econ unit 13 ch. 17

Chapter 17 — Markets for Factors of Production

1. Describe the anatomy of ___ markets

2. Explain how the value of marginal product (VMP) determines the demand for a factor of production

3. Explain how wage rates and employment are determined & the role of labour unions

4. Explain how rental rates for capital and land, and natural resource prices, are determined

factor

The Anatomy of Factor Markets

Factor markets allocate the four factors of production:

1. __ – human physical & mental effort

2. ___ – tools, machinery, buildings used to produce goods/services

3. ___ (Natural Resources) – gifts of nature (land, minerals, oil, water)

4. ___ – organization, ____, and risk-taking

These factors are ____ in the production process. Their __ are determined in __ markets.

labor, capital, land, entrepreneurship, organization, inputs, prices, factor

1. Markets for Labour Services

• Labour = physical and ___ effort supplied to produce goods & services.

• Labour market = people and firms trading ___ services.

• Price of labour = ___ rate.

Types of Labour

• Casual labour: hired __-by-day (fruit pickers).

Contract labour: ___ job contracts (most labour).

mental, labor, wage, day, long-term

Competitive Labour Markets

• Many buyers (firms) and sellers (workers)

• No one controls the wage → wage rate determined by supply & demand

• Higher demand → more jobs

• Lower demand → job losses

Labour Unions

• Act like a ___ on the ___ side.

• Wage rate determined through collective ___ between union & employer.

• Can negotiate higher wages but sometimes reduce employment.

monopoly, supply, bargaining

2. Markets for Capital Services

• Capital goods = produced goods used to produce ___ goods (machines, buildings, tools).

• Capital goods themselves are traded in goods markets (market for dump trucks).

Capital Services

• The ___ of capital is traded in ___ markets.

• Rental rate = price for ___ capital (renting a ___ or truck from U-Haul).

Implicit Rental Rate

Most firms own their capital
Even then, using capital has a cost:

• __

• ____cost (__ of tying up funds)

These make up the __ rental rate of capital → the price the firm “pays itself” for using its own capital.

other, use, rental, hiring, car, depreciation, interest, OC, implicit

3. Markets for Land Services & Natural Resources

Land - Includes all natural resources (land surface, water, minerals, forests).

____ Rate of Land - The price for the use of land 

Renewable vs. Nonrenewable Resources

Renewable (can be used repeatedly) - farmland, forests (if replanted), water

Nonrenewable (can only be used once):

• Oil

• Natural gas

• Coal

Commodity Prices

• Prices of ___ resources are determined in global commodity markets.

• These prices fluctuate with global supply & demand.

rental, nonrenewable

4. Entrepreneurship

• Entrepreneurial services ___ traded in markets.

• Entrepreneurs earn ___ or take on losses based on their business decisions.

• Profit is the “___” of entrepreneurship.

aren’t, profit, price

1. What are the factors of production and their prices?

• Labour → Wage rate

• Capital → ___ rate (implicit or explicit)

• Land (natural resources) → Rental rate or ___ price

• Entrepreneurship → Profit (or loss)

rental, commodity

2. What is the distinction between capital and the services of capital?

• Capital = physical objects used in production (machinery, buildings, equipment).

Services of capital = the productive __ of that equipment (hours of machine operation).

use

3. What is the distinction between the price of capital equipment and the rental rate of capital?

• Price of __ equipment = the purchase price of the physical good (buying a truck).

Rental rate of capital = the price of using the equipment for a period (renting a truck for a day).

capital

Chapter 17 — The Demand for a Factor of Production

Key Idea - The demand for any factor of production (labour, capital, land) is a derived demand.

Derived Demand

• A firm demands a factor because it needs it to produce ___.

Demand for factors comes from demand for the goods/services produced.

output

How Firms Decide How Much Labour to Hire

A firm hires labour based on a comparison between:

1. Cost of hiring one more worker → ___ rate

2. Value to the firm of hiring one more worker → Value of ___ Product (VMP)

A profit-maximizing firm hires a factor only if ____ ≥ __ price.

wage, marginal, VMP, factor

Value of Marginal Product (VMP)

The value of marginal product is the value of the output produced by one more ___ of a factor.

VMP = ___ of Output × __ Product (MP)

Star Coffee

• Price of coffee = $4 per cup

• MP of 2nd worker = 6 cups/hour

• VMP of 2nd worker = 6 × 4 = $24

Interpretation: Hiring the second worker adds $24 of revenue per hour.

unit, price, marginal

A Firm’s Demand for Labour

The Core Rule - A firm maximizes profit by hiring workers up to the point where: __ = Wage Rate

• If VMP > wage, __ more workers increases profit.

• If VMP < wage, firing workers increases profit.

• If VMP = wage, profit is maximized → optimal quantity of labour.

Decreasing VMP

• VMP falls as more workers are hired because ___ diminishes.

This makes the demand for labour downward sloping.

VMP, hiring, MP

A Firm’s Demand for Labour Curve

How It’s Derived

• The VMP curve becomes the firm’s ____ for labour curve.

• Shows how many workers the firm hires at different wage rates.

Star Coffee

If wage = $20/hour:

• Worker 2: VMP = $24 → hire

• Worker 3: VMP = $20 → hire

• Worker 4: VMP = $16 → __ hire

Quantity of labour demanded = 3 workers.

Movement versus Shift

• Change in ____ rate → __ along the demand curve

• Change in anything else → shift of the entire demand curve

demand, don’t, wage, movement

What Shifts a Firm’s Demand for Labour?

A firm’s labour demand depends on:

1. Price of the Firm’s Output

• Higher output price → higher ___ → demand for labour __ (shifts right)

• Lower output price → lower VMP → demand decreases
  If coffee price rises to $6:

• VMP of the 4th worker increases from $16 → $24

At wage = $20, the firm now hires 4 workers instead of 3

VMP, increases

2. Prices of Other Factors of Production

If capital becomes cheaper:

• The firm may substitute ___ for labour → demand for labour decreases

• But if cheaper capital expands production enough, labour demand may increase

Short run: Usually labour __
Long run: Could be ↑ or ↓ depending on scale effects

capital, decreases

3. Technology

• ____technology → demand for certain labour types ↓

• Labour-using/____ technology → demand ↑

• Self-serve coffee machines reduce demand for baristas.

• Growth of online shopping reduces demand for store clerks but increases demand for:

  • warehouse workers

  • delivery drivers

  • software engineers

  • website designers

labour-saving, skill-complementing

Factor	Effect on Labour Demand
Price of output	↑ price → ↑ VMP → demand shifts ___
Price of capital or other inputs	Cheaper capital → usually ↓ labour demand; but may ↑ if scale increases
_	Can increase or decrease depending on whether labour is replaced or complemented

right, tech

1. What is the value of marginal product of labour? The value of the output produced by one additional worker; VMP = __ × __

Price of Output, Marginal Product

2. Relationship between VMP and marginal product?

• Marginal product reflects ___ output added by an ___ worker.

VMP converts marginal product into ___ value using the price of output.

physical, extra, dollar

3. How is the firm’s demand for labour derived from VMP?

• The VMP curve shows the value of each additional __.

• The firm hires workers until VMP = wage.

Thus, the downward-sloping VMP curve becomes the demand for labour curve.

worker

4. What influences the demand for labour?

1. Price of the firm’s output

2. Prices of ____ factors (__)

3. Technology changes

other, capital

Chapter 17 — Labour Markets (Detailed Notes)

1. Overview of Labour Markets

Labour services are traded in many different labour markets, varying by scope:

• ___ markets (coffee shop workers, bakers)

• ____ markets (air traffic controllers, nurses)

• ___ markets (superstar athletes)

Labour markets determine:

• Wage rates

• ___ levels

• How unions or market power influence __

local national global employment wages

2. Competitive Labour Market

A competitive labour market has:

• Many firms demanding labour

• Many ___ supplying labour

• No single buyer or seller can influence the wage

Wage and employment are determined by market supply & demand

households

2A. Market Demand for Labour

• Derived from ___ firms’ demand for labour.

• A firm hires workers up to the point where: Wage = Value of Marginal Product (VMP).

Because each firm’s demand curve slopes downward, the market demand curve also slopes downward.

individual

2B. Market Supply of Labour

Derived from households’ decisions on labour vs. leisure.

___ Wage

• ____ wage at which a worker is willing to work.

• Evan’s reservation wage = $10/hour.

• Below $10 → Evan supplies no labour.

• Above $10 → he supplies labour.

reservation, minimum

Labour Supply Curve (Individual)

• At first slopes upward: as wage ↑, labour supplied ↑.

• Eventually ___ backward: After $30/hour, Evan prefers more leisure, so he works fewer hours.

Why backward?

Substitution Effect

• Higher wage = higher opportunity cost of leisure

• Worker substitutes leisure → labour

• Labour supplied increases

Income Effect

• Higher wage = higher income

• Workers “buy” more leisure

• Labour supplied decreases

When ___ effect > __ effect → curve bends backward

bends, income, substitution

Market Labour Supply Curve

• Always upward sloping 

  • Many households with different reservation wages

  • Higher wages attract more __, not more hours

workers

3. Labour Market Equilibrium

When supply (S) meets demand (D):

• Equilibrium wage: where quantity supplied = quantity demanded

• Coffee shop workers: Wage: $15/hour

  • Employment: 300 workers

How market fixes disequilibrium

• Wage > $15 → surplus of workers → wage ____

• Wage < $15 → shortage → wage rises

• Only at $15 are there no forces pushing wage up/down

falls

4. Wage Differences + Trends in Canada

Average wage: $32.06/hour

Reasons wage rates differ across occupations

• Differences in VMP (__/productivity)

• Differences in training or ability

• Scarcity of workers in high-skill jobs

• Some occupations experience more market power

Why wages rise over time

• Technological change → workers become more __ → ↑ VMP → ↑ labour demand

• Education & experience increase VMP

• Even jobs with ___ physical output (childcare) can experience rising VMP due to high-income parents ___ more.

skills, productive, fixed, WTP

5. Wage Inequality Rising

1. Technology

   • Increases productivity of high-skilled workers (↑ wages)

   • Eliminates low-skill jobs (↓ wages)

     • ATMs reduced bank teller jobs

     • Computerization increased programmer wages

2. Globalization

   • More global __ for low-skill workers

   • More global opportunities for high-skill workers

competition

6. Gender Pay Gap — Explanation

1. Hours worked differ - Men average 40 hrs, women 35.4 hrs

2. ___ choices

   • Women → more arts degrees

   • Men → more STEM degrees (higher paying)

3. Marriage & children

   • Women take on more parenting → reduces career time

   • Study (never-married men vs women) → no wage gap

Possible ___ - After adjusting for all factors → 0–5% wage difference

educational, discrimination

Why gap narrowed historically?

• More women entering high-paying fields

• More equal division of parenting duties

Why it widened in 2022?

• COVID harmed women’s employment more

• Effects lingered into 2022

Is this a new trend?

• Unlikely.

• Earnings in __-dominated sectors started rising faster as the economy reopened in 2023.

female

7. Labour Unions

A labour __ is an organized group of workers aiming to:

• Increase wage rates

• Improve working conditions

How unions influence supply

• Restrict ___ (apprenticeships, certification)

• Only effective in markets where entry is ___ (doctors, electricians)

• Ineffective where large nonunion labour ___ exist (farm labour)

Tradeoff

• Labour demand is downward sloping

• Higher wages → fewer jobs

Unions must also try to raise __ for union labour.

union, entry, limited, supplies, demand

Union Methods to Increase Labour Demand

1. Increase VMP

   • ___ programs

   • Certification

2. Lobbying for ___ restrictions - Protect domestic union jobs

3. Support minimum wage laws - Makes low-skilled labour more expensive → firms hire higher-skilled union workers

Lobby for ___ restrictions - Reduces supply of competing workers

training, import, immigration

8. Union Market Equilibrium (Graph Summary)

Without union:

• Wage = $15

• Employment = 300

Union restricts supply (SC → SU):

• Wage rises to $20

• Employment falls to 200

Union also increases demand (DC → DU):

• Wage rises further to $25

• Employment increases to 250

Spillover effect:

• Excess workers enter ___ markets → ↑ supply in nonunion sectors → ↓ wages there

Increases union–nonunion wage gap

nonunion

9. Monopsony in Labour Markets

A monopsony = labour market with ___ employer.

• Provincial governments hiring nurses

• A mining firm in a __ town

Monopsony behaviour

• Faces upward-sloping labour supply curve

• Must __ wages to attract more workers

• BUT must pay the higher wage to ___ workers → Marginal Cost of Labour (MCL)___ wage rate

one, small, raise, all, >

Profit-maximizing rule

Hire workers until: ____ = __

Results

• ____ wage

• ___ workers hired than in competitive market

• Monopsony wage: $10

• Employment: 100

• Competitive wage: $15

• Employment: 150

Thus, monopsonies pay ___ and employ __ workers.

MCL=VMP, lower, fewer, less, fewer

10. ____ Monopoly (__ + ____)

Union = ___ seller of labour
Monopsony = monopoly ___ of labour

Outcome determined by ____ power.

If both sides are equally strong:

They split difference between monopsony wage ($10) and VMP wage ($20) →
Final wage = $15

• NHL (owners) vs. NHLPA (players’ union)

• Can lead to ___/lockouts

bilateral, union, monopsony, monopoly, buyer, strikes

11. Minimum Wage in Monopsony

Unlike in competitive markets:

In monopsony, minimum wage can increase employment.

• Monopsony wage: $10

• Minimum wage imposed: $15

• Employment rises: From 100 → 150 workers

Reason:

• The minimum wage creates a perfectly elastic supply curve up to 150 workers

• Firm’s ___ becomes constant at $15, lowering ___ relative to before

• Firm hires more workers where MCL = __

MCL, MCL, VMP

1. What determines labour supply?

• Tradeoff between ___ and leisure

• ___ wage

• Income & __ effects

labor, reservation, substitution

2. How are wage & employment determined in competitive markets? Intersection of market supply and demand

3. How do unions influence wages?

• Restrict labour supply

• ___ labour demand

• Bargain for higher wages

increase

4. What is a monopsony? Why lower wages?

• One employer

• Faces upward-sloping supply curve

• MCL __ wage → hires fewer workers at ___ wage

5. Wage rate when union faces monopsony? Bargained outcome between monopsony wage and competitive wage

6. Minimum wage effect in monopsony? Can raise both wage and ___ (unlike competitive market)

>, lower, employment