1. Factor Markets Land, Labor, Physical Capital & Human Capital
Chapter 18: Markets for Factors of Production:
Land, Labor, Physical Capital & Human Capital
Capital Goods = Machines
Labor = Workers

2. Product & Factor Markets
How many goods
to Produce?
Revenue
Spending
PRODUCT
Markets
Goods
and services
sold
Goods and
services
bought
Set MR = MC
FIRMS
HOUSEHOLDS
FACTOR
Markets
Factors of
production
Labor, land,
capital & entrepreneurship
How many inputs to hire?
Wages, rent,
and profit
Income
= Flow of inputs
and outputs
Land, Labor & Capital?
= Flow of dollars

3. The Market for Labor The Market for Nurses Based on Supply & Demand
Wage
Rate
Based on Supply & Demand
Price = Wage Rate
Demand = Producers
Supply = Workers
↑ Demand => Wages rise
↑ Supply => Wages fall D2
Demand
Supply Q2 W2 E1 Q W
Quantity of
Nurses

4. Land, Labor, Capital, Technology, etc…
Derived Demand
Demand for a factor of production is a derived demand:
Demand for an input (factor) is derived from demand for a firm’s output
Demand
Product ↑
Leads to
↑ Demand for Factors of Production
Land, Labor, Capital, Technology, etc…

5. - Demand for apple pickers is derived from the market demand for apples
The Market for Apples
The Market for Apple Pickers
Price of
PRODUCT
Market
Wage of
FACTOR
Market
Apples
Apple
Pickers
Supply
Demand
Demand
Supply P Q Q W
Quantity of
Quantity of
Apples
Apple Pickers
Any change in the PRODUCT MARKET will change demand in the FACTOR MARKET.
Copyright©2003 Southwestern/Thomson Learning

6. Marginal Revenue Product (MRP)
MRP = demand curve for Factors of Production
MRP = marginal product of input x market price of output
Measures the value in dollars of output produced
MRP = MP (of input)  Price (of output)
If a T-Shirt is $30 dollars
MP labor = 10 Shirts
MRP = 10 X $30 = $300

7. Marginal Revenue Product (MRP)
MRP = MP (of input)  P (of output)
Assume Output Price constant at $0.50
MP  Price = MRP
Qty Total Marginal Price MRP
Labor Product Product
___ $ ___
___ ___ ___
___ ___ ___
___ ___ ___

8. Labor Demand Curve The MRP of labor = Labor Demand curve
Market
wage
Declining MP reduces value of “next” worker

9. Practice Problem
Lesson 2, Activity 44