Transcript Ch. 18 Outline Part 2

Ch 18: The Markets For the Factors of
Production
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What are the “factors of production”?
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Remember the circular flow model?????
Factor Markets differ from “goods
markets”
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………..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
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………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
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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
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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
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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
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P x MPL = VMPL
……because market price is constant and we
experience diminishing MPL,……then the
VMPL also diminishes
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…….so how many workers do we hire ???
Wage (W) = VMPL
…..so your Labor D curve is a reflection of
the VMPL (for a competitive profit max. firm)
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…….REMEMBER……VMPL = P x MPL... and
the VMPL is the D curve.
……so if the P increases or decreases, then
VMPL…… and so the D curve will…..
…….or if the MP changes, then the VMPL will
…….and so the D curve will……..
……also REMEMBER…..
 A profit max COMPETITIVE firm will produce
where P = MC and hire where
W = VMPL
…if P x MPL = W….
…then P = W / MPL...and W / MPL = MC….
….then P = MC
 *remind…VMPL also called Marg Rev Prod
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Shifting Labor Demand Curve
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Output Price (P x MPL) = VMPL
Technology (increases the MPL of each
worker…(P x MPL) = VMPL....so increases
the VMPL
Supply of other factors ….will affect MPL of
each worker
Supply of Labor
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….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
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***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..
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How would you like to be an investment banker now?
Immigration
Productivity and Wages
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Principle: Productivity = Standard of Living
Wages = Productivity as measured by VMPL
3 Determinants of Productivity/Standard of
Living:
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Physical capital
Human capital
Technological knowledge
Capital Income
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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