Principles of Microeconomics: Ch. 18 Second Canadian Edition Chapter 18 The Markets for the Factors of Production © 2002 by Nelson, a division of Thomson.

Principles of Microeconomics: Ch. 18 Second Canadian Edition

Chapter 18

The Markets for the Factors of Production

© 2002 by Nelson, a division of Thomson Canada Limited


Overview

The Market for the Factors of Production

Labour Market EquilibriumOther Factors of Production - Land and

Capital



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

– What are the major factors of production?

– What determines how much each factor of production is paid?

– What determines how much of each factor of production will be purchased?



The demand for a factor of production is a Derived Demand.

A firm’s demand for a factor of production is derived from its decision to supply a good in another market.


A Firm’s Demand For LabourLabour markets, like other markets in the

economy, are governed by the forces of supply and demand.

Most labour services, rather than being final goods ready to be enjoyed by consumers, are inputs into the production of other goods.


A Firm’s Demand For Labour:The Competitive Profit-Maximizing

FirmA Competitive Firm

–is a price taker, for both the product it sells (e.g. apples) and the input it buys (e.g. apple pickers)

–has the goal to maximize profitsThe firm’s supply of apples and its

demand for workers are derived from its primary goal of maximizing profits.


The Production Function and The Marginal Product of Labour

Illustrates and describes the relationship between the quantity of inputs used and the quantity of output from production.

Output

Input


The Marginal Product of Labour

Marginal Product of Labour: The increase is the amount of output from an additional unit of labour.

MPL = (Q2 - Q1) ÷ (L2 - L1)Example:

MPL = (180 - 100) ÷ (2 - 1) = 80– The second unit of labour adds 80

additional bushels of apples picked


The Diminishing Marginal Product of Labour

As the number of workers increases, the marginal product of labour declines.

As more and more workers are hired, each additional worker contributes less to the production.– The production function gets flatter as

the number of workers rises.


The Marginal Product of Labour: How many workers to hire?

To maximize profits, the firm considers how much profit each worker would bring in. . .

Value of the Marginal Product


Value of the Marginal Product...

… is the marginal product of the input (MPL) multiplied by the market price of the output:

VMPL = (MPL) x (PQ )– VMPL is measured in dollars and

diminishes as the number of workers rises because the market price of the good (PQ) is constant.


Value of the Marginal Product

Value of Marginal Product Curve

VMPL

Quantity of labour


“How Many Workers Do I Hire?”

Value of Marginal Product Curve

VMPL

Quantity of labour

?


How many workers to hire?

To maximize profit, the firm hires workers up to the point where the VMPL is equal to the cost of the labour, i.e. market wage.

VMPL = WAGEThe value-of-marginal-product curve is

the labour demand curve for a competitive, profit-maximizing firm.


“How Many Workers Do I Hire?”VMPL & WAGE

Quantity of labour

MarketWage

VMPL Curve



Quantity of labour

MarketWage

VMPL Curve



Quantity of labour

MarketWage

Profit-MaxQuantity

VMPL Curve


Quick Quiz!Define “marginal product

of labour” and the “value of the marginal product of labour.”

Describe how a competitive, profit-maximizing firm decides how many workers to hire.


Overview



Capital


Labour-Market EquilibriumLabour supply and labour demand

together determine the equilibrium wage, and shifts in the supply or demand curve for labour cause the equilibrium wage to change.

Profit maximization by competitive firms demanding labour, ensures that the equilibrium wage always equals the value of the marginal product.


Labour-Market Equilibrium: Shifts in the Supply and Demand of LabourThe wage adjusts to balance the

supply and demand for labour.Shift in Supply of labour: may be

caused by increased number of available labour.

Shift in Demand for labour: may be caused by an increased demand for the final product produced by labour.


Shifts in the Supply and Demand of Labour

Shifts in Supply of Labour: Result in a surplus of labour, which

puts downward pressure on wages, which

makes it profitable for firms to hire more workers, which results in diminishing marginal product, which lowers the value of the marginal product.

Gives a new equilibrium...



Quantity of labour

MarketWage

Profit-MaxQuantity

VMPL Curve

S0 S1



Quantity of labour

MarketWage

Profit-MaxQuantity

VMPL Curve

S0 S1



Quantity of labour

MarketWage

Profit-MaxQuantity

VMPL Curve

S0 S1


What causes productivity and wages to vary so much over time?

Physical Capital: when workers work with a larger quantity of equipment and structures, they produce more.

Human Capital: when workers are more educated, they produce more.

Technological Knowledge: When workers have access to more sophisticated technologies, they produce more.


Quick Quiz!

How does the immigration of workers affect labour supply, labour demand, the marginal product of labour, and the equilibrium wage?


Overview



Capital


Other Factors of Production: Land and Capital

Capital: refers to the stock of equipment and structures used for production.– 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.


Two Prices for Land & Capital

Purchase Price:

–the price a person pays to own that factor of production indefinitely.

Rental Price:

–the price a person pays to use that factor for a limited period of time.


Determining the Rental Price and Quantity of Land and Capital

Rental Price:– The rental price of land and the rental

price of capital are determined by supply and demand.

Quantity Purchased:– The firm increases the quantity hired until

the value of the factor’s marginal product equals the factor price.


The Market for Land/Capital

P

Q

Supply

Demand

Rental Price of Land/Capital

Quantity of Land/Capital


Profit Maximizing Quantities for Land/Capital

Market Price

Profit-Max Quantity

VMP

Factor Price

Quantity of Land/Capital


Determining the Rental Price and Quantity of Land and Capital

Labour, land, and capital each earn the

value of their marginal contribution to the

production process.


Determining the Purchase Price and Quantity of Land and Capital

Equilibrium Purchase Price:

–depends on both the current value of the marginal product and the value of the marginal product expected to prevail in the future.

– Land and Capital are paid the value of their marginal product.


Linkages Among the Factors of Production

The factors of production not only depend on the demand and supply of

the products they are used to produce, but they are also dependent upon each

other.

Economic Interdependence


Economic Interdependence between Factors of Production

An event that changes the supply of any factor of production can alter the earnings of all the factors.

The change in earnings of any factor can be found by analyzing the impact of the event on the value of the marginal product of that factor.


Quick Quiz!What determines the

income of the owners of land and capital?

How would an increase in the quantity of capital affect the incomes of those who already own capital? How would it affect the incomes of workers?


Overview



Capital

Principles of Microeconomics: Ch. 18 Second Canadian Edition Chapter 18 The Markets for the Factors of Production © 2002 by Nelson, a division of Thomson.

Documents

principles of microeconomics

marginal product slide

factor of production

labour labour markets

production function

canadian edition value

major factors of production

canadian edition chapter