Download FactorsMarkets Part II

Factors of Production
Part II
(Chapter 18)
MRP
MRP sometimes call Value of Marginal Product (VMP)
Economic Decision Making:
If MB ≥ MC do it
If MB < MC don’t
Shifts in Labor Demand
Demand Curve shifts right when:
• Demand for Product
• Productivity
– Technology, working conditions, etc...
Wage
Rate
Market
wage
• Price of other resources:
– Price of complementary resource
– Price of substitute resource
Marginal Revenue Product
(demand curve for labor)
0
Profit-maximizing quantity
Quantity of
Workers
“It Depends”
Two different substitute actions when price of substitute falls:
1) Substitution Effect- you hire less workers
2) Output Effect- MC falls, so output increases => you hire more workers
Competitive Market:
Supply of Labor
• For a firm in a competitive market:
– Wage is the firm’s labor supply curve
– Each firm is a “wage taker”
MRP = Wage Rate
Wage
Rate
If demand rises,
Firm hires more workers
Wage is unchanged
Market
wage
Marginal Revenue Product
(demand curve for labor)
0
Profit-maximizing quantity
Quantity of
Workers
Derived Demand
Demand
For product
Price of
Product
MRP
More
Workers
Hired
Wage rate
Unchanged!
The Market Supply Curve
• Is upward sloping & represents the trade-off between
Work & Leisure
– upward-sloping means that an increase in wages induces
more people to work
Wage
(price of
labor)
Supply
Equilibrium
wage, W
Demand
0
Equilibrium
employment, L
Quantity of
Labor
What will
Get me to
work?
A Shift in Labor Supply
Wage
(price of
labor)
1. An increase in
labor supply . . .
Supply, S
S
More workers hired
Wages Falls
Marginal Product Falls
W
W
2. . . . reduces
the wage . . .
Demand
0
L
Quantity of
Labor
3. . . . and raises employment.
L
A Shift in Labor Demand
Wage
(price of
labor)
Supply
More workers hired
Wages Rise
Marginal Product Increases
W
1. An increase in
labor demand . . .
W
2. . . . increases
the wage . . .
D
Demand, D
0
L
Quantity of
Labor
3. . . . and increases employment.
L
Optimizing 1-Resource
• If Marginal Benefit ≥ Marginal Cost then __________
• Marginal Factor Cost (MFC) – cost of additional
factor of production
• Sometimes called MRC
• Competitive firms hire each factor of production until
the MRP = MFC
The Least-Cost Rule
• Challenge: how do you decide optimal quantity between 2
resources?
Labor
Capital
or
Your choice must satisfy the following equation
(Only one combination will work!)
MPL/PL = MPK/PK
or
• If MPL/PL > MPK/PK then
MPL/ MPK = PL/PK
L &
K
• If MPL/PL < MPK/PK then do opposite
Worksheet
• Labor Markets