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Lecture Principles of economics - Chapter 6: The markets for the factors of production

In this chapter you will analyze the labor demand of competitive, profitmaximizing firms, consider the household decisions that lie behind labor supply, learn why equilibrium wages equal the value of the marginal product of labor, consider how the other factors of production land and capital are compensated, examine how a change in the supply of one factor alters the earnings of all the factors. | 6 THE ECONOMICS OF LABOR MARKETS 18 The Markets for the Factors of Production The Markets for the 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. A 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. Figure 1 The Versatility of Supply and Demand Copyright©2003 Southwestern/Thomson Learning Quantity of Apples 0 Price of Apples Demand Supply Demand Supply Quantity of Apple Pickers 0 Wage of Apple Pickers (a) The Market for Apples (b) The Market for Apple Pickers P Q L W 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 | 6 THE ECONOMICS OF LABOR MARKETS 18 The Markets for the Factors of Production The Markets for the 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. A 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. Figure 1 The Versatility of Supply and Demand Copyright©2003 Southwestern/Thomson Learning Quantity of Apples 0 Price of Apples Demand Supply Demand Supply Quantity of Apple Pickers 0 Wage of Apple Pickers (a) The Market for Apples (b) The Market for Apple Pickers P Q L W 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 The production function illustrates the relationship between the quantity of inputs used and the quantity of output of a good. Table 1 How the Competitive Firm Decides How Much Labor to Hire Copyright©2004 South-Western Figure 2 The Production Function Copyright©2003 Southwestern/Thomson Learning Production function Quantity of Apple Pickers 0 Quantity of Apples 300 280 240 180 100 1 2 3 4 5 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 = Q/ L MPL = (Q2 – Q1)/(L2 – L1) The Production Function and the Marginal Product of Labor 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. This property is called diminishing marginal