1. Markets for Factors of Production

2. 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

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

4. 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)

5. 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

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

7. 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

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