size of workforce affects amount of output producedProduction function: relationship between quantity of inputs used to make a good and the quantity of output of that goodMarginal product of labor: increase in amount of output from an additional unit of laborDiminishing marginal product: property whereby the marginal product of an input declines as the quantity of the input increasesAs more and more workers are hired, each additional worker contributes less to the production of apples. For this reason, the production function becomes flatter as number of workers rises.The Value of the Marginal Product and the Demand for LaborTo find workers contribution to revenue, convert marginal product of labor into the value of the marginal product (measured in dollars).Value of the marginal product: the marginal product of an input times the price of the outputA competitive, profit-maximizing firm hires workers up to the point where he value of the marginal product of labor equals the wage.The value-of-marginal-product curve is the labor-demand curve for a competitive, profit-maximizing firm.What Causes the Labor-Demand Curve to Shift?The output priceWhen output price changes, value of marginal product changes, and the labor-demand curve shifts.Ex. An increase in the prices of apples raises the value of the marginal product of each worker who picks the apples, and therefore increases labor demand from the firms that supply apples. A decrease in price of apples reduces value of marginal product and decreases labor demandTechnological ChangeEx. Invention of a cheap industrial robot could conceivably reduce marginal product of labor, shifting labor-demand curve to the left.Supply of other factorsEx. Fall in supply of ladders will reduce marginal product of apple pickers and thus the demand for apple pickersThe Supply of LaborThe Trade-off between Work and LeisureTrade-off between labor and leisure lies behind the labor-supply curveLabor supply cure reflects how workers’ decisions about the labor-leisure trade-off respond to a change in that opportunity costUpward sloping labor curve means that an increase in the wage induces workers to increase the quantity of labor they supply. Because time is limited, more hours of work mean that workers are enjoying less leisure. Workers respond to increase in opportunity cost of leisure by taking less of it.What Causes the Labor-Supply Curve to Shift?Change in tastesIn 1950 34% of women were employed and in 2000 64% were.Changes in alternative opportunitiesSupply of labor in any one labor market depends on the opportunities available in other labor markets.If wage earned by pear pickers suddenly rises, some apple pickers may choose to switch occupations, and supply of labor in market for apple pickers fallsImmigrationMovement of workers from region to region is an important source of shifts in labor supplyWhen immigrants come to U.S., supply of labor in U.S. increases, and supply of labor in the immigrants’ countries falls.Equilibrium in the Labor MarketAny event that changes the supply or demand for labor must change the equilibrium wage and the value of the marginal product by the same amount because these must always be equal.Shifts in Labor SupplyWhen labor supply increases, the equilibrium wage falls and employment rises. The change in wage reflects a change in the value of the marginal product of labor: with more workers, the added output from an extra worker is smaller.Shifts in Labor DemandSuppose that increase in popularity of apples causes price to rise. Price increase does not change marginal product of labor for any given number of workers, but does raise value of marginal product. With higher price of apples, hiring more apple pickers is more profitableWhen labor demand increases, equilibrium wage rises and employment rises. The change in wage reflects change in value of marginal product of labor. With high output price, added output from an extra worker is more valuableThe Other Factors of Production: Land and CapitalCapital: equipment and structures used to produce goods and servicesEquilibrium in the Markets for Land and CapitalPurchase price of land or capital is the price a person pays to own that factor of production indefinitelyRental price is the price a person pays to use that factor for a limited period of timeThe demand for land and capital is determined just like the demand for laborFor both land and capital, the firm increases the quantity hired until the value of the factor’s marginal product equals the factor’s priceThe demand curve for each factor reflects the marginal productivity of that factorLabor, land, and capital each earn the value of their marginal contribution to the production process.Chapter 18 - The Markets for the Factors of Production 11/25/2010- Factors of production: the inputs used to
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