1. Unemployment What are the costs of unemployment? Discouraged Workers
Those 16 years and older who are willing and able to work and who are actively looking for work but have not found a job.
What are the costs of unemployment?
Lost output. Psychological impact.
Discouraged Workers
Individuals who have stopped looking for a job because they are convinced they will not find a suitable one. Not considered unemployed.
Types of Unemployment
Frictional, Structural, Cyclical, Seasonal

2. Significance of Resource Pricing
Money-income determination
Household income
Resource allocation
Shift of resources
Cost minimization
Profit = Revenue minus Costs
Ethical questions and policy issues
Equality, taxes, regulation

3. Derived Demand Strength of demand depends on:
The productivity of the resource in helping to create a good.
The market value or price of the good it helps produce.

4. Marginal Product
The marginal product of any input into production is the increase in the quantity of output obtained from an additional unit of that input. 9 20

5. Marginal Product
The marginal product of any input into production is the increase in the quantity of output obtained from an additional unit of that input. 9 21

6. Diminishing Marginal Product
Diminishing marginal product is the property whereby the marginal product of an input declines as the quantity of the input increases.
Example: As more and more workers are hired at a firm, each additional worker contributes less and less to production because the firm has a limited amount of equipment. 22

7. 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. 6 11

8. The Production Function and The Marginal Product of Labor
The marginal product of labor is the increase in the amount of output from an additional unit of labor.
MPL = D Q/D L
MPL = (Q2 – Q1)/(L2 – L1) 7 12

9. The Production Function and The Marginal Product of Labor
Quantity
of Apples
Production
300
function
280
240
180
100 1 2 3 4 5
Quantity of
Apple Pickers 6 14

10. Diminishing Marginal Product of Labor
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. 8 15

11. Diminishing Marginal Product of Labor
Quantity of
Apple Pickers
Quantity
of Apples
300
280
240
180
100
Production
function 1 2 3 4 5 8 17

12. Factors of Production
Factors of production are the inputs used to produce goods and services. 2 2

13. The Market for the Factors of Production
What are the major factors of production?
What determines how much is paid for each factor of production?
What determines how much of each factor of production will be purchased? 2 3

14. A Firm’s Demand For Labor
Labor is the most important factor of production.
Labor markets, like other markets in the economy, are governed by the forces of supply and demand. 4 6

15. A Firm’s Demand For Labor
The Market for Apples
The Market for Apple Pickers
Quantity of
Apples
Price of P Q
Demand
Supply
Demand
Supply
Quantity of
Apple Pickers
Wage of
Apple
Pickers L W 4 7

16. Determinants of Resource Demand
Changes in the Price of other resources
Changes in Productivity
technological improvements
Changes in Product Demand
resource demand is derived from product demand. 2 2

17. A Firm’s 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. 4 8

18. The Competitive Profit-Maximizing Firm
Two basic assumptions about the firm are:
ä It is competitive in both the product market and the input market.
ä Its goal is to maximize profits. 5 9

19. The Competitive Profit-Maximizing Firm
The firm must consider how the size of its workforce affects the amount of output that is produced. 5 10

20. Rule for Employing Resources
MRP = MRC rule
It will be profitable for a firm to hire additional units of a resource up to the point at which that resource’s MRP = MRC.
MRP is also equal to the resource demand curve. 22

21. How many workers to hire?
To maximize profits, the firm considers how much profit each worker would bring in.
ä Called the value of the marginal product. 9 18

22. Value of the Marginal Product
The value of the marginal product is measured in dollars.
It diminishes as the number of workers rises because the market price of the good is constant. 10 21

23. Value of the Marginal Product
Value of marginal product
(demand curve for labor)
Quantity of
Apple Pickers 11 22

24. Labor-Market Equilibrium
Labor supply and labor demand determine the equilibrium wage.
Shifts in the supply or demand curve for labor cause the equilibrium wage to change. 18 31

25. Labor-Market Equilibrium
Profit maximization by competitive firms demanding labor ensures that the equilibrium wage always equals the value of the marginal product of labor.
The wage adjusts to balance the supply and demand for labor. 18 32

26. Labor-Market Equilibrium
Wage
(price of
labor)
Equilibrium
wage, W
Quantity of
Labor
employment, L
Supply
Demand 19 34

27. Shifts in the Supply and Demand of Labor
Shift in Supply of Labor
ä May be caused by a change in the number of workers.
Shift in Demand for Labor
ä May be caused by a change in the demand for the final product produced by labor, labor productivity, and prices of other resources. 19 35

28. Shift in Labor Supply An increase in the supply of labor :
ä Results in a surplus of labor.
ä Puts downward pressure on wages.
ä Makes it profitable for firms to hire more workers.
ä Results in diminishing marginal product.
ä Lowers the value of the marginal product.
ä Gives a new equilibrium. 20 36

29. Shift in Labor Supply
Wage
(price of
labor)
Quantity of
Labor 21 37

30. Shift in Labor Supply Wage Supply, S1 (price of labor) Demand
Quantity of
Labor 21 38

31. Shift in Labor Supply Wage (price of labor) Supply, S1 W1 Demand L1L1
Quantity of
Labor 21 39

32. Shift in Labor Supply Wage (price of labor) Supply, S1 S2 W1 Demand L1L1
Quantity of
Labor 21 40

33. Shift in Labor Supply Wage (price of labor) Supply, S1
1. An increase in
labor supply... S2 W1
Demand L1
Quantity of
Labor 21 41

34. Shift in Labor Supply Wage (price of labor) Supply, S1
1. An increase in
labor supply... S2 W1 W2
Demand L1 L2
Quantity of
Labor 21 42

35. Shift in Labor Supply Wage (price of labor) Supply, S1
1. An increase in
labor supply... S2 W1 W2
2. ...reduces
the wage...
Demand L1 L2
Quantity of
Labor 21 43

36. Shift in Labor Supply Wage (price of labor) Supply, S1
1. An increase in
labor supply... S2 W1 W2
2. ...reduces
the wage...
Demand
3. ...and raises employment. L1 L2
Quantity of
Labor 21 44

37. Shift in Labor Demand An increase in the demand for labor :
ä Makes it profitable for firms to hire more workers.
ä Puts upward pressure on wages.
ä Raises the value of the marginal product.
ä Gives a new equilibrium. 20 45

38. Shift in Labor Demand
Wage
(price of
labor)
Quantity of
Labor 46

39. Shift in Labor Demand Wage (price of Supply labor) Demand, D1
Quantity of
Labor 47

40. Shift in Labor Demand Wage (price of labor) Supply W1 Demand, D1 L1L1
Quantity of
Labor 48

41. Shift in Labor Demand Wage (price of labor) Supply W1 D2 Demand, D1 L1L1
Quantity of
Labor 49

42. Shift in Labor Demand Wage (price of labor) Supply 1. An increase in
Demand, D1 L1
Quantity of
Labor 50

43. Shift in Labor Demand Wage (price of labor) Supply W2
1. An increase in
labor demand... W1 D2
Demand, D1 L1 L2
Quantity of
Labor 51

44. Shift in Labor Demand Wage (price of labor) Supply W2
1. An increase in
labor demand... W1
2. ...increases
the wage... D2
Demand, D1 L1 L2
Quantity of
Labor 52

45. Shift in Labor Demand Wage (price of labor) Supply W2
1. An increase in
labor demand... W1
2. ...increases
the wage... D2
Demand, D1 L1 L2
Quantity of
Labor
3. ...and increases employment. 53

46. Combination of Several Resources
The Profit-Max Rule
MRP = MRC
The Least-Cost Rule
MPL/PL = MPc/Pc
McConnell pgs 24 54

47. The Least Cost Rule Minimize cost of producing a given output
Last dollar spent on each resource yields the same marginal product
Marginal Product
Of Labor (MPL)
Price of Labor (PL)
Of Capital (MPC)
Price of Capital (PC) =

48. Elasticity of Resource Demand
Ease of Substitutes
Receptionists vs Physicians
Elasticity of Product Demand
Percent of Total Cost 24 54

49. Case Study: Productivity and Wages
What causes productivity and wages to vary so much over time and across countries?
ä Physical Capital: When workers work with a larger quantity of equipment and structures, they produce more.
ä Human Capital: When workers are more educated, they produce more. 24 54

50. Case Study: Productivity and Wages
What causes productivity and wages to vary so much over time and across countries?
ä Technological Knowledge: When workers have access to more sophisticated technologies, they produce more. 24 55

51. Quick Quiz!
How does the immigration of workers affect labor supply, labor demand, the marginal product of labor, and the equilibrium wage? 25 58

52. The Rental Price and Quantity of Land and Capital
Land and capital are paid the value of their marginal product.
They each earn the value of their marginal contribution to the production process. 29 63

53. The Purchase Price and Quantity of Land and Capital
The equilibrium purchase price of land and capital depends on the following:
ä The current value of the marginal product.
ä The value of the marginal product expected to prevail in the future. 30 64

54. Linkages Among the Factors of Production
Factors of production are used together.
ä The marginal product of any one factor depends on the quantities of all factors that are available. 31 65

55. Linkages Among the Factors of Production
A change in the supply of one factor alters the equilibrium earnings of all the factors. 31 66

56. Economic Rent
Price paid for the use of natural resources that are completely fixed in supply.
Helps allocate land for different uses.
Surplus payment
Payment above the amount needed to gain use of the resource. Land would be available to society even if rent was not paid. 2 2

57. Interest
Price paid for the use of money. Remember that money is a medium of exchange, not a resource.
Interest is paid to the resource owner.
Interest rates show the amount of money available for borrowing. 2 2

58. Interest
Interest rates are established in the loanable funds market (supply and demand).
Demand for funds is based on consumption.
Supply of funds is based on savings.
Interest rates can vary depending on risk, loan size, and length of loan. 2 2