Factor Markets Land, Labor, Physical Capital & Human Capital

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Presentation transcript:

Factor Markets Land, Labor, Physical Capital & Human Capital Chapter 18: Markets for Factors of Production: Land, Labor, Physical Capital & Human Capital Capital Goods = Machines Labor = Workers

Product & Factor Markets How many goods to Produce? Revenue Spending PRODUCT Markets Goods and services sold Goods and services bought Set MR = MC FIRMS HOUSEHOLDS FACTOR Markets Factors of production Labor, land, capital & entrepreneurship How many inputs to hire? Wages, rent, and profit Income = Flow of inputs and outputs Land, Labor & Capital? = Flow of dollars

The Market for Labor The Market for Nurses Based on Supply & Demand Wage Rate Based on Supply & Demand Price = Wage Rate Demand = Producers Supply = Workers ↑ Demand => Wages rise ↑ Supply => Wages fall D2 Demand Supply Q2 W2 E1 Q W Quantity of Nurses

Land, Labor, Capital, Technology, etc… Derived Demand Demand for a factor of production is a derived demand: Demand for an input (factor) is derived from demand for a firm’s output Demand Product ↑ Leads to ↑ Demand for Factors of Production Land, Labor, Capital, Technology, etc…

- Demand for apple pickers is derived from the market demand for apples The Market for Apples The Market for Apple Pickers Price of PRODUCT Market Wage of FACTOR Market Apples Apple Pickers Supply Demand Demand Supply P Q Q W Quantity of Quantity of Apples Apple Pickers Any change in the PRODUCT MARKET will change demand in the FACTOR MARKET. Copyright©2003 Southwestern/Thomson Learning

Marginal Revenue Product (MRP) MRP = demand curve for Factors of Production MRP = marginal product of input x market price of output Measures the value in dollars of output produced MRP = MP (of input)  Price (of output) If a T-Shirt is $30 dollars MP labor = 10 Shirts MRP = 10 X $30 = $300

Marginal Revenue Product (MRP) MRP = MP (of input)  P (of output) Assume Output Price constant at $0.50 MP  Price = MRP Qty Total Marginal Price MRP Labor Product Product 1 25 ___ $0.50 ___ 45 ___ ___ ___ 60 ___ ___ ___ 70 ___ ___ ___

Labor Demand Curve The MRP of labor = Labor Demand curve Market wage Declining MP reduces value of “next” worker

Practice Problem Lesson 2, Activity 44

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