Download Factors of Production

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
HOUSEHOLDS
FACTOR
Markets
Labor, land,
capital & entrepreneurship
Income
= Flow of inputs
and outputs
= Flow of dollars
How many
inputs to hire?
Land, Labor & Capital?
The Market for Labor
The Market for Nurses
Wage
Rate
Based on Supply & Demand
Supply
Price = Wage Rate
W2
Demand = Producers
Supply = Workers
E1
W
D2
Demand
↑ Demand => Wages rise
↑ Supply => Wages fall
0
Q
Q2
Quantity of
Nurses
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 apple pickers is derived from the market demand for apples
The Market for Apple Pickers
The Market for Apples
Price of
Apples
PRODUCT
Market
Wage of
Apple
Pickers
Supply
P
FACTOR
Market
Supply
W
Demand
Demand
0
Q
Quantity of
Apples
0
Q
Quantity of
Apple Pickers
Any change in the PRODUCT MARKET will change demand in
the FACTOR MARKET.
Copyright©2003 Southwestern/Thomson Learning
Marginal Revenue Product (MRP)
• MRP = demand curve for Factors of Production
• MRP = marginal product of input x market price of output
– Measures the value in dollars of output produced
• MRP = MP (of input)  Price (of output)
If a T-Shirt is $30 dollars
MP labor = 10 Shirts
MRP = 10 X $30 = $300
Marginal Revenue Product (MRP)
• MRP = MP (of input)  P (of output)
Assume Output Price constant at $0.50
MP 
Qty
Labor
1
2
3
4
Total
Marginal
Product Product
25
___
45
___
60
___
70
___
Price =
MRP
Price
MRP
$0.50
___
___
___
___
___
___
___
Labor Demand Curve
• The MRP of labor = Labor Demand curve
Value
of the
Marginal
Product
Qty
Labor
0
1
2
3
4
Total
Product
0
25
45
60
70
Marginal
Product
_25
_20
_15
_10
Market
wage
MRP
MRP
_.50
_.50
_.50
_.50
$12.50
$10.00
$7.50
$5.00
Declining MP reduces
value of “next” worker
(demand curve for labor)
0
Price
Quantity of
Apple Pickers
Practice Problem
• Lesson 2, Activity 44