Download Lecture 6a - cda college

Chapter 10:
Input Demand:
The Labour and Land Markets
Input Markets: Basic Concepts
Demand for Inputs: A Derived Demand
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derived demand: The demand for resources
(inputs) that is dependent on the demand for the
outputs those resources can be used to produce.
productivity of an input: The amount of output
produced per unit of that input.
Diminishing Returns
Marginal Revenue Product
Determination of Factor Prices by
Supply and Demand
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How do we obtain the market demand for
inputs?
How do we find the overall market equilibrium?
Decisions about labour supply are determined by
the price of labour, and demographic factors.
The supply of capital depends upon past
investments made by businesses, households, and
governments.
Fundamentals of Wage Determination
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Economists tend to look at the average real wage
The demand for labour is determined by its marginal
productivity
Marginal productivity of better-trained or bettereducated workers will generally be higher than that of
workers with less ‘human capital’
Labour supply refers to the number of hours that the
population desires to work in gainful activities.
The substitution effect tempts each worker to work longer
because of the higher pay for each hour of work. The income
effect operates in the opposite direction because higher
wages mean that workers can now afford more leisure time
along with other good things of life. At some critical wage,
the supply curve may bend backward.
Fundamentals of Wage Determination
(cont.)
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Wage differentials
Differences in the quality of labour explain many of the
other differentials. Differences in people (i.e. unique
individuals such as Bill Gates) is another segment that
justifies wage differentials. Finally, noncompeting groups
(i.e. immigrants) that specialize in a specific trade,
particularly in the short run, justify wage differentials.
Discrimination
Discrimination occurs when economic difference arise
because of irrelevant personal characteristics such as race,
gender, sexual orientation, or religion.
A Firm Using Only One Variable
Factor of Production: Labour
Comparing Marginal Revenue and
Marginal Cost to Maximize Profits
Comparing Marginal Revenue and Marginal
Cost to Maximize Profits (cont.)
Labour Markets
A Firm Using Only One Variable Factor of Production: Labour
Deriving Input Demands
A Firm Employing Two Variable Factors of Production in the
Short and Long Run
Substitution and Output Effects of a Change in Factor Price
factor substitution effect The tendency of firms to substitute
away from a factor whose price has risen and toward a factor
whose price has fallen.
output effect of a factor price increase (decrease) When a
firm decreases (increases) its output in response to a factor price
increase (decrease), this decreases (increases) its demand for all
factors.
Substitution and Output Effects of a
Change in Factor Price
Substitution and Output Effects of a
Change in Factor Price (cont.)
Land Markets
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demand-determined price The price of a good that is in fixed
supply; it is determined exclusively by what firms and households
are willing to pay for the good.
pure rent The return to any factor of production that is in fixed
supply.
A firm will pay for and use land as long as the revenue earned from
selling the product produced on that land is sufficient to cover the
price of the land. Stated in equation form, the firm will use land up
to the point at which
MRPA = PA, where A is land
The supply of land of a given quality at a given location is truly
fixed in supply. Its value is determined exclusively by the amount
that the highest bidder is willing to pay for it. Because land cannot
be reproduced, supply is perfectly inelastic.
Land Markets (cont.)
The Firm’s Profit-Maximizing
Condition in Input Markets
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Every firm has an incentive to use variable inputs as long as the revenue
generated by those inputs covers the costs of those inputs at the margin.
In other words, firms will employ each input up to the point that its price
equals its MRP. This condition holds for all factors at all levels of output:
Profit-maximizing condition for the perfectly competitive firm is
PL = MRPL = (MPL x PX)
PK = MRPK = (MPK x PX)
PA = MRPA = (MPA x PX)
where L is labour, K is capital, A is land (acres), X is output, and PX is the
price of that output.
When all these conditions are met, the firm will be using the optimal, or
least costly, combination of inputs. If all these conditions hold at the same
time, the
MPL = MPK = MPA
Input Demand Curves
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Shifts in Factor Demand Curves
The Demand for Outputs
The Quantity of Complementary and Substitutable Inputs
The Prices of Other Inputs
Technological Change
technological change The introduction of new methods of
production or new products intended to increase the
productivity of existing inputs or to raise marginal products.
Technological change can and does have a powerful influence
on factor demands. As new products and new techniques of
production are born, so are demands for new inputs and new
skills. As old products become obsolete, so, too, do the
labor skills and other inputs needed to produce them.
Labour Market Issues and Policies
History and Practice of Labour Unions
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Business unionism: American unions were engaged primarily in improving the
economic status of workers. American unions were the opposite of the labour
movements in many European countries, in which unions have sometimes
dominated political parties and waged a class struggle to alter the form of
government or to promote socialism.
Craft unions: Workers were grouped on the basis of a particular skill, such
as carpentry or bricklaying.
Industrial unions: those organizing an entire industry such as steel or coal.
Collective bargaining
How unions raise wages
Effects on employment
Effects on wages and employment
Has unionization raised wages?