Download Chapter 18 Mankiw

The Market for the Factors of
Production
 Factors
of Production are the inputs used to
produce goods and services.
– What are the major factors of production?
– What determines how much each factor
of production is paid?
– What determines how much of each
factor of production will be purchased?
Principles of Microeconomics: Ch. 18
First Canadian Edition
The Market for the Factors of
Production
The
demand for a
factor of production is
a Derived Demand.
A
firm’s demand for a
factor of production is
derived from its decision
to supply a good in
another market.
Principles of Microeconomics: Ch. 18
First Canadian Edition
A Firm’s Demand For Labour
 Labour
is the most important factor of
production.
 Labour markets, like other markets in the
economy, are governed by the forces of
supply and demand.
 Most labour services, rather than being
final goods ready to be enjoyed by
consumers, are inputs into the production
of other goods.
Principles of Microeconomics: Ch. 18
First Canadian Edition
A Firm’s Demand For Labour:
The Competitive Profit-Maximizing
Firm
A
Competitive Firm
– is a price taker, for both the product
it sells (e.g. apples) and the input it
buys (e.g. apple pickers)
– has the goal to maximize profits
The firm’s supply of apples and its
demand for workers are derived from
its primary goal of maximizing profits.
Principles of Microeconomics: Ch. 18
First Canadian Edition
The Production Function and The
Marginal Product of Labour
Output
Illustrates and
describes the
relationship
between the
quantity of inputs
used and the
quantity of output
from production.
Input
Principles of Microeconomics: Ch. 18
First Canadian Edition
The Marginal Product of Labour
Marginal
Product of Labour: The
increase is the amount of output from
an additional unit of labour.
MPL = (Q2 - Q1) ÷ (L2 - L1)
Example:
MPL = (180 - 100) ÷ (2 - 1) = 80
–
The second unit of labour adds 80
additional bushels of apples picked
Principles of Microeconomics: Ch. 18
First Canadian Edition
The Diminishing Marginal Product
of Labour
As
the number of workers increases,
the marginal product of labour
declines.
As more and more workers are hired,
each additional worker contributes
less to the production.
–
The production function gets flatter as the
number of workers rises.
Principles of Microeconomics: Ch. 18
First Canadian Edition
The Marginal Product of Labour:
How many workers to hire?
To maximize profits,
the firm considers
how much profit
each worker would
bring in. . .
Value of the
Marginal Product
Principles of Microeconomics: Ch. 18
First Canadian Edition
Value of the Marginal Product...
… is the marginal product of the input
(MPL) multiplied by the market price of
the output:
VMPL = (MPL) x (Px )
–
VMPL is measured in dollars and
diminishes as the number of workers
rises because the market price of the
good (Px) is constant.
Principles of Microeconomics: Ch. 18
First Canadian Edition
How many workers to hire?
To
maximize profit, the firm hires
workers up to the point where the
VMPL is equal to the cost of the labour,
i.e. market wage.
VMPL = WAGE
The
value-of-marginal-product curve is
the labour demand curve for a
competitive, profit-maximizing firm.
Principles of Microeconomics: Ch. 18
First Canadian Edition
Labour-Market Equilibrium
Labour
supply and labour demand
together determine the equilibrium
wage, and shifts in the supply or
demand curve for labour cause the
equilibrium wage to change.
Profit maximization by competitive
firms demanding labour, ensures that
the equilibrium wage always equals
the value of the marginal product.
Principles of Microeconomics: Ch. 18
First Canadian Edition
Labour-Market Equilibrium: Shifts
in the Supply and Demand of Labour
The
wage adjusts to balance the
supply and demand for labour.
Shift in Supply of labour: may be
caused by increased number of
available labour.
Shift in Demand for labour: may be
caused by an increased demand for
the final product produced by labour.
Principles of Microeconomics: Ch. 18
First Canadian Edition
What causes productivity and wages
to vary so much over time?
Physical
Capital: when workers work
with a larger quantity of equipment and
structures, they produce more.
Human
Capital: when workers are more
educated, they produce more.
Technological
Knowledge: When
workers have access to more sophisticated
technologies, they produce more.
Principles of Microeconomics: Ch. 18
First Canadian Edition
Other Factors of Production:
Land and Capital
Capital:
refers to the stock of
equipment and structures used for
production.
–
The economy’s capital represents the
accumulation of goods produced in the
past that are being used in the present to
produce new goods and services.
Principles of Microeconomics: Ch. 18
First Canadian Edition