Download Chapter 18 The markets for the factors of production Factors of

Chapter 18
The markets for the factors of production
Factors of Production
• The factors of production are inputs
used to produce goods.
A firm’s demand for
labor
• the labor markets are governed by the
supply and demand
• labor is known as one of the important
factor of production
A firms demand for
labor, profit
maximizing
• In a competitive firm, it is the price taker
for both the good it sells and buys
• The firm’s supply of goods and it’s
demand for workers are derived from its
primary goal of maximizing profits
The production
function and the
product of labor
Price
marginal
Gets flatter and flatter
Input
Marginal Product of
Labor
• the marginal product is the extra output
produced by one more unit of an input
Diminishing Marginal
Product??
• Output that results from one additional
unit of a factor of production (such as a
labor hour or machine hour), all other
factors remaining constant.
• As more and more workers are hired,
each additional worker contributes less
to the production.
Worker #??
u To
maximize profit, the firm hires
workers up to the point where the
VMPL (value-of-marginal-product) is
equal to the cost of the labour
Shifts in labor
• Shift in supply- possible cause when
there is an increase in available labour
• Shift in demand- possibly caused by an
increase in demand for the final product
produced by labor
Labor market
Equilibrium
u Profit
maximization by competitive
firms demanding labour, ensures that
the equilibrium wage always equals the
value of the marginal product.
Productivity and
• Key words. wages
• Capital- stock of equipment &
structures used to produce. Goods
produced to make new goods and
services.
• Rental price- Price to own a factor for
an unlimited or unspecified period of
time..
• Purchase price-
Productivity and
wages
• Purchase price- price to won that factor
for an unlimited for an unspecified
period of time.
Productivity and
wages
–
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.
Summary
• The factors of production are inputs
used to produce goods.
• In a competitive firm, it is the price taker
for both the good it sells and buys
• the marginal product is the extra output
produced by one more unit of an input
•
To maximize profit, the firm hires
workers up to the point where the
VMPL (value-of-marginal-product) is
equal to the cost of the labour
• Profit maximization by competitive firms
demanding labour, ensures that the
equilibrium wage always equals the
value of the marginal product.
Questions
• what is the diminishing marginal
product?
• Is the competitive firm a price taker or
price maker?