1. 6 THE ECONOMICS OF LABOR MARKETS

2. Copyright©2004 South-Western 18 The Markets for the Factors of Production Markaður fyrir framleiðsluþætti

3. Copyright © 2004 South-Western The Markets for the Factors of Production Factors of production (framleiðsluþættir) are the inputs (aðföng) used to produce goods and services.

4. Copyright © 2004 South-Western The Market for the Factors of Production The demand for a factor of production (eftirspurn eftir framleiðsluþáttum) is a derived demand (afleidd eftirspurn). A firm’s demand for a factor of production is derived (eftirspurn er leidd af) from its decision to supply a good in another market.

5. Copyright © 2004 South-Western THE DEMAND FOR LABOR Labor markets, like other markets in the economy, are governed by the forces of supply and demand. (Vinnumarkaður, eins og aðrir markaðir, stjórnast af öflum framboðs og eftirspurnar).

6. Figure 1 The Versatility of Supply and Demand Copyright©2003 Southwestern/Thomson Learning Quantity of Apples 0 Price of Apples Demand Supply Demand Supply Quantity of Apple Pickers 0 Wage of Apple Pickers (a) The Market for Apples(b) The Market for Apple Pickers P QL W

7. Copyright © 2004 South-Western THE 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. (Þjónusta sem byggir að vinnuafli, eru hluti af því sem þarf til að framleiða vöru, frekar en að flokkast sem endanleg neysluvara).

8. Copyright © 2004 South-Western 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. Framleiðslufall lýsir sambandinu milli magns hráefnis sem notað er og magns framleiddrar vöru.

9. Figure 2 The Production Function Copyright©2003 Southwestern/Thomson Learning Production function Quantity of Apple Pickers 0 Quantity of Apples 300 280 240 180 100 12345

10. Copyright © 2004 South-Western The Production Function and the Marginal Product of Labor The marginal product of labor (jaðarframleiðsla vinnuafls) is the increase in the amount of output from an additional unit of labor. MPL =  Q/  L MPL = (Q 2 – Q 1 )/(L 2 – L 1 )

11. Copyright © 2004 South-Western The Production Function and the Marginal Product of Labor Diminishing Marginal Product of Labor (Minnkandi jaðarframleiðsla vinnuafls) 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. This property is called diminishing marginal product.

12. Copyright © 2004 South-Western The Production Function and the Marginal Product of Labor Diminishing marginal product refers to the property whereby the marginal product of an input declines as the quantity of the input increases.

13. Figure 2 The Production Function Copyright©2003 Southwestern/Thomson Learning Production function Quantity of Apple Pickers 0 Quantity of Apples 300 280 240 180 100 12345

14. Copyright © 2004 South-Western What Causes the Labor Demand Curve to Shift? Output Price Technological Change Supply of Other factors

15. Copyright © 2004 South-Western What Causes the Labor Supply Curve to Shift? Changes in Tastes (breyting á smekk) Changes in Alternative Opportunities (breytingar á öðurm möguleikum) Immigration (innflytjendur)

16. Copyright © 2004 South-Western EQUILIBRIUM IN THE LABOR MARKET The wage adjusts to balance the supply and demand for labor. (Aðlögun verður á launum sem leiðir til jafnvægis í framboði og eftirspurn eftir vinnuafli). The wage equals the value of the marginal product of labor. (Laun eru jöfn jaðarframeiðslu vinnuafls).

17. Figure 4 Equilibrium in a Labor Market Copyright©2003 Southwestern/Thomson Learning Wage (price of labor) 0 Quantity of Labor Supply Demand Equilibrium wage,W Equilibrium employment,L

18. Copyright © 2004 South-Western EQUILIBRIUM IN THE LABOR MARKET Labor supply and labor demand determine the equilibrium wage. (Vinnuframboð og vinnueftirspurn ákvarða jafnvægislaun). Shifts in the supply or demand curve for labor cause the equilibrium wage to change. (Breytinar á framboðs og eftirspurn vinnuafls leiðir til breytinga á jafnvægislaunum).

19. Figure 5 A Shift in Labor Supply Copyright©2003 Southwestern/Thomson Learning Wage (price of labor) 0 Quantity of Labor Supply,S Demand 2.... reduces the wage... 3.... and raises employment. 1. An increase in labor supply... S W L W L

20. Copyright © 2004 South-Western Shifts in Labor Supply An increase in the supply of labor : Results in a surplus of labor. Puts downward pressure on wages. Makes it profitable for firms to hire more workers. Results in diminishing marginal product. Lowers the value of the marginal product. Gives a new equilibrium.

21. Figure 6 A Shift in Labor Demand Copyright©2003 Southwestern/Thomson Learning Wage (price of labor) 0 Quantity of Labor Supply Demand,D 2.... increases the wage... 3.... and increases employment. D W L W L 1. An increase in labor demand...

22. Copyright © 2004 South-Western Shifts in Labor Demand An increase in the demand for labor : Makes it profitable for firms to hire more workers. Puts upward pressure on wages. (Þrýstir launum upp). Raises the value of the marginal product. (Hækkar virði jaðarframleiðslu). Gives a new equilibrium. (Leiðir til nýs jafnvægis).

23. Copyright © 2004 South-Western OTHER FACTORS OF PRODUCTION: LAND AND CAPITAL Capital refers to the equipment and structures used to produce goods and services. The economy’s capital represents the accumulation of goods produced in the past that are being used in the present to produce new goods and services.

24. Copyright © 2004 South-Western OTHER FACTORS OF PRODUCTION: LAND AND CAPITAL Prices of Land and Capital The purchase price is what a person pays to own a factor of production indefinitely. The rental price is what a person pays to use a factor of production for a limited period of time.

25. Copyright © 2004 South-Western Summary The economy’s income is distributed in the markets for the factors of production. The three most important factors of production are labor, land, and capital. The demand for a factor, such as labor, is a derived demand that comes from firms that use the factors to produce goods and services.