Principles of Microeconomics Module 6 Market for Inputs in Production
Principles of MicroeconomicsModule 6
Market for Inputs in Production
Factors of Production• Factorsofproduction:theinputsusedtoproducegoodsandservices.
• ProductionFunction:Relationshipbetweenquantityofinputs(orfactorsofproduction)andtotaloutput
Q=f(Land,Labor,Capital)
Determining Production
Example:Q=100K+25L
Ifthefirmincreasescapital(K)itwillincreaseproduction(Q)Ifthefirmincreaseslabor(L)itwillincreaseproduction(Q)
• Demandforfactorsofproductioncomesfromthefirm• Supplyoffactorsofproductioncomesfromthehousehold
Demand for Factors of Production• Firmsdemandinputstoproducegoodsandservices• Buttheirdemandisbasedonthedemandofotherpeopleforthegoodtheyareproducing• Ifmanypeoplewanttobuytheirgood– needlotsofinputstoproducealargequantitytomeetthedemand• Ifdemandislow– theydon’tneedtoproduceasmuch
àDerivedDemandforfactorsofproduction• Firm’sdemandforinputsisderived fromconsumers’demandfortheirproduct
Demand for Labor
• MarginalPhysicalProductofLabor(MPL)explainswhysomepeopleearnmorethanothers• Someworkersaremoreproductive:• Experience• Education/Training• Accesstolatestproductiontechnology
Demand for Labor
Marginal Product of Labor
Labor Output MPL ValueofMPL(MPL*Price)
Wageperworker(daily)
MarginalProfit
0 0
1 50
2 90
3 120
4 140
5 150
7 150
Supposewehaveasmallcompanymakingtoasters.Thepriceofeachtoasteris$10.Assumeeachworkerispaid$100perday
Marginal Product of Labor
Labor Output MPL ValueofMPL(MPL*Price)
Wageperworker(daily)
MarginalProfit
0 0
1 50 50
2 90 40
3 120 30
4 140 20
5 150 10
6 150 0
Supposewehaveasmallcompanymakingtoasters.Thepriceofeachtoasteris$10.Assumeeachworkerispaid$100perday
Marginal Product of Labor
Labor Output MPL ValueofMPL(MPL*Price)
Wageperworker(daily)
MarginalProfit
0 0
1 50 50 $500
2 90 40 $400
3 120 30 $300
4 140 20 $200
5 150 10 $100
6 150 0 $0
Supposewehaveasmallcompanymakingtoasters. Thepriceofeachtoaster is$10.Assumeeachworker ispaid$100perday
Marginal Product of Labor
Labor Output MPL ValueofMPL(MPL*Price)
Wageperworker(daily)
MarginalProfit
0 0
1 50 50 $500 $100
2 90 40 $400 $100
3 120 30 $300 $100
4 140 20 $200 $100
5 150 10 $100 $100
6 150 0 $0 $100
Supposewehaveasmallcompanymakingtoasters. Thepriceofeachtoaster is$10.Assumeeachworker ispaid$100perday
MarginalProductofLabor
Labor Output MPL ValueofMPL(MPL*Price)
Wageperworker(daily)
MarginalProfit
0 0
1 50 50 $500 $100 $400
2 90 40 $400 $100 $300
3 120 30 $300 $100 $200
4 140 20 $200 $100 $100
5 150 10 $100 $100 $0
6 150 0 $0 $100 -$100
Supposewehaveasmallcompanymakingtoasters. Thepriceofeachtoaster is$10.Assumeeachworker ispaid$100perday
Value of Marginal Product of Labor• ValueofMPLà thevalueofthelastunitproducedbytheadditionalworker• Alsoknownas:MarginalRevenueProduct(MRP)orMarginalValueProduct• IncompetitivemarketsMRP=P*MPL becausefirmsarepricetakersandthepricealsoreflectsmarginalrevenue
Demand for LaborValueofMPL
QuantityofLabor
DemandbyFirms
$500
$400
$300
$200
$100
$0 MarketWageRate$100
1 23 45
Wageofeachworker=ValueofoutputtheyeachproduceWage=ValueofMPL
ValueofMPL:Firm’swillingnesstopayforlabor
Diminishing Marginal Returns to LaborOutputisincreasingatadecreasingrateiffirmincreasesonlyoneinputEachworkeraddstoproduction,butlessandless
Labor Output MPL0 01 50 502 90 403 120 304 140 205 150 106 150 0 01234567
150
140
130
120
90
50
0
Shifts in Demand for Labor1. Changeinoutputprice
• Priceofgoodincreasesà• Firmwillproducemoreà• Demandmorelabor
• ValueofMPLgoesup!
ValueofMPL
QuantityofLabor
D.1
$500
$400
$300
$200
$100
$0
1 23 45
D.2
Shifts in Demand for Labor
2.TechnologicalChange• Techprogressà workersmoreproductiveà firmneedslesslabor
3.Supply/Costofotherfactors• Ifotherfactorsbecomescarceà firmcanproducelessoverallà lessdemandforlabor
Supply of Labor•
Marginal Factor Costs• Recallthatthewagerate=$100perworker
Labor Output Wageperworker(daily)
LaborCostfortheFirm
0 0 $0
1 50 $100 $100
2 90 $100 $200
3 120 $100 $300
4 140 $100 $400
5 150 $100 $500
6 150 $100 $600
Marginal Factor Costs• Recallthatthewagerate=$100perworker• WhenthewagedoesnotchangewiththenumberofworkersemployedMFC=Wage
Labor Output Wage(daily)
LaborCostfortheFirm MFC
0 0 $0
1 50 $100 $100 $100
2 90 $100 $200 $100
3 120 $100 $300 $100
4 140 $100 $400 $100
5 150 $100 $500 $100
6 150 $100 $600 $100
Supply of LaborWage
QuantityofLabor
SupplybyHouseholds$150
$125
$100
$75
$50
$25
$0
1 23 45
MarginalFactorCost=
MarketWageRate
Shifts in Supply of Labor• Changeinnumberofworkers/population• Moreworkersinterestedinajobà morelaboravailable• Influxofworkersà shiftssupplycurve
• ChangeinPreferencesorIncome:• Moreincome:peopleprefertotaketimeoffandgoonvacation– Slabordecreases• Prefertobuymoregoods:needtoworkmoreformoreincome
• ChangeinPriceofRelatedServices(andgoods):• Servicesthataffectthe“cost”ofworking:childcarecosts• Childcaremoreexpensive:maychoosetonotwork
• ChangeinExpectations:• Retirementage/pension• Lifeexpectancy• Health
EquilibriumforLaborWage
QuantityofLaborDemandbyFirms
SupplybyHouseholds$150
$125
$100
$75
$50
$25
$0
1 23 456 78 910
Equilibrium:ValueMPL=MFC
EquilibriumintheFactorsMarketoccurswhentheValueofoutputproducedbythelastworkerisequaltothecostofemployingthatworker(OR)whereValueMPL=MFC
Linkages among the Factors of Production
• Factorsofproductionareusedtogether• Productivityofeachfactordependsonthequantitiesoftheotherfactorsavailable
• Changeinthesupplyofanyonefactorcanchangetheearningsofallofthefactors.• Changeintheearningsofanyfactorcanbefoundbymeasuringtheimpactoftheeventmarginalproductofthatfactor.