1. Copyright 2002, Pearson Education Canada1 Input Demand: The Labour and Land Markets Chapter 10

2. Copyright 2002, Pearson Education Canada2 Firm and Household Decisions (Figure 10.1)

3. Copyright 2002, Pearson Education Canada3 Derived Demand zDerived demand is a demand for resources (inputs) that is dependent on the demand for the outputs those resources can be used to produce.

4. Copyright 2002, Pearson Education Canada4 Inputs zThe productivity of an input is the amount of output produced per unit of that input. zComplementary inputs are factors of production that can be used together to enhance each other. zSubstitutable inputs are factors of production that can be used in place of each other.

5. Copyright 2002, Pearson Education Canada5 Marginal Product (MP) & Marginal Revenue Product (MRP) zThe marginal product of labour (MP L ) is the additional output produced by one additional unit of labor. zThe marginal revenue product (MRP) refers to the additional revenue a firm earns by employing one additional unit of an input, ceteris paribus. MRP L = MP L x P X

6. Copyright 2002, Pearson Education Canada6 Marginal Revenue Product per Hour of Labour in Sandwich Production (Table 10.1)

7. Copyright 2002, Pearson Education Canada7 Deriving a Marginal Revenue Product Curve from Marginal Product (Figure 10.2) zThe marginal revenue product of labour is the price of output, P x, times the marginal product of labour, MP L. zIn competition, MRP L is the market value of labour’s marginal product. zAs long as output price is constant, the MRP L curve has the same downward slope as the MP L curve.

8. Copyright 2002, Pearson Education Canada8 Marginal Revenue Product and Factor Demand for a Firm Using One Variable Input (Labour) (Figure 10.3) A competitive firm using only one variable factor of production will use that factor as long as its marginal revenue product exceeds its unit cost. A perfectly competitive firm will hire labour as long as MRP L is greater than the going wage.

9. Copyright 2002, Pearson Education Canada9 The Two Profit-Maximizing Conditions Are Simply Two Views of the Same Choice Process (Figure 10.4)

10. Copyright 2002, Pearson Education Canada10 A Firm Employing Two Variable Factors of Production zSuppose that the firm can vary its employment of both labour and capital. zHow can the firm’s demand for labour and capital be characterized? zWhen more than one factor vary, we must consider the impact of a change in one factor price on the demand for other factors.

11. Copyright 2002, Pearson Education Canada11 Two Effects When the Price of an Input Changes zThe factor substitution effect is the tendency of firms to substitute away from a factor whose relative price has risen and toward a factor whose relative price has fallen. zThe output effect is the tendency of a firm to increase output when the price of an input falls; which in turn increases the demand for all inputs. zThese effects explain the downward sloping input demand curve.

12. Copyright 2002, Pearson Education Canada12 Land Markets zLand has perfectly inelastic supply; the supply is strictly fixed. zDemand-determined price refers to the price of a good that is fixed in supply; it is determined exclusively by what firms and households are willing to pay for the good. zPure rent is the return to any factor of production that is fixed in supply. zThe firm will use land up to the point where MRP H = P H where H is land (hectares).

13. Copyright 2002, Pearson Education Canada13 The Firm’s Profit-Maximizing Condition in Input Markets zP L = MRP L = (MP L x P X ) Labour Market zP K = MRP K = (MP K x P X ) Capital Market zP H = MRP H = (MP H x P X ) Land Market MP L = MP K = MP H P L P K P H

14. Copyright 2002, Pearson Education Canada14 Input Demand Curves zSeveral factors contribute to shifts in input demand curves: ydemand for outputs ycomplementary and substitutable inputs yprices of other inputs ytechnological change

15. Copyright 2002, Pearson Education Canada15 Marginal Productivity Theory of Income Distribution zAt equilibrium, all factors of production end up receiving rewards determined by their productivity as measured by marginal revenue product.

16. Copyright 2002, Pearson Education Canada16 Review Terms & Concepts zcomplementary inputs zdemand determined price zderived demand zfactor substitution effect zmarginal product of labour (MP L ) zmarginal productivity theory of income distribution zmarginal revenue product (MRP) zoutput effect of a factor price change zproductivity of an input zpure rent zsubstitutable inputs ztechnological change