1. Factors of Production

2. Remember?

3. Factors of Production Land Labor Physical capital Human capital
What is capital?
The value of the assets that are used by a firm in producing its output

4. Types of Capital Physical Capital “capital”
Manufactured resources – equipment, buildings, tools, and machines
Human Capital
Improvement in labor created by education and knowledge and embodied in the workforce
Become more important with progress of technology

5. Allocation of Resources
Mississippi and Louisiana after Hurricane Katrina
States had an urgent and immediate need for workers in building trades
What ensured that those needed workers came?
The FACTOR MARKET!
The market for a factor of production allocated that factor of production to where it was needed

6. Allocation of Resources
Derived Demand – demand for the factor is derived from the firm’s output choice
Factor markets are also where most of us get the largest shares of our income
Income usually comes in the form of wages and salaries
Prices of factors of production differ among different groups
Higher wage rate, larger proportion of the total income in the economy goes to people who derive their income from labor
Factor distribution of income

7. Value of Marginal Product
Most factor markets in the modern American economy are perfectly competitive – buyers and sellers are price-takers

8. The Production Function for George and Martha’s Farm
(a) Total Product
(b) Marginal Product of Labor
Quantity of wheat (bushels)
Marginal product of labor (bushels per worker)
As we know from earlier chapters, a price-taking firm’s profit is maximized by producing the quantity of output at which the marginal cost of the last unit produced is equal to the market price.
Once we determine the optimal quantity of output, we can go back to the production function and find the optimal number of workers.
100 TP 19 17 80 15 13 60 11 9 40 7 5 20
MPL
Figure Caption: Figure 20-2: The Production Function for George and Martha’s Farm
Panel (a) shows how the quantity of output of wheat on George and Martha’s farm depends on the number of workers employed. Panel (b) shows how the marginal product of labor depends on the number of workers employed. 1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8
Quantity of labor (workers)
Quantity of labor (workers)

9. Value of Marginal Product
The value of the marginal product of a factor is the extra value of output generated by employing one more unit of that factor.
Value of the marginal product of labor =
VMPL = P × MPL
The general rule is that a profit-maximizing, price-taking producer employs each factor of production up to the point at which the value of the marginal product of the last unit of the factor employed is equal to that factor’s price.

10. Value of Marginal Product
Should
George and
Martha hire an
extra worker?
Yes, if
VMPL > W

11. Value of Marginal Product
The decision to hire is a marginal decision
Marginal benefit to the producer from hiring an additional worker (VMPL) should be compared with the marginal cost to the producer (W)
What is the optimal choice?
Marginal benefit = marginal cost

12. Value of Marginal Product
VMPL = W
Does not apply to labor, only factors of production
General Rule: profit-maximizing price-taking producer employs each factor of production up to the point at which the value of the marginal product of the last unit of the factor employed is equal to that factor’s price

13. Marginal Product and Factor Demand
Quantity of Labor L
(workers)
Marginal product of labor
MPL
(bushels per worker)
Value of the Marginal Product of Labor
VMPL = P X MPL 19 1 17 2 15 3 13 4 11 5 9 6 7 8
Price is $20

14. The Value of the Marginal Product Curve
Wage rate, VMPL
Optimal point
$400
300 A
Market wage rate
200
Value of the marginal product value curve
Figure Caption: Figure 20-3: The Value of the Marginal Product Curve
This curve shows how the value of the marginal product of labor depends on the number of workers employed. It slopes downward because of diminishing returns to labor in production. To maximize profit, George and Martha choose the level of employment at which the value of the marginal product of labor is equal to the market wage rate. For example, at a wage rate of $200 the profit-maximizing level of employment is 5 workers, shown by point A. The value of the marginal product curve of a factor is the producer’s individual demand curve for that factor.
100
VMPL 1 2 3 4 5 6 7 8
Quantity of labor (workers)
Profit-maximizing number of workers

15. Marginal Product and Factor Demand
The value of the marginal product curve of a factor shows how the value of the marginal product of that factor depends on the quantity of the factor employed.

16. Utilizing the Marginal Product Curve
Problem:
Martha and George currently employ 3 workers who get paid $200
Should Martha and George employ an additional worker?
If they add one worker, increase the value of their production by $260 but increase their cost by $200 which means an increased profit of $60

17. Utilizing the Marginal Product Curve
A producer can always increase profit by employing on e more unit of a factor of production as long as the value of the marginal product produced by that unit exceeds it factor price

18. The Value of the Marginal Product Curve
Wage rate, VMPL
The firm maximizes profit by choosing a level of employment at which the value of the marginal product of the last worker hired EQUALS the wage rate
Optimal point
$400
300 A
Market wage rate
200
Value of the marginal product value curve
Figure Caption: Figure 20-3: The Value of the Marginal Product Curve
This curve shows how the value of the marginal product of labor depends on the number of workers employed. It slopes downward because of diminishing returns to labor in production. To maximize profit, George and Martha choose the level of employment at which the value of the marginal product of labor is equal to the market wage rate. For example, at a wage rate of $200 the profit-maximizing level of employment is 5 workers, shown by point A. The value of the marginal product curve of a factor is the producer’s individual demand curve for that factor.
100
VMPL 1 2 3 4 5 6 7 8
Quantity of labor (workers)
Profit-maximizing number of workers

19. Utilizing the Marginal Product Curve
Firms use the marginal product curve in order to determine the profit-maximizing level of employment
The value of the marginal product of labor curve is the individual producer’s labor demand curve
In general…..a producer’s value of the marginal product curve for any factor of production is that producer’s individual demand curve for that factor of production

20. Factors of Production

21. Remember?

22. Factors of Production
_________
__________________
What is capital?

23. Types of Capital Physical Capital Human Capital
Become more important with progress of technology

24. Allocation of Resources
Mississippi and Louisiana after Hurricane Katrina
States had an urgent and immediate need for workers in building trades
What ensured that those needed workers came?
_____________________
The market for a factor of production allocated that factor of production to where it was needed

25. Allocation of Resources
Derived Demand –
Factor markets are also where most of us get the largest shares of our income
Income usually comes in the form of _________ and _________
Prices of factors of production differ among different groups
Factor distribution of income

26. Value of Marginal Product
Most factor markets in the modern American economy are perfectly competitive – buyers and sellers are __________________

27. The Production Function for George and Martha’s Farm
(a) Total Product
(b) Marginal Product of Labor
Quantity of wheat (bushels)
Marginal product of labor (bushels per worker)
100 19 17 80 15 13 60 11 9 40 7 5 20
Figure Caption: Figure 20-2: The Production Function for George and Martha’s Farm
Panel (a) shows how the quantity of output of wheat on George and Martha’s farm depends on the number of workers employed. Panel (b) shows how the marginal product of labor depends on the number of workers employed. 1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8
Quantity of labor (workers)
Quantity of labor (workers)

28. Value of Marginal Product
The value of the marginal product of a factor is the extra value of output generated by employing ___________of that factor.
Value of the marginal product of labor =
_____________________
The general rule is that a profit-maximizing, price-taking producer employs each factor of production up to the point at which the value of the marginal product of the last unit of the factor employed is equal to that factor’s price.

29. Value of Marginal Product
Should
George and
Martha hire an
extra worker?

30. Value of Marginal Product
The decision to hire is a marginal decision
What is the optimal choice?

31. Value of Marginal Product
VMPL = W
General Rule: profit-maximizing price-taking producer employs each factor of production up to the point at which the value of the marginal product of the last unit of the factor employed is equal to that factor’s price

32. Marginal Product and Factor Demand
Quantity of Labor L
(workers)
Marginal product of labor
MPL
(bushels per worker)
Value of the Marginal Product of Labor
VMPL = P X MPL 19 1 17 2 15 3 13 4 11 5 9 6 7 8
Price is $20

33. The Value of the Marginal Product Curve
Wage rate, VMPL
$400
300 A
200
Value of the marginal product value curve
Figure Caption: Figure 20-3: The Value of the Marginal Product Curve
This curve shows how the value of the marginal product of labor depends on the number of workers employed. It slopes downward because of diminishing returns to labor in production. To maximize profit, George and Martha choose the level of employment at which the value of the marginal product of labor is equal to the market wage rate. For example, at a wage rate of $200 the profit-maximizing level of employment is 5 workers, shown by point A. The value of the marginal product curve of a factor is the producer’s individual demand curve for that factor.
100
VMPL 1 2 3 4 5 6 7 8
Quantity of labor (workers)

34. Marginal Product and Factor Demand
The value of the marginal product curve of a factor shows how the value of the marginal product of that factor depends on the quantity of the factor employed.

35. Utilizing the Marginal Product Curve
Problem:
Martha and George currently employ 3 workers who get paid $200
Should Martha and George employ an additional worker?
If they add one worker, increase the value of their production by $260 but increase their cost by $200 which means an increased profit of $60

36. Utilizing the Marginal Product Curve
A producer can always increase profit by employing on e more unit of a factor of production as long as the value of the marginal product produced by that unit exceeds it factor price

37. The Value of the Marginal Product Curve
Wage rate, VMPL
$400
300 A
200
Value of the marginal product value curve
Figure Caption: Figure 20-3: The Value of the Marginal Product Curve
This curve shows how the value of the marginal product of labor depends on the number of workers employed. It slopes downward because of diminishing returns to labor in production. To maximize profit, George and Martha choose the level of employment at which the value of the marginal product of labor is equal to the market wage rate. For example, at a wage rate of $200 the profit-maximizing level of employment is 5 workers, shown by point A. The value of the marginal product curve of a factor is the producer’s individual demand curve for that factor.
100
VMPL 1 2 3 4 5 6 7 8
Quantity of labor (workers)

38. Utilizing the Marginal Product Curve
Firms use the marginal product curve in order to determine the profit-maximizing level of employment
The value of the marginal product of labor curve is the individual producer’s labor demand curve
In general…..