1. Factors of Production Part II (Chapter 18)

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

3. 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:

4. 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

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

6. 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?

7. A Shift in Labor Supply 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 More workers hired Wages Falls Marginal Product Falls

8. A Shift in Labor Demand 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... More workers hired Wages Rise Marginal Product Increases

9. 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

10. 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

11. Worksheet Labor Markets