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Factor Markets
Chapter 18:
Markets for Factors of Production:
Land, Labor, Physical Capital & Human Capital
Capital Goods = Machines
Labor = Workers
Product & Factor Markets
Price
How many goods
to Produce?
MC
ATC
P
Revenue
Goods
and services
sold
PRODUCT
Markets
Spending
MR
Goods and
services
bought
0
Quantity
produced
Demand
Efficient
scale
Quantity
Set MR = MC
•
•
FIRMS
Factors of
production
Wages, rent,
and profit
Determines Qty produced
Maximizes profit
HOUSEHOLDS
FACTOR
Markets
Labor, land,
capital & entrepreneurship
Income
= Flow of inputs
and outputs
= Flow of dollars
How many
inputs to hire?
Focus on inputs
Land, Labor & Capital
The Market for Labor
The Market for Nurses
Wage
Rate
Based on Supply & Demand
Supply
W2
W1
Price = Wage Rate
E2
Demand = Producers
Supply = Workers
E1
D2
Demand
0
Q1 Q2
Quantity of
Nurses
↑ Demand => Wages rise
Derived Demand
• Demand for a factor of production is a derived demand:
– Demand for an input (factor) is derived from demand for a firm’s output
Demand
Product ↑
Leads to
↑ Demand for Factors of Production
Land, Labor, Capital, Technology, etc…
- Demand for tech workers is derived from the market demand for apple products
Market for I-phones
The Market for Tech Workers
Price of
I-Phone
PRODUCT
Market
Wage of
Tech
Workers
Supply
FACTOR
Market
$100,000
P
Demand
Demand
0
Supply
Q
Quantity of
Apple Products
0
Q
Quantity of
Tech workers
Any change in PRODUCT MARKET will change demand in FACTOR MARKET.
Copyright©2003 Southwestern/Thomson Learning
Marginal Revenue Product (MRP)
• MRP =
Measures the value in dollars of output produced
– demand curve for inputs
• MRP = marginal product of input X
market price of output
• MRP = MP (of input)  Price (of output)
Example:
If a T-Shirt is $30 dollars
MP Labor = 10 Shirts
MRP = 10 X $30 = $300
Labor Demand Curve
• MRP = Labor Demand curve
• Set wage rate = MRP (to determine # of workers)
Value
of the
Marginal
Product
Low Skilled Workers
Qty
Labor
0
1
2
3
4
Total
Product
0
25
45
60
70
Marginal
Product
_25
_20
_15
_10
Price
MRP
_.50
_.50
_.50
_.50
$12.50
$10.00
$7.50
$5.00
$10
Hire 2 workers where
MRP = wage rate
MRP
(demand curve for labor)
0
Quantity of
Apple Pickers
Declining MP reduces
value of “next” worker
Practice Problem
• Lesson 2, Activity 44