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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 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