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6
THE ECONOMICS OF LABOR MARKETS
The Markets for the
Factors of Production
Markaður fyrir
framleiðsluþætti
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18
The Markets for the Factors of
Production
• Factors of production (framleiðsluþættir) are
the inputs (aðföng) used to produce goods and
services.
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The Market for the Factors of
Production
• The demand for a factor of production
(eftirspurn eftir framleiðsluþáttum) is a derived
demand (afleidd eftirspurn).
• A firm’s demand for a factor of production is
derived (eftirspurn er leidd af) from its
decision to supply a good in another market.
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THE DEMAND FOR LABOR
• Labor markets, like other markets in the
economy, are governed by the forces of supply
and demand. (Vinnumarkaður, eins og aðrir
markaðir, stjórnast af öflum framboðs og
eftirspurnar).
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Figure 1 The Versatility of Supply and Demand
(a) The Market for Apples
(b) The Market for Apple Pickers
Price of
Apples
Wage of
Apple
Pickers
Supply
P
Supply
W
Demand
Demand
0
Q
Quantity of
Apples
0
L
Quantity of
Apple Pickers
Copyright©2003 Southwestern/Thomson Learning
THE DEMAND FOR LABOR
• Most labor services, rather than being final
goods ready to be enjoyed by consumers, are
inputs into the production of other goods.
(Þjónusta sem byggir að vinnuafli, eru hluti af
því sem þarf til að framleiða vöru, frekar en að
flokkast sem endanleg neysluvara).
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The Production Function and the Marginal
Product of Labor
• The production function illustrates the
relationship between the quantity of inputs used
and the quantity of output of a good.
Framleiðslufall lýsir sambandinu milli magns
hráefnis sem notað er og magns framleiddrar
vöru.
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Figure 2 The Production Function
Quantity
of Apples
Production
function
300
280
240
180
100
0
1
2
3
4
5
Quantity of
Apple Pickers
Copyright©2003 Southwestern/Thomson Learning
The Production Function and the Marginal
Product of Labor
• The marginal product of labor (jaðarframleiðsla
vinnuafls) is the increase in the amount of
output from an additional unit of labor. MPL =
Q/L
• MPL = (Q2 – Q1)/(L2 – L1)
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The Production Function and the Marginal
Product of Labor
• Diminishing Marginal Product of Labor
(Minnkandi jaðarframleiðsla vinnuafls)
• As the number of workers increases, the marginal
product of labor declines.
• As more and more workers are hired, each
additional worker contributes less to production
than the prior one.
• The production function becomes flatter as the
number of workers rises.
• This property is called diminishing marginal
product.
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The Production Function and the Marginal
Product of Labor
• Diminishing marginal product refers to the
property whereby the marginal product of an
input declines as the quantity of the input
increases.
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Figure 2 The Production Function
Quantity
of Apples
Production
function
300
280
240
180
100
0
1
2
3
4
5
Quantity of
Apple Pickers
Copyright©2003 Southwestern/Thomson Learning
What Causes the Labor Demand Curve to
Shift?
• Output Price
• Technological Change
• Supply of Other factors
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What Causes the Labor Supply Curve to
Shift?
• Changes in Tastes (breyting á smekk)
• Changes in Alternative Opportunities
(breytingar á öðurm möguleikum)
• Immigration (innflytjendur)
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EQUILIBRIUM IN THE LABOR
MARKET
• The wage adjusts to balance the supply and
demand for labor. (Aðlögun verður á launum
sem leiðir til jafnvægis í framboði og eftirspurn
eftir vinnuafli).
• The wage equals the value of the marginal
product of labor. (Laun eru jöfn jaðarframeiðslu
vinnuafls).
Copyright © 2004 South-Western
Figure 4 Equilibrium in a Labor Market
Wage
(price of
labor)
Supply
Equilibrium
wage, W
Demand
0
Equilibrium
employment, L
Quantity of
Labor
Copyright©2003 Southwestern/Thomson Learning
EQUILIBRIUM IN THE LABOR
MARKET
• Labor supply and labor demand determine the
equilibrium wage. (Vinnuframboð og
vinnueftirspurn ákvarða jafnvægislaun).
• Shifts in the supply or demand curve for labor
cause the equilibrium wage to change.
(Breytinar á framboðs og eftirspurn vinnuafls
leiðir til breytinga á jafnvægislaunum).
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Figure 5 A Shift in Labor Supply
Wage
(price of
labor)
1. An increase in
labor supply . . .
Supply, S
S
W
W
2. . . . reduces
the wage . . .
Demand
0
L
Quantity of
Labor
3. . . . and raises employment.
L
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Shifts in Labor Supply
• An increase in the supply of labor :
•
•
•
•
•
•
Results in a surplus of labor.
Puts downward pressure on wages.
Makes it profitable for firms to hire more workers.
Results in diminishing marginal product.
Lowers the value of the marginal product.
Gives a new equilibrium.
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Figure 6 A Shift in Labor Demand
Wage
(price of
labor)
Supply
W
1. An increase in
labor demand . . .
W
2. . . . increases
the wage . . .
D
Demand, D
0
L
Quantity of
Labor
3. . . . and increases employment.
L
Copyright©2003 Southwestern/Thomson Learning
Shifts in Labor Demand
• An increase in the demand for labor :
• Makes it profitable for firms to hire more workers.
• Puts upward pressure on wages. (Þrýstir launum
upp).
• Raises the value of the marginal product. (Hækkar
virði jaðarframleiðslu).
• Gives a new equilibrium. (Leiðir til nýs jafnvægis).
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OTHER FACTORS OF PRODUCTION:
LAND AND CAPITAL
• Capital refers to the equipment and structures
used to produce goods and services.
• 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.
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OTHER FACTORS OF PRODUCTION:
LAND AND CAPITAL
• Prices of Land and Capital
• The purchase price is what a person pays to own a
factor of production indefinitely.
• The rental price is what a person pays to use a
factor of production for a limited period of time.
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Summary
• The economy’s income is distributed in the
markets for the factors of production.
• The three most important factors of production
are labor, land, and capital.
• The demand for a factor, such as labor, is a
derived demand that comes from firms that use
the factors to produce goods and services.
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