Ch 18 notes ppt - Solon City Schools
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Transcript Ch 18 notes ppt - Solon City Schools
Ch 18: The Markets For the Factors of
Production
What are the “factors of production”?
Remember the circular flow model?????
Factor Markets differ from “goods
markets”
………..because the DEMAND for a factor is
DERIVED
………meaning the demand is derived from
the decision to supply a good
Ex: the demand for “great econ teachers” is
derived from the decision to “supply” the AP
Econ curriculum
Labor (or any other factor of
production) – governed by laws of
Supply and Demand
………assumptions………
Perfect competition for BOTH the market for
the good and the market for the labor
Price and Wage “TAKERS”
GOAL - Profit max.
Production Function p.401
Y– axis …
….output
X – axis….
….input or (factor of production)
So what lesson did we learn from the
production function???????
Diminishing Marginal Product
Value of the Marginal Product
(Marginal Revenue Product)
How many workers to hire?????
Consider how much profit each worker would
bring in.
Profit = TR – TC …right?.........
….so the profit from an additional worker is
the …..
“Workers Contribution” to revenue - Wage
Workers Contribution to revenue?????
Convert the MPof Labor (MPL) into the Value
of the MPL (VMPL) (also Marg Rev Prod.)
Simply
Price of the good x MPL = VMPL (or MRP)
P x MPL = VMPL (or P x MPL = MRP)
……because market price is constant and
we experience diminishing MPL,……then the
VMPL (MRP) also diminishes
…….so how many workers do we hire ???
Wage (W) = VMPL or W = MRP
…..so your Labor D curve is a reflection of
the VMPL (MRP)
(for a competitive profit max. firm)
Now evaluate when not at Qmax
Profit Max Rule: MR=MC
Profit Max Rule: W = VMPL
W = MRP
Wage
Supply
=D
Wage,
Supply
D (VMPL) (MRP)
Q Labor
…….REMEMBER……VMPL (MRP) = P x MPL... and
the VMPL (MRP) is the D curve.
……so if the P increases or decreases, then VMPL
(MRP) will ….?
Increase or decrease ……and so the D curve will….?
Shift left or right
Or if he MP increases or decreases, then the VMPL
(MRP) will …?
Increase or decrease ………and so the D curve will…?
Shift left or right
p. 403 FYI
……also REMEMBER…..
A profit max COMPETITIVE firm will produce
where P = MC and hire where
W = VMPL(MRP)
…if P x MPL = W….
…then P = W / MPL...and W / MPL = MC….
….then P = MC
Shifting Labor Demand Curve
Output Price (P x MPL) = VMPL (MRP)
If P changes …then…?
Technology (increases the MPL of each
worker…(P x MPL) = VMPL(MRP) ....so
increases the VMPL (MRP)
Opposite of technology increase?
Supply of other factors ….will affect MPL of
each worker
Supply of Labor
….reflects how Labor / Leisure tradeoff
responds to change in opportunity cost.
….an increase in W will increase the Labor
you will supply …..think of the “law of supply”
….but an increase in Labor supplied by you =
a decrease in leisure time
W increase = increase in opportunity cost of
leisure
Shifting Labor Supply Curve
***whenever people change the amount of
work they will provide at a given wage
Change taste (lifestyle) – ex- women
Change in alternative opportunities (better
opportunities in other fields) …or change in
landscape of the industry..
How would you like to be an investment banker now?
Immigration
Productivity and Wages
Principle: Productivity = Standard of Living
Wages = Productivity as measured by
VMPL(MRP)
3 Determinants of Productivity/Standard of
Living:
Physical capital
Human capital
Technological knowledge
Capital Income
Simplified for our model- income households
earn from the rent of their capital
Reality- most firms own their own capital
……but the income earned from the use of
this is eventually returned to households in
forms of stock dividends, bond interest