Unit 5: Factors of Production and their Market

Factors of Production Factors of production are the inputs used to produce goods and services.

The Market for the Factors of Production The demand for a factor of production is a derived demand. uA firm’s demand for a factor of production is derived from its decision to supply a good in another market.

The Demand for Labor Labor markets, like other markets in the economy, are governed by the forces of supply and demand.

The Versatility of Supply and Demand... (a) The Market for Apples(b) The Market for Apple Pickers Quantity of Apples Quantity of Apple Pickers QL P W 00 Price of Apples Wage of Apple Pickers Demand Supply

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.

The Production Function and The Marginal Product of Labor

What have we learned about PC that tells us the last factor market was structured in such a way?

The Production Function...

Diminishing Marginal Product of Labor u As the number of workers increases, the marginal product of labor declines. u The production function becomes flatter as the number of workers rises. This property is called diminishing marginal product.

The crux of the lesson… A firm will optimize their economic profit at where MRP=Wage That is how firms decide how much to pay their workers

Activity 40 something

Top of the Class Sit in seats which will lessen distractions in class Have Activity 44 out so we can go over it Answer: What are some factor markets one finds in Nimitz?

Input Demand and Output Supply When a competitive firm hires labor up to the point at which the value of the marginal product equals the wage, it also produces up to the point at which the price equals the marginal cost.

What Causes the Labor Demand Curve to Shift? u Output Price u Technological Change u Supply of Other factors

The Labor Supply Curve u The labor supply curve reflects how workers’ decisions about the labor-leisure tradeoff respond to changes in opportunity cost. u An upward-sloping labor supply curve means that an increase in the wages induces workers to increase the quantity of labor they supply.

Discussion Question What do you think the labor-leisure tradeoff entails?

The Labor Supply Curve Supply Wage (price of labor) Quantity of Labor 0

What Causes the Labor Supply Curve to Shift? u Changes in Tastes u Changes in Alternative Opportunities u Immigration

Equilibrium in the Labor Market u The wage adjusts to balance the supply and demand for labor. u The wage equals the value of the marginal product of labor.

Equilibrium employment, L Equilibrium in the Labor Market... Supply Wage (price of labor) Quantity of Labor 0 Demand Equilibrium wage, W

Equilibrium in the Labor Market u Labor supply and labor demand determine the equilibrium wage. u Shifts in the supply or demand curve for labor cause the equilibrium wage to change.

A Shift in Labor Supply... Wage (price of labor) W1W1 0Quantity of Labor L1L1 Supply, S 1 Demand 2....reduces the wage and raises employment. 1. An increase in labor supply... S2S2 W2W2 L2L2

A Shift in Labor Supply u An increase in the supply of labor : u Results in a surplus of labor. u Puts downward pressure on wages. u Makes it profitable for firms to hire more workers. u Results in diminishing marginal product. u Lowers the value of the marginal product. u Gives a new equilibrium.

A Shift in Labor Demand... Wage (price of labor) W1W1 0 Quantity of Labor L1L1 Supply Demand, D increases the wage and increases employment. 1. An increase in labor demand... D2D2 W2W2 L2L2

Shifts in Labor Demand u An increase in the demand for labor : u Makes it profitable for firms to hire more workers. u Puts upward pressure on wages. u Raises the value of the marginal product. u Gives a new equilibrium.

Up of Warming, 4/16 Using the enlightening understanding of capital you have acquired in this class, come up with a thorough description of what capital (k) is and the many types of capital which exist

Three Determinants of Productivity u Physical Capital u When workers work with a larger quantity of equipment and structures, they produce more. u Human Capital u When workers are more educated, they produce more. u Technological Knowledge u When workers have access to more sophisticated technologies, they produce more.

Productivity and Wage Growth in the United States

Productivity and Wage Growth around the World

Other Factors of Production: Land and Capital u (Capital refers to the stock of equipment and structures used for production) u 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.

Prices of Land and Capital u The purchase price is what a person pays to own a factor of production indefinitely. u The rental price is what a person pays to use a factor of production for a limited period of time.

Equilibrium in Markets for Land and Capital u The rental price of land and the rental price of capital are determined by supply and demand. u The firm increases the quantity hired until the value of the factor’s marginal product equals the factor’s price.

The Markets for Land and Capital... Quantity of Land Quantity of Capital QQ P P 00 Rental Price of Land Rental Price of Capital Demand Supply (a) The Market for Land(b) The Market for Capital

Equilibrium in Markets for Land and Capital uEach factor’s rental price must equal the value of their marginal product. uThey each earn the value of their marginal contribution to the production process.

Linkages Among the Factors of Production Factors of production are used together. u The marginal product of any one factor depends on the quantities of all factors that are available.

Linkages Among the Factors of Production A change in the supply of one factor alters the earnings of all the factors.

Linkages Among the Factors of Production A change in earnings of any factor can be found by analyzing the impact of the event on the value of the marginal product of that factor.