Transcript Chapter 11

Chapter 11
Markets for
Factors of
Production
11 Markets for Factors of Production
Chapter 11 Outline
11.1 The Competitive Labor Market
11.2 The Supply of Labor: Your Labor-Leisure Tradeoff
11.3 Wage Inequality
11.4 The Market for Other Factors of Production: Physical
Capital and Land
Key Ideas
1. The three main factors of production are labor, physical
capital, and land.
2. Firms derive the demand for labor by determining the
value of marginal product of labor.
11 Markets for Factors of Production
Key Ideas
3. The supply of labor is determined by trading off the marginal
benefit from labor given by earnings against the marginal cost, the
value of foregone leisure.
4. Wage inequality can be attributed to differences in human capital,
differences in compensating wages, and discrimination in the job
market.
5. In addition to labor, a producer must derive the demand for
physical capital and land to achieve its production objectives.
11.1 The Competitive Labor Market The Demand for Labor
Why does a firm hire labor?
Remember that consumers demand a good or service because
they get utility or satisfaction from consuming it.
Why would a firm hire labor? Does it get utility from having
workers around all day? FACT: demand for labor is a derived
demand—that firms hire labor because labor produces an output
for them. So their demand for labor is directly related to the
market’s demand for their product.
11.1 The Competitive Labor Market The Demand for Labor
Hiring – based
on the MPL, i.e.
productivity of
labor.
Exhibit 11.2 Production
Data for The Wisconsin
Cheeseman
Value of marginal product of labor = how much each worker
contributes to revenue. The contribution of an additional worker to a
firm’s revenues.
11.1 The Competitive Labor Market The Demand for Labor
Exhibit 11.2 Production Data for The Wisconsin
Cheeseman
With 15, who should not be hired since the value is
$110 and the wage is $118. We keep hiring until VMP
 If we can sell
each one of
these for $2 (P
=$2) , then
worker 5
contributes
$228 in
revenue to the
firm, etc.
 Assume the
wage (W)
=$118
Need to check
whether VMPL
=W
11.1 The Competitive Labor Market The Demand for Labor
Exhibit 11.3 Demand for Labor
11.1 The Competitive Labor Market
The Demand for Labor
Assumptions:
1. Perfect competition in the output market, for
example, P =$2 and remained that way.
2. Perfect competition in the labor market, the W =$118
and remained that way.
Maximizing Profit:
1. In choice of how much to produce
MR = MC
2. In choice of how many workers to hire
MP x P = W or VMPL = W
11.2 The Supply of Labor: Your Labor-Leisure Tradeoff
Why don’t they work all the time?
Why don’t they work all the
time?
 Individuals create a balance
between paid work and
time spent on other things.
11.2 The Supply of Labor: Your Labor-Leisure Tradeoff
How much work vs. how much leisure…
 Understand that the consumption of
anything or any activity is done until the
marginal benefit of doing it is equal to its
marginal cost.
 The marginal cost of one more hour of leisure
–what are you giving up?—is the wage that
could have been earned if that hour was
spent working (assuming labor and leisure
are the only two options). That is, the
opportunity cost of leisure is the wage.
 Marginal benefit of leisure = Wage
11.2 The Supply of Labor: Your Labor-Leisure Tradeoff
Two things in
this table.
 First, the higher the
wage rate, the more
hours both Alice and
Tom are willing to
work.
 Second, that Alice is
willing to work
more at each wage
rate than Tom.
 Table really
represents is a
Exhibit 11.4 Total Days of Labor Supplied per Year for Alice and Tom relationship
between the price of
work and the
quantity of work.
This is a supply
relationship.
11.2 The Supply of Labor: Your Labor-Leisure Tradeoff
Exhibit 11.5 Individual Labor Supply Curves
11.2 The Supply of Labor: Your Labor-Leisure Tradeoff Labor Market
Equilibrium: Supply Meets Demand
Exhibit 11.6 Labor Market Equilibrium
The demand and supply curves for labor determine an
equilibrium price (wage) and an equilibrium quantity
(some time period of work).
11.2 The Supply of Labor: Your Labor-Leisure Tradeoff Labor Demand
Shifters
The demand curve for labor is the same thing as the VMPL.
Because that is so, the curve would shift if either of its two
components (price of output and labor productivity) changes.
Exhibit 11.3 Demand for Labor
Shifts of the labor demand curve:
1. Price of the good the firm produces
2. Technology used in production
11.2 The Supply of Labor: Your Labor-Leisure Tradeoff Labor Demand
Shifters
1.
Price of the good the firm produces -- if the price of the
output increases, each worker is worth more to the
firm.
Example:
If Tom’s marginal product is 5 units of output, and
Price of output = $10
VMPL = 5 x $10 = $50
Price of output = $12
VMPL = 5 x $12 = $60
Thus, the demand for labor shifts right
11.2 The Supply of Labor: Your Labor-Leisure Trade of Labor Demand
Shifters
Exhibit 11.7 A Rightward Shift in the Labor Demand Curve
11 Markets for Factors of Production
Why do tickets to professional sporting events
cost so much money?
Recall: VMPL = W—that workers are paid according to their value
to the firm
Incorrect: but that the causality is exactly reversed: athletes’
salaries are so high because ticket prices are so high. That is, the
demand for tickets not only increases ticket prices, but it also
increases the demand (and salaries) for athletes.
11.2 The Supply of Labor: Your Labor-Leisure Tradeoff Labor Demand
Shifters
2. Technology used in production -- the other component is
worker productivity. Technology could make workers more
productive…
Example: If the price of the output is $10, and
Tom’s MP = 5 units
Tom’s MP = 7 units
VMPL = 5 x $10 = $50
VMPL = 7 x $10 = $70
MPL increased from 5 units to 7 units, selling for P=
$10.
 If labor and technology are complements, the labor demand curve
shifts to the right.
 Labor and technology could also be substitutes, as technology
could replace workers, so the labor demand curve shifts to the left.
11.2 The Supply of Labor: Your Labor-Leisure Tradeoff Labor Supply
Shifters
Shifts of the labor supply curve
1. Population changes
2. Changes in worker preferences and tastes
3. Opportunity costs
1. Population changes = The more people there are, the
greater the supply of labor, so the labor supply curve
shifts to the right.
11.2 The Supply of Labor: Your Labor-Leisure Tradeoff Labor Supply
Shifters
Exhibit 11.8 A Shift in the Labor Supply Curve
2. Changes in worker preferences and tastes
Examples:
•
•
Greater proportion of women in the labor force
Greater proportion of older workers wanting to continue working rather than retire
11.2 The Supply of Labor: Your Labor-Leisure Tradeoff Labor Supply
Shifters
Exhibit 11.8 A Shift in the Labor Supply Curve
11.2 The Supply of Labor: Your Labor-Leisure Tradeoff Labor Supply
Shifters
3. Opportunity costs = if the alternatives to working
change overall, or for a particular industry or firm, the
labor supply curve will shift.
Example:
• The Affordable Care Act could cause some workers
to leave the labor force because they can get
insurance coverage outside of employment.
11.3 Wage Inequality
Not really one equilibrium wage
Although the labor market doesn’t determine one wage,
an equilibrium wage is relevant for specific industries
and types of workers.
Exhibit 11.9 U.S. Hourly Wage Distribution (2012)
11.3 Wage Inequality
Why are wages different?
1. Differences in human capital
2. Differences in compensating wages
3. The nature and extent of discrimination in the job
market
4. Differences in human capital
Human capital = each person’s investment in
themselves, leading to the ability to be more productive
Examples: education, job training, health
College =you are investing in your human capital.
11.3 Wage Inequality Differences in Human Capital
Job training
 Industry-specific training increases productivity within
an entire industry.
 Firm-specific training increases productivity for just the
hiring firm.
2. Differences in compensating wage differentials
Compensating wage differentials = wage premiums
necessary to attract workers into occupations that have
unattractive aspects.
Examples:
• Window washer
• Worker on Alaska pipeline
• Garbage collector
11.3 Wage Inequality Discrimination in the Job Market
3. Discrimination in the job market
 Taste-based discrimination = discrimination that
arises due to people’s prejudices against a group of
people
 Statistical discrimination = discrimination that
arises due to expectations about a group of people
 Employers cannot know a potential worker’s
productivity with certainty
 Might use characteristics as a proxy for productivity
(gender, race, etc.)
11.3 Wage Inequality Discrimination in the Job Market
Taste-based discrimination = can originate with
employers, other employees, or customers
Exhibit 11.11 Mean Hourly
Wage of Hispanic and NonHispanic Workers (2013)
 Any other reasons that explains this wage
difference between Hispanics and nonHispanics: differences in income.
 Ever heard the statistic that women earn 76
cents for every dollar a man earns. Point out
that women also have lower levels of job
training and are more likely to come into and
out of the labor force because of child-rearing.
The point is that just looking at the wages
between two groups should not lead one to
conclude that there is discrimination.
11.4 The Market for Other Factors of Production: Physical Capital and
Land
Physical capital = Lasting input into the
production process
Land =Includes other natural resources
 Capital and land can either be owned or rented -- unlike
labor, which can only be rented
 Raw materials that are used up in the course of production
are intermediate goods, not an example of labor, capital, or
land. The distinction between intermediate goods and
physical capital is that capital is not used up, such as
machinery or buildings.
11.4 The Market for Other Factors of Production: Physical Capital and
Land
Value of marginal product of capital (VMPK) how much each additional unit of capital contributes
to the firm’s revenues
 In the case of capital, the price is the rental
price—the cost of using the capital for some
period of time.
11.4 The Market for Other Factors of Production: Physical Capital and
Land
 Unlike the case of
labor, this time the firm
needs to make a
decision about how
many machines to use.
Again, the price of the
output is $2 per unit,
and the last column
represents the value of
each machine to the
firm.
 How many machines
the firm would want if
the rental price is
$80?move down the
Exhibit 11.13 Production Schedule for The Wisconsin Cheeseman
last column to
demonstrate that the
value is greater than
the price until we get
to 10 machines.
11.4 The Market for Other Factors of Production: Physical Capital and
Land
Exhibit 11.14 Demand for Physical Capital
Demand for capital - a relationship between price of
capital and how much the firm wants. Recognize that
this is a demand relationship and equilibrium is the
same as with labor—the firm will utilize any input until the
marginal benefit is equal to the marginal cost.
11 Markets for Factors of Production
Evidence-Based Economics Example:
 Is there discrimination in the labor market?
 Using many different data sets, industries, and methodologies,
the EBE points out that it does seem that there is discrimination
in the labor market, although it is difficult to pinpoint its cause
exactly.
 These studies look at labor market discrimination—there could
also be significant pre-labor market discrimination—
discrimination that could exist before an individual even gets to
the labor market - discrimination in the acquisition of education
or training, for example.