Chapter 18: Markets for the Factors of Production

Factors of production

The inputs used to produce goods and services. Ex: Land, Labor, Capital. Similar to the markets for goods and services.

Derived demand

Business demand that ultimately comes from (derives from) the demand for consumer goods.

Wage earned by workers is determined by

supply and demand.

A price taker in a competitive output market

has no control over the price at which it can sell its goods.

A price taker in a competitive labor market

has no control over the wage that it must pay its workers.

The firm must consider how

the quantity of goods they can gather and sell is affected by the number of workers hired.

Production function

The relationship between the quantity of inputs used to make a good and the quantity of output of that good.

Marginal product of labor

The increase in the amount of output from an additional unit of labor.

Diminishing marginal product

The property whereby the marginal product of an input declines as the quantity of the input increases.

Value of the marginal product

The marginal product of an input times the price of the output; the extra revenue a firm gets from hiring an additional unit of a factor of production. Economists sometimes refer to this as a firm's marginal revenue product. Wage = Value of the marginal product of labor

Because the firm chooses the quantity of labor at which the value of the marginal product equals the wage,

the value-of-marginal-product curve is the firm's labor demand curve.

When a competitive firm hires labor up to the point at which the value of the marginal product is equal to the wage,

it also produces a level of output at which price equals marginal cost.

An increase in the price of the product...

raises the value of the marginal product of labor and therefore increases the demand for labor.

A decrease in the price of the product...

lowers the value of the marginal product of labor and therefore decreases the demand for labor.

Technological advance raises the marginal product of labor, which in turn

raises the value of the marginal product of labor.

Leisure

In economics, this is all time not spent working for pay

When opportunity cost of leisure increases,

so does wage.

What causes the labor supply curve to shift?

Changes in tastes (for leisure vs. working), changes in alternative opportunities (other occupations), immigration

Any event that changes the supply or demand for labor must

change the equilibrium wage and the value of the marginal product by the same amount, because these must always be equal.

Wage adjusts to

balance the supply and demand for labor.

An increase in the supply of labor would shift

the supply curve to the right, creating a surplus of workers at the original wage.

As the number of workers employed rises,

the marginal product of labor falls due to the diminishing marginal product of labor. Both wage and VMPL are lower.

A decrease in the supply of labor would shift

the supply curve to the left, creating a shortage of workers at the original wage.

As the number of workers employed falls,

the marginal product of labor rises falls due to the diminishing marginal product of labor. Both wage and VMPL are now higher.

An increase in the demand for labor will shift the labor demand curve

to the right, creating a shortage at the original wage, putting upward pressure on the equilibrium wage causing the quantity of labor supplied to increase. VMPL = P

Monopsony

A market structure in which there is only a single buyer of a good, service, or resource

Capital

The equipment and structures used to produce goods and services.

The purchase price of land or capital is

the price a person pays to own that factor of production indefinitely.

The rental price of land or capital is

the price a person pays to use that factor for a limited amount of time, both determined by its supply and demand

What is the rental price of labor?

Wages

For both land and capital, the firm increases the quantity hired until

the value of the factor's marginal product equals the factor's rental price.

The purchase price of land and capital depend on

the current value of the marginal product and the expected future value of the marginal product.