Markets for Factors of Production

Factors of Production Inputs used to produce goods & services Different from markets for goods & services in that it is a derived demand – its demand is derived from its decision to supply a good in another market

Demand for Labor Households are suppliers while firms are the demanders Wage earned by workers is determined by the supply & demand for workers

Competitive Profit-Maximizing Firm Assume firm is competitive in the market for its good/service and in the market for workers that produce the good/service Also, assume the firm is profit maximizing (TR – TC)

Production Function & Marginal Product of Labor How does the number of workers hired impact the amount of output we can produce? Production Function – relationship between quantity of inputs used and the quantity of output produced Marginal Product of Labor – increase in amount of output from hiring one additional worker

Diminishing Marginal Product As the number of workers increases, the marginal product of labor decreases

Value of Marginal Product (of Labor) also called Marg. Rev. Product Firm wants to know how many workers to hire Profit = TR – TC so… Worker’s contribution to TR is VMPL; you get this by MP x P Worker’s contribution to TC is the wage paid Therefore, a profit maximizing firm hires workers up to the point where VMPL = wage

Demand for Labor VMPL is the labor demand curve for a competitive, profit-maximizing firm