Factors of Production Part II (Chapter 18)

MRP sometimes call Value of Marginal Product ( VMP ) MRP If MB ≥ MC do it If MB < MC don’t Economic Decision Making:

Shifts in Labor Demand Demand for Product Productivity –Technology, working conditions, etc... Price of other resources: –Price of complementary resource –Price of substitute resource “It Depends” Two different substitute actions when price of substitute falls: 1)Substitution Effect- you hire less workers 2)Output Effect- MC falls, so output increases => you hire more workers Demand Curve shifts right when:

Competitive Market: Supply of Labor For a firm in a competitive market: –Wage is the firm’s labor supply curve –Each firm is a “wage taker” If demand rises, Firm hires more workers Wage is unchanged MRP = Wage Rate

Derived Demand Demand For product Price of Product MRP More Workers Hired Wage rate Unchanged!

The Market Supply Curve Is upward sloping & represents the trade-off between Work & Leisure –upward-sloping means that an increase in wages induces more people to work What will Get me to work?

A Shift in Labor Supply Wage (price of labor) 0 Quantity of Labor Supply,S Demand reduces the wage and raises employment. 1. An increase in labor supply... S W L W L More workers hired Wages Falls Marginal Product Falls

A Shift in Labor Demand Wage (price of labor) 0 Quantity of Labor Supply Demand,D increases the wage and increases employment. D W L W L 1. An increase in labor demand... More workers hired Wages Rise Marginal Product Increases

If Marginal Benefit ≥ Marginal Cost then __________ Marginal Factor Cost (MFC) – cost of additional factor of production Sometimes called MRC Competitive firms hire each factor of production until the MRP = MFC Optimizing 1-Resource

The Least-Cost Rule Challenge: how do you decide optimal quantity between 2 resources? Labor Capital or Your choice must satisfy the following equation (Only one combination will work!) MP L /P L = MP K /P K or MP L / MP K = P L /P K If MP L /P L > MP K /P K then L & K If MP L /P L < MP K /P K then do opposite

Worksheet Labor Markets