UNIT 5 THE MARKETS FOR FACTORS OF PRODUCTION The supply and demand for labor, land, and capital

ital determine the prices paid to workers, landowners, and capital owners Factors of Production- the inputs used to produce goods and services The demand for a factor of production is a derived demand Derived Demand- a firms demand for a factor of production is derived from its decision to supply a good in another market

The Demand For Labor Labor markets are governed by supply and demand

The Competitive Profit- Maximizing Firm It is assumed that the firm is competitive in the market meaning the firm is a price taker It is assumed that the firm is profit maximizing Profit Maximizing- the firms primary goal is to maximize its profit

The Production Function and the Marginal Product of Labor A firm must determine how the size of its labor force impacts its output of goods 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 the quantity of the input increases

The Value of the Marginal Product and the Demand for Labor Profit Worker = Revenue Worker Wage Value of the Marginal Product- the marginal product of an input times the price of the output Value of the Marginal Product decreases with the increase in labor Marginal Revenue Product- the extra revenue the firm gets from hiring an additional unit of a factor of production A competitive, profit-maximizing firm hires workers up to the point where the value of the marginal product of labor equals the wage o vMPL = Wage

The Value of Marginal Product curve is the labor-demand curve for a competitive profit-maximizing-firm A competitive firm hires labor up to the point at which the value of the marginal product equals wage. A competitive firm hires labor up to the point at which price equals marginal cost

What Causes the Labor- Demand Curve to Shift Factors that may cause the labor- demand curve to shift o Output Price o Technological Change o Supply of Other Factors Output price changes the value of marginal product of labor Technological Advances may increase or reduce the need for laborers Labor Augmenting- technological advance that raises employment Labor Saving- technological advance that reduces employment

The Supply of Labor The Trade-Off Between Work and Leisure People face trade offs Cost of something is what you give up to get it Labor Supply curve may not be upward sloping

What Causes the Labor- Supply Curve to Shift Factors that may shift the Labor- Supply Curve o Changes in Preferences o Changes in Alternative Opportunities o Immigration

Equilibrium in the Labor Market Two facts about how wages determined in competitive labor markets 1. The wage adjusts to balance the supply and demand for labor 2. The Wage equals the value of the marginal product of labor 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

Economics of Immigration

Makes more sense to describe immigrants in terms of skill levels than in terms of citizenship Wage effects are ameliorated by immigration

Productivity and Wages Highly productive workers are highly paid Less Productive workers are less highly paid

The Other Factors of Production: Land and Capital Capital- the equipment and structures used to produce goods and services

Equilibrium in The Markets for Land and Capital Purchase Price- the price a person pays to own that factor of production indefinitely Rental Price- the price a person pays to use that factor for a limited period of time Labor, Land, and Capital each earn the value of their marginal contribution to the production process The equilibrium purchase price of a piece of land or capital depends on both the current value of the marginal product and the value of the marginal product expected to prevail in the future.

Linkages Among the Factors of Production When the supply of a factor falls, its equilibrium factor price rises An event that changes the supply of any factor of production can alter the earnings of all the factors

The Economics of the Black Death Wages increased and rents decreased as a result of the Black Plague