Transcript Document

Factors of Production
• What do you think is the most important price
you will encounter throughout your life?
• The price of your labor!!!
Copyright © 2004 South-Western
Factors of Production
• Factors of Production (inputs, resources)
• Inputs used to produce goods and services
• Land, labor (L), capital (K), entrepreneurship
Copyright © 2004 South-Western
Why Factor Prices Matter
• Occupational Outlook Quarterly
• Derived Demand results from …
the demand for a specific product/service
When D rises, P ……
rises!!
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Why Factor Prices Matter
Copyright © 2004 South-Western
The Demand for Labor
• Determination of equilibrium wages
• Examine the link between
• The production of goods and the demand for labor
Copyright © 2004 South-Western
Governed by the forces of supply and demand.
(a) The Market for Apples
(b) The Market for Apple Pickers
Price of
Apples
Wage of
Apple
Pickers
Supply
P
Supply
W
Demand
Demand
0
Q
Quantity of
Apples
0
L
Quantity of
Apple Pickers
Copyright©2003 Southwestern/Thomson Learning
Marginal Productivity
and Factor Demand
• Competitive firm
•
•
•
•
Seller of goods
Buyer of labor
Price taker
Profit maximizing
• Profit = TR - TC
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Marginal Productivity
and Factor Demand
• Production Function
• relationship between
• quantity of inputs used to make a good
• quantity of output of that good
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The Production Function
Quantity
of Apples
Production
function
300
280
240
180
100
0
1
2
3
4
5
Quantity of
Apple Pickers
Copyright©2003 Southwestern/Thomson Learning
Marginal Productivity
and Factor Demand
• Marginal product of labor
• increase in the amount of output from an additional
unit of labor
• MPL = Q/L
• MPL = (Q2 – Q1)/(L2 – L1)
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Marginal Productivity
and Factor Demand
• Diminishing Marginal Product of Labor
• Q increases and MPL declines
• Each additional worker contributes less to
production than the prior worker.
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Marginal Productivity
and Factor Demand
1. List the four Factors of Production.
2. What derives the demand for labor?
3. Which Factor of Production accounts for
most of the income/
4. Define Marginal Product of Labor.
5. Define Diminishing Marginal Product of
Labor.
Copyright © 2004 South-Western
Marginal Productivity
and Factor Demand
Value of Marginal Product – VMPL is …
• The total monetary benefit of hiring each worker
VMPL = (P of output) * MPL
Worker contribution = worker revenue – wage (W)
The extra revenue from hiring an additional worker
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Marginal Productivity
and Factor Demand
Lemonade Stand
Units of Labor
Total Product
(# cups/hour)
Marginal
Product of Labor
Value of
Marginal
Produce
0
0
---
---
1
8
8
$2*8 = $16
2
18
10
3
26
8
4
32
6
5
36
4
6
38
2
Copyright © 2004 South-Western
Marginal Productivity
and Factor Demand
Lemonade Stand
Units of Labor
Total Product
(# cups/hour)
Marginal
Product of Labor
Value of
Marginal
Produce
0
0
---
---
1
8
8
$2*8 = $16
2
18
10
$20
3
26
8
16
4
32
6
12
5
36
4
8
6
38
2
4
Copyright © 2004 South-Western
Marginal Productivity
and Factor Demand
• Hiring Labor is a …
• Comparison between
• The marginal benefit of the next worker (VMPL)
• The marginal cost (MC) of the next worker.
• HIRE:
• NEVER HIRE:
• STOP HIRING:
VMPL >= W (wage)
VMPL < W
VMPL = W
This is the profit-maximizing hiring decision
for ANY factor of production.
Copyright © 2004 South-Western
Value of the Marginal Product
Value
of the
Marginal
Product
P = MC
Market
wage
Value of marginal product
(demand curve for labor)
0
Profit-maximizing quantity
VMPL = W
Quantity of
Apple Pickers
Copyright©2003 Southwestern/Thomson Learning
Marginal Productivity
and Factor Demand
Lemonade Stand
Units of Labor
Total Product
(# cups/hour)
Marginal
Product of Labor
Value of
Marginal
Produce
0
0
---
---
1
8
8
$2*8 = $16
2
18
10
$20
3
26
8
16
4
32
6
12
5
36
4
8
6
38
2
4
Copyright © 2004 South-Western
Equilibrium in a Labor Market
Wage
(price of
labor)
Supply
Equilibrium
wage, W
Demand
0
Equilibrium
employment, L
Quantity of
Labor
Copyright©2003 Southwestern/Thomson Learning
Shifts of the Factor Demand Curve
1. Changes in the price of goods
1. P rising may mean more workers hired.
2. D curve shifts right since VMP increases.
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Shifts of the Factor Demand Curve
1. Changes in the supply of other factors.
1. Tools (capital) improve labor.
2. More land usually means more labor hired.
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Shifts of the Factor Demand Curve
1. Changes in technology.
1. Better technology usually means a more
productive labor force.
Copyright © 2004 South-Western
Demand in the Market
for
Land and Capital
How does the owner of a firm determine how
much land and capital to employ?
Same way the firm hires labor
• R = ‘rental rate’
• MC of hiring the next unit of land or capital
• Maximize profits = VMPLand = RLand
• Maximize profits = VMPCapital = RCapital
Copyright © 2004 South-Western
Supply in the Market
for
Land and Capital
Supply of Land is nearly vertical or ???
inelastic! Why?
Only so much land.
Supply of Capital is less steep or ???
Very elastic! Why?
Easier to generate and/or use capital.
Copyright © 2004 South-Western
Equilibrium Markets for Land and Capital
Land
Rental
Price of
Land
Capital
Rental
Price of
Capital
Supply
P
Supply
P
Demand
Demand
0
Q
Quantity of
Land
0
Q
Quantity of
Capital
Copyright
© 2004 South-Western
Copyright©2003
Southwestern/Thomson Learning
THE SUPPLY OF LABOR
• Trade off
V.
Labor (working and wages)
Leisure
Copyright © 2004 South-Western
The Supply of Labor
Complete the sentence:
“They would need to pay me at least $ ____ /hour
before I did that job. Anything less than or equal
to this amount and I will pass and choose not to
work that job.”
Copyright © 2004 South-Western
Work v. Leisure
Cost-benefit Decision
• Benefit of one hour of work = wages used to
consume goods and services.
• Cost of one hour of work: the utility which could be
gained from leisure.
• P of leisure = wage you give up.
Copyright © 2004 South-Western
Work v. Leisure
Cost-benefit Decision
• Will work when
• MUWage > MULeisure
• Will NOT work when
• MUWage < MULeisure
Equilibrium is when
MUWage = MULeisure
Copyright © 2004 South-Western
Supply of Labor Curve
Wage
(price of
labor)
0
Supply
Quantity of
Labor
Copyright©2003 Southwestern/Thomson Learning
Shifts in the Market Labor Supply Curve
1. Changes in Preferences and Social Norms
1. List two you know about.
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Shifts in the Market Labor Supply Curve
1. Changes in Population
1. List one you know about.
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Shifts in the Market Labor Supply Curve
1. Changes in Opportunities
1. List two you know about.
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Shifts in the Market Labor Supply Curve
1. Changes in Wealth
1. List one you know about.
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Input Combinations
Let’s talk construction!
Carpenters use tools to build houses,
but here are different combinations of
labor and capital that will get the
same house built. One man with a nail
gun could be more productive
than several men with hammers
and nails. The firm must decide if that more expensive, but more
productive, nail gun is a better choice than several men with
inexpensive hammers.
How does a firm decide which method of producing is best?
Copyright © 2004 South-Western
Input Combinations
Let’s talk construction!
Substitutes – two factors that can do essentially the same work.
List two you know about.
Complements – two factors that must be combined to produce
output.
List two know about.
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Determining the Optimal Input Mix
Least-cost Combination of Inputs is when the …
firm hires factor so that the marginal product/dollar spent
on each is the same.
Copyright © 2004 South-Western
Cost Minimization
A city needs to dig a 100-foot drainage ditch.
They hire MicroP6 for the job. MicroP6 has two
combinations:
Combo 1: a rented backhoe and skilled driver.
Combo 2: ten unskilled workers each with a
shovel.
Copyright © 2004 South-Western
Cost Minimization
A city needs to dig a 100-foot drainage ditch.
They hire MicroP6 for the job. MicroP6 has two
combinations:
Cost of Labor
Cost of Capital
Combo 1
One skilled driver =
$500
Rented Backhoe =
$2500
Combo 2
Ten unskilled workers =
$100 * 10 = $1000
Ten shovels =
$25 * $10 = $240
Total Cost of
Producing 100’ of
Ditch Digging
What are the Total Costs?
Copyright © 2004 South-Western
Cost Minimization
A city needs to dig a 100-foot drainage ditch.
They hire MicroP6 for the job. MicroP6 has two
combinations:
Total Cost of
Producing 100’ of
Ditch Digging
Cost of Labor
Cost of Capital
Combo 1
One skilled driver =
$500
Rented Backhoe =
$2500
$3000
Combo 2
Ten unskilled workers =
$100 * 10 = $1000
Ten shovels =
$25 * $10 = $240
$1250
Which does the city choose?
Copyright © 2004 South-Western
Cost Minimization
What about productivity?
Combo1 can produce a 300’ ditch in the same
time it takes Combo 2 to produce a 100’ ditch.
Total Cost of
Producing 100’ of
Ditch Digging
Cost of Labor
Cost of Capital
Combo 1
One skilled driver =
$500
Rented Backhoe =
$2500
$3000
Combo 2
Ten unskilled workers =
$100 * 10 = $1000
Ten shovels =
$25 * $10 = $240
$1250
Which does the city choose?
Copyright © 2004 South-Western
Marginal Productivity Theory
of
Income Distribution
The division of income among the economy’s
factors of production is determined by each
factor’s marginal productivity at the market
equilibrium.
What about the distribution of income for
different types of labor within the broader labor
market?
Copyright © 2004 South-Western
Marginal Productivity Theory
and
Wage Inequality
1. Compensating differentials
1. Police officer in Chicago (pop. 2.85M)
2. Police officer in Hanover, ID (pop. 3,790)
They perform essentially the same task.
Whose is usually more dangerous?
Copyright © 2004 South-Western
Marginal Productivity Theory
and
Wage Inequality
1. Differences in Talent
1. Top Chef, Hall of Fame athlete, award willing
author
2. Beginning chef, minor-league athlete, beginning
author
They perform essentially the same task.
Whose would you sample?
Copyright © 2004 South-Western
Marginal Productivity Theory
and
Wage Inequality
1. Difference in Human Capital
Human Capital is the accumulated
education, experience and training possessed by an
individual.
It’s associated with
more productivity and thus
a higher wage.
Copyright © 2004 South-Western
Marginal Productivity Theory
and
Wage Inequality
1. Market Power
unions
2. Efficiency Wages
above competitive wage
3. Discrimination
Copyright © 2004 South-Western