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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