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Ch 18: The Markets For the Factors of Production What are the “factors of production”? Remember the circular flow model?????
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Factor Markets differ from “goods markets” ………..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
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Labor (or any other factor of production) – governed by laws of Supply and Demand ………assumptions……… Perfect competition for BOTH the market for the good and the market for the labor Price and Wage “TAKERS” GOAL - Profit max.
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Production Function p.401 Y– axis … ….output X – axis…. ….input or (factor of production) So what lesson did we learn from the production function??????? Diminishing Marginal Product
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Value of the Marginal Product (Marginal Revenue Product) 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 (or MRP) P x MPL = VMPL (or P x MPL = MRP) ……because market price is constant and we experience diminishing MPL,……then the VMPL (MRP) also diminishes
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…….so how many workers do we hire ??? Wage (W) = VMPL or W = MRP …..so your Labor D curve is a reflection of the VMPL (MRP) (for a competitive profit max. firm)
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Wage, Supply D (VMPL) (MRP) = D Supply Wage Q Labor Profit Max Rule: MR=MC Profit Max Rule: W = VMPL W = MRP Now evaluate when not at Qmax
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…….REMEMBER……VMPL (MRP) = P x MPL... and the VMPL (MRP) is the D curve. ……so if the P increases or decreases, then VMPL (MRP) will ….? Increase or decrease ……and so the D curve will….? Shift left or right Or if he MP increases or decreases, then the VMPL (MRP) will …? Increase or decrease ………and so the D curve will…? Shift left or right
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p. 403 FYI ……also REMEMBER….. A profit max COMPETITIVE firm will produce where P = MC and hire where W = VMPL(MRP) …if P x MPL = W…. …then P = W / MPL...and W / MPL = MC…. ….then P = MC
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Shifting Labor Demand Curve Output Price (P x MPL) = VMPL (MRP) If P changes …then…? Technology (increases the MPL of each worker…(P x MPL) = VMPL(MRP)....so increases the VMPL (MRP) Opposite of technology increase? Supply of other factors ….will affect MPL of each worker
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Supply of Labor ….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
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Shifting Labor Supply Curve ***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.. How would you like to be an investment banker now? Immigration
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Productivity and Wages Principle: Productivity = Standard of Living Wages = Productivity as measured by VMPL(MRP) 3 Determinants of Productivity/Standard of Living: Physical capital Human capital Technological knowledge
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Capital Income 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
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