Transcript Value of the marginal product

PowerPoint Presentations for
Principles of Microeconomics
Sixth Canadian Edition
by Mankiw/Kneebone/McKenzie
Adapted for the
Sixth Canadian Edition by
Marc Prud’homme
University of Ottawa
THE MARKETS
FOR THE FACTORS
OF PRODUCTION
Chapter 18
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18-2
THE MARKETS FOR THE
FACTORS OF PRODUCTION
 In 2011, the total income of all Canadians was about
$1.7 trillion.
 People earned this income in various ways:
 Workers earned about three-quarters of it in the
form of wages and benefits.
 The rest went to landowners and to the owners of
capital in the form of rent, profit, and interest.
 What determines how much goes to workers?
 To landowners?
 To the owners of capital?
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THE MARKETS FOR THE
FACTORS OF PRODUCTION
 This chapter provides the basic theory for the analysis
of factor markets.
 Factors of production: the inputs used to produce
goods and services
 Labour
 Land
 Capital
 The demand for a factor of production is a derived
demand.
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THE DEMAND FOR LABOUR
 Labour markets, like other markets in the
economy, are governed by the forces of
supply and demand.
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FIGURE 18.1:
The Versatility of Supply and Demand
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The Competitive, Profit-Maximizing Firm
How does an apple producer decide what
quantity of labour to demand?
Two assumptions:
1. The firm is competitive both in the
market for apples and in the market for
apple pickers.
2. The firm is a profit-maximizing firm.
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The Production Function
and the Marginal Product of Labour
 To make its hiring decision, the firm must consider
how the size of its workforce affects the amount
of output produced.
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The Production Function
and the Marginal Product of Labour
 Production function: the relationship between
the quantity of inputs used to make a good
and the quantity of output of that good
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TABLE 18.1:
How the Competitive Firm Decides How Much Labour to Hire
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FIGURE 18.2:
The Production Function
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The Production Function
and the Marginal Product of Labour
 Marginal product of labour (MPL): the
increase in the amount of output from an
additional unit of labour
 Diminishing marginal product: the property
whereby the marginal product of an input
declines as the quantity of the input
increases
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The Value of the Marginal Product
and the Demand for Labour
 When deciding how many workers to hire,
the firm considers how much profit each
worker would bring in.
 Because profit is total revenue minus total
cost, the profit from an additional worker is
the worker’s contribution to revenue minus
the worker’s wage.
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The Value of the Marginal Product
and the Demand for Labour
 Value of the marginal product (VMP): the
marginal product of an input times the price
of the output
 Economists sometimes call the VMP the
firm’s marginal revenue product.
 It is the extra revenue the firm gets from
hiring an additional unit of a factor of
production.
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The Value of the Marginal Product
and the Demand for Labour
 A competitive, profit-maximizing firm hires
workers up to the point where the value of the
marginal product of labour equals the wage.
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FIGURE 18.3:
The Value of the Marginal Product of Labour
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What Causes the
Labour Demand Curve to Shift?
 Factors that affect the labour demand curve:
 The output price
 Technological change
 The supply of other factors
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QuickQuiz
Define marginal product of labour and value
of the marginal product of labour.
Describe how a competitive, profit-maximizing
firm decides how many workers to hire.
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Active Learning
Computing MPL and VMPL
P = $5/bushel.
Find MPL
and VMPL,
fill them in the blank
spaces of the table.
Then graph
a curve with VMPL
on the vertical axis,
L on horizontal axis.
L
(no. of
worker)
Q
(bushels of
wheat)
0
0
1
1000
2
1800
3
2400
4
2800
5
3000
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MPL
VMPL
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Active Learning
Answers
Farmer Jack’s
production
function exhibits
diminishing
marginal product:
MPL falls as
L increases.
This property is very
common.
L
(no. of
workers)
Q
(bushels of
wheat)
0
0
1
1000
2
1800
3
2400
4
2800
5
3000
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MPL =
∆Q/∆L
VMPL = P
x MPL
1000
$5,000
800
4,000
600
3,000
400
2,000
200
1,000
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Active Learning
Answers
Farmer Jack’s
VMPL curve is
downward
sloping
due to
diminishing
marginal
product.
The VMPL curve
$6,000
5,000
4,000
3,000
2,000
1,000
0
0
1
2
3
4
L (number of workers)
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5
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Active Learning
Answers
The VMPL curve
$6,000
Suppose wage
W = $2500/week.
5,000
How many workers
should Jack hire?
4,000
Answer: L = 3
At any smaller L, can
increase profit by
hiring another worker.
At any larger L, can
increase profit by
hiring one fewer
worker.
3,000
$2,50
02,000
1,000
0
0
1
2
3
4
L (number of workers)
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THE SUPPLY OF LABOUR
 A formal model of labour supply is included in
Chapter 21.
 This chapter provides a brief informal
discussion about the decisions that lie behind
the labour supply curve.
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The Tradeoff between Work and Leisure
 The labour supply curve reflects how workers’
decisions about the labour–leisure tradeoff respond
to a change in that opportunity cost.
 An upward-sloping labour supply curve means
that an increase in the wage induces workers to
increase the quantity of labour they supply.
 A backward-sloping supply curve means that an
increase in the wage induces workers to decrease
the quantity of labour they supply.
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What Causes the
Labour Supply Curve to Shift?
 Factors that affect the labour supply curve:
 Changes in tastes
 Changes in alternative opportunities
 Immigration
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QuickQuiz
Who has a greater opportunity cost of
enjoying leisure—a janitor or a brain surgeon?
Explain.
Can this help explain why doctors work such
long hours?
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EQUILIBRIUM IN THE LABOUR MARKET
 Two facts about how wages are determined
in competitive labour markets:
1. The wage adjusts to balance the supply
and demand for labour.
2. The wage equals the value of the
marginal product of labour.
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FIGURE 18.4:
Equilibrium in a Labour Market
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EQUILIBRIUM IN THE LABOUR MARKET
 Any event that changes the supply or demand
for labour must change the equilibrium wage
and the value of the marginal product by the
same amount, because these must always be
equal.
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Shifts in Labour Supply
 Suppose that immigration increases the
number of workers willing to pick apples.
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FIGURE 18.5:
A Shift in Labour Supply
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Shifts in Labour Demand
 Now suppose that an increase in the
popularity of a good causes its price to rise.
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FIGURE 18.6:
A Shift in Labour Demand
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TABLE 18.2:
Productivity and Wage Growth in Canada
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QuickQuiz
How does an immigration of workers affect
labour supply, labour demand, the marginal
product of labour, and the equilibrium
wage?
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Thinkstock
THE OTHER FACTORS
OF PRODUCTION: LAND AND CAPITAL
 Capital: the equipment
and structures used to
produce goods and
services
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Equilibrium in the Markets
for Land and Capital
 What determines how much the owners of
land and capital earn for their contribution to
the production process?
 The purchase price of land or capital is the
price a person pays to own that factor of
production indefinitely.
 The rental price is the price a person pays
to use that factor for a limited period of
time.
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FIGURE 18.7:
The Markets for Land and Capital
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Linkages among the Factors of Production
 The price paid to any factor of production
(labour, land, or capita) = the VMP of that
factor.
 The VMP of any factor, in turn, depends on
the quantity of that factor that is available.
 When the supply of a factor falls, its
equilibrium factor price rises.
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Linkages among the Factors of Production
 When the supply of any factor changes,
however, the effects are not limited to the
market for that factor.
 A change in the supply of any one factor
alters the earnings of all the factors.
 Moral of the story:
 An event that changes the supply of any
factor of production can alter the earnings
of all the factors.
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QuickQuiz
What determines the income of the owners of
land and capital?
How would an increase in the quantity of
capital affect the incomes of those who
already own capital?
How would it affect the incomes of workers?
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THE END
Chapter 18
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