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Factor Markets Chapter 18 Markets for Factors of Production • Factors of production are inputs used to produce goods & services • Demand for a factor of production is a derived demand: – A firm’s demand for a factor of production is derived from demand for their own product Labor markets, like other markets, are governed by the forces of supply & demand (a) The (b) The Market for Apples Price of Apples Market for Apple Pickers Wage of Apple Pickers Supply P Supply W Demand Demand 0 Q Quantity of Apples 0 L Quantity of Apple Pickers The demand for apple pickers is derived from the market demand for apples Copyright©2003 Southwestern/Thomson Learning Marginal Product of Labor • Production Function- illustrates the relationship between quantity of inputs & quantity of output • Marginal Product of Labor (MPL)- the increase in output from an additional unit of labor – MPL = Q/L or – MPL = (Q2 – Q1)/(L2 – L1) As more workers are added Marginal Product Labor Declines MPL = Q/L Diminishing Marginal Product of Labor: Each additional worker contributes less to production than the prior one The Production Function Diminishing Marginal Product makes the Production Function becomes “flatter” Quantity of Apples Production function 300 280 240 180 100 0 1 2 3 4 5 Quantity of Apple Pickers Marginal Revenue Product (MRP) • MRP = The marginal product of input multiplied by the market price of output (measured in dollars) • MRPL = MPL P • MRP = Δ in Total Revenue / Δ in Resource Qty Qty Labor 0 1 2 3 4 Total Product 0 25 45 60 70 Marginal Product ___ ___ ___ ___ Price MRP ___ ___ ___ ___ ___ ___ ___ ___ Price for a competitive firm equals MR & remains constant Assume Price = $0.50 To Maximize Profit • A competitive firm hires workers up to the point where MRP =Wage • The MRP curve is the labor demand curve for a competitive, profit-maximizing firm. MRP & Maximizing Profit Value of the Marginal Product When a competitive firm hires labor up to the point where MRP = Wage, it also produces up to the point at which the P = MC Market wage Marginal Revenue Product (demand curve for labor) 0 Profit-maximizing quantity Quantity of Apple Pickers Worksheet • Lesson 2, Activity 44 • New Terms: – Marginal Product of Labor – Marginal Revenue Product