Unemployment What are the costs of unemployment? Discouraged Workers Those 16 years and older who are willing and able to work and who are actively looking for work but have not found a job. What are the costs of unemployment? Lost output. Psychological impact. Discouraged Workers Individuals who have stopped looking for a job because they are convinced they will not find a suitable one. Not considered unemployed. Types of Unemployment Frictional, Structural, Cyclical, Seasonal

Significance of Resource Pricing Money-income determination Household income Resource allocation Shift of resources Cost minimization Profit = Revenue minus Costs Ethical questions and policy issues Equality, taxes, regulation

Derived Demand Strength of demand depends on: The productivity of the resource in helping to create a good. The market value or price of the good it helps produce.

Marginal Product The marginal product of any input into production is the increase in the quantity of output obtained from an additional unit of that input. 9 20

Marginal Product The marginal product of any input into production is the increase in the quantity of output obtained from an additional unit of that input. 9 21

Diminishing Marginal Product Diminishing marginal product is the property whereby the marginal product of an input declines as the quantity of the input increases. Example: As more and more workers are hired at a firm, each additional worker contributes less and less to production because the firm has a limited amount of equipment. 22

The Production Function and The Marginal Product of Labor The production function illustrates the relationship between the quantity of inputs used and the quantity of output of a good. 6 11

The Production Function and The Marginal Product of Labor The marginal product of labor is the increase in the amount of output from an additional unit of labor. MPL = D Q/D L MPL = (Q2 – Q1)/(L2 – L1) 7 12

The Production Function and The Marginal Product of Labor Quantity of Apples Production 300 function 280 240 180 100 1 2 3 4 5 Quantity of Apple Pickers 6 14

Diminishing Marginal Product of Labor As the number of workers increases, the marginal product of labor declines. As more and more workers are hired, each additional worker contributes less to production than the prior one. The production function becomes flatter as the number of workers rises. 8 15

Diminishing Marginal Product of Labor Quantity of Apple Pickers Quantity of Apples 300 280 240 180 100 Production function 1 2 3 4 5 8 17

Factors of Production Factors of production are the inputs used to produce goods and services. 2 2

The Market for the Factors of Production What are the major factors of production? What determines how much is paid for each factor of production? What determines how much of each factor of production will be purchased? 2 3

A Firm’s Demand For Labor Labor is the most important factor of production. Labor markets, like other markets in the economy, are governed by the forces of supply and demand. 4 6

A Firm’s Demand For Labor The Market for Apples The Market for Apple Pickers Quantity of Apples Price of P Q Demand Supply Demand Supply Quantity of Apple Pickers Wage of Apple Pickers L W 4 7

Determinants of Resource Demand Changes in the Price of other resources Changes in Productivity technological improvements Changes in Product Demand resource demand is derived from product demand. 2 2

A Firm’s Demand For Labor Most labor services, rather than being final goods ready to be enjoyed by consumers, are inputs into the production of other goods. 4 8

The Competitive Profit-Maximizing Firm Two basic assumptions about the firm are: ä It is competitive in both the product market and the input market. ä Its goal is to maximize profits. 5 9

The Competitive Profit-Maximizing Firm The firm must consider how the size of its workforce affects the amount of output that is produced. 5 10

Rule for Employing Resources MRP = MRC rule It will be profitable for a firm to hire additional units of a resource up to the point at which that resource’s MRP = MRC. MRP is also equal to the resource demand curve. 22

How many workers to hire? To maximize profits, the firm considers how much profit each worker would bring in. ä Called the value of the marginal product. 9 18

Value of the Marginal Product The value of the marginal product is measured in dollars. It diminishes as the number of workers rises because the market price of the good is constant. 10 21

Value of the Marginal Product Value of marginal product (demand curve for labor) Quantity of Apple Pickers 11 22

Labor-Market Equilibrium Labor supply and labor demand determine the equilibrium wage. Shifts in the supply or demand curve for labor cause the equilibrium wage to change. 18 31

Labor-Market Equilibrium Profit maximization by competitive firms demanding labor ensures that the equilibrium wage always equals the value of the marginal product of labor. The wage adjusts to balance the supply and demand for labor. 18 32

Labor-Market Equilibrium Wage (price of labor) Equilibrium wage, W Quantity of Labor employment, L Supply Demand 19 34

Shifts in the Supply and Demand of Labor Shift in Supply of Labor ä May be caused by a change in the number of workers. Shift in Demand for Labor ä May be caused by a change in the demand for the final product produced by labor, labor productivity, and prices of other resources. 19 35

Shift in Labor Supply An increase in the supply of labor : ä Results in a surplus of labor. ä Puts downward pressure on wages. ä Makes it profitable for firms to hire more workers. ä Results in diminishing marginal product. ä Lowers the value of the marginal product. ä Gives a new equilibrium. 20 36

Shift in Labor Supply Wage (price of labor) Quantity of Labor 21 37

Shift in Labor Supply Wage Supply, S1 (price of labor) Demand Quantity of Labor 21 38

Shift in Labor Supply Wage (price of labor) Supply, S1 W1 Demand L1 L1 Quantity of Labor 21 39

Shift in Labor Supply Wage (price of labor) Supply, S1 S2 W1 Demand L1 L1 Quantity of Labor 21 40

Shift in Labor Supply Wage (price of labor) Supply, S1 1. An increase in labor supply... S2 W1 Demand L1 Quantity of Labor 21 41

Shift in Labor Supply Wage (price of labor) Supply, S1 1. An increase in labor supply... S2 W1 W2 Demand L1 L2 Quantity of Labor 21 42

Shift in Labor Supply Wage (price of labor) Supply, S1 1. An increase in labor supply... S2 W1 W2 2. ...reduces the wage... Demand L1 L2 Quantity of Labor 21 43

Shift in Labor Supply Wage (price of labor) Supply, S1 1. An increase in labor supply... S2 W1 W2 2. ...reduces the wage... Demand 3. ...and raises employment. L1 L2 Quantity of Labor 21 44

Shift in Labor Demand An increase in the demand for labor : ä Makes it profitable for firms to hire more workers. ä Puts upward pressure on wages. ä Raises the value of the marginal product. ä Gives a new equilibrium. 20 45

Shift in Labor Demand Wage (price of labor) Quantity of Labor 46

Shift in Labor Demand Wage (price of Supply labor) Demand, D1 Quantity of Labor 47

Shift in Labor Demand Wage (price of labor) Supply W1 Demand, D1 L1 L1 Quantity of Labor 48

Shift in Labor Demand Wage (price of labor) Supply W1 D2 Demand, D1 L1 L1 Quantity of Labor 49

Shift in Labor Demand Wage (price of labor) Supply 1. An increase in Demand, D1 L1 Quantity of Labor 50

Shift in Labor Demand Wage (price of labor) Supply W2 1. An increase in labor demand... W1 D2 Demand, D1 L1 L2 Quantity of Labor 51

Shift in Labor Demand Wage (price of labor) Supply W2 1. An increase in labor demand... W1 2. ...increases the wage... D2 Demand, D1 L1 L2 Quantity of Labor 52

Shift in Labor Demand Wage (price of labor) Supply W2 1. An increase in labor demand... W1 2. ...increases the wage... D2 Demand, D1 L1 L2 Quantity of Labor 3. ...and increases employment. 53

Combination of Several Resources The Profit-Max Rule MRP = MRC The Least-Cost Rule MPL/PL = MPc/Pc McConnell pgs. 322-324 24 54

The Least Cost Rule Minimize cost of producing a given output Last dollar spent on each resource yields the same marginal product Marginal Product Of Labor (MPL) Price of Labor (PL) Of Capital (MPC) Price of Capital (PC) =

Elasticity of Resource Demand Ease of Substitutes Receptionists vs Physicians Elasticity of Product Demand Percent of Total Cost 24 54

Case Study: Productivity and Wages What causes productivity and wages to vary so much over time and across countries? ä Physical Capital: When workers work with a larger quantity of equipment and structures, they produce more. ä Human Capital: When workers are more educated, they produce more. 24 54

Case Study: Productivity and Wages What causes productivity and wages to vary so much over time and across countries? ä Technological Knowledge: When workers have access to more sophisticated technologies, they produce more. 24 55

Quick Quiz! How does the immigration of workers affect labor supply, labor demand, the marginal product of labor, and the equilibrium wage? 25 58

The Rental Price and Quantity of Land and Capital Land and capital are paid the value of their marginal product. They each earn the value of their marginal contribution to the production process. 29 63

The Purchase Price and Quantity of Land and Capital The equilibrium purchase price of land and capital depends on the following: ä The current value of the marginal product. ä The value of the marginal product expected to prevail in the future. 30 64

Linkages Among the Factors of Production Factors of production are used together. ä The marginal product of any one factor depends on the quantities of all factors that are available. 31 65

Linkages Among the Factors of Production A change in the supply of one factor alters the equilibrium earnings of all the factors. 31 66

Economic Rent Price paid for the use of natural resources that are completely fixed in supply. Helps allocate land for different uses. Surplus payment Payment above the amount needed to gain use of the resource. Land would be available to society even if rent was not paid. 2 2

Interest Price paid for the use of money. Remember that money is a medium of exchange, not a resource. Interest is paid to the resource owner. Interest rates show the amount of money available for borrowing. 2 2

Interest Interest rates are established in the loanable funds market (supply and demand). Demand for funds is based on consumption. Supply of funds is based on savings. Interest rates can vary depending on risk, loan size, and length of loan. 2 2