Download Factors of Production

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