Factors of Production. Remember? 1.Land 2.Labor 3.Physical capital 4.Human capital What is capital? The value of the assets that are used by a firm in

Factors of Production

Remember?


1. Land2. Labor3. Physical capital4. Human capital

What is capital?The value of the assets that are used by a firm

in producing its output

Types of Capital• Physical Capital– “capital”–Manufactured resources – equipment,

buildings, tools, and machines

• Human Capital– Improvement in labor created by education

and knowledge and embodied in the workforce

– Become more important with progress of technology

Allocation of Resources

• Mississippi and Louisiana after Hurricane Katrina

• States had an urgent and immediate need for workers in building trades

• What ensured that those needed workers came?

• The FACTOR MARKET!• The market for a factor of production allocated

that factor of production to where it was needed

Allocation of Resources• Derived Demand – demand for the factor is

derived from the firm’s output choice• Factor markets are also where most of us get

the largest shares of our income• Income usually comes in the form of wages

and salaries• Prices of factors of production differ among

different groups– Higher wage rate, larger proportion of the total

income in the economy goes to people who derive their income from labor

– Factor distribution of income

Value of Marginal Product

• Most factor markets in the modern American economy are perfectly competitive – buyers and sellers are price-takers

MPL

7 86543210

1917151311975

Marginal product of

labor (bushels

per worker)

7 86543210

100

80

60

40

20

Quantity of wheat (bushels)

(a) Total Product (b) Marginal Product of Labor

TP

Quantity of labor (workers)

The Production Function for George and Martha’s Farm


• As we know from earlier chapters, a price-taking firm’s profit is maximized by producing the

quantity of output at which the marginal cost of the last unit produced is equal to the market price. • Once we determine the optimal quantity of

output, we can go back to the production function and find the optimal number of workers.

Value of Marginal ProductThe value of the marginal product of a factor

is the extra value of output generated by employing one more unit of that factor.

Value of the marginal product of labor = VMPL = P × MPL

The general rule is that a profit-maximizing, price-taking producer employs each factor of production up to the point at which the value of the marginal product of the last unit of the factor employed is equal to that factor’s price.


• Should George and Martha hire anextra worker?

• Yes, if VMPL > W


• The decision to hire is a marginal decision–Marginal benefit to the producer from

hiring an additional worker (VMPL) should be compared with the marginal cost to the producer (W)

• What is the optimal choice?• Marginal benefit = marginal cost

Value of Marginal Product• VMPL = W• Does not apply to labor, only factors of

production

• General Rule: profit-maximizing price-taking producer employs each factor of production up to the point at which the value of the marginal product of the last unit of the factor employed is equal to that factor’s price

Marginal Product and Factor Demand

• Price is $20

Quantity of LaborL

(workers)

Marginal product of laborMPL

(bushels per worker)

Value of the Marginal Product of

LaborVMPL = P X MPL

019

117

215

313

411

59

67

75

8

The Value of the Marginal Product Curve

Value of the marginal product value curve

VMPL

A

0 1 2 3 4 8765

$400

300

200

100

Wage rate, VMPL

Profit-maximizing number of workers

Optimal point

Market wage rate



• The value of the marginal product curve of a factor shows how the value of the marginal product of that factor depends on the quantity of the factor employed.

Utilizing the Marginal Product Curve

• Problem:– Martha and George currently employ 3 workers

who get paid $200– Should Martha and George employ an additional

worker?• If they add one worker, increase the value of

their production by $260 but increase their cost by $200 which means an increased profit of $60


• A producer can always increase profit by employing on e more unit of a factor of production as long as the value of the marginal product produced by that unit exceeds it factor price



VMPL

A

0 1 2 3 4 8765

$400

300

200

100

Wage rate, VMPL

Profit-maximizing number of workers

Optimal point

Market wage rate


The firm maximizes profit by choosing a level of employment at

which the value of the marginal product of the last worker hired

EQUALS the wage rate


• Firms use the marginal product curve in order to determine the profit-maximizing level of employment

• The value of the marginal product of labor curve is the individual producer’s labor demand curve

• In general…..a producer’s value of the marginal product curve for any factor of production is that producer’s individual demand curve for that factor of production


Remember?


1. _________2. _________3. __________________4. __________________

What is capital?

Types of Capital• Physical Capital

• Human Capital

– Become more important with progress of technology

Allocation of Resources

• Mississippi and Louisiana after Hurricane Katrina

• States had an urgent and immediate need for workers in building trades

• What ensured that those needed workers came?

• _____________________• The market for a factor of production allocated

that factor of production to where it was needed

Allocation of Resources• Derived Demand –

• Factor markets are also where most of us get the largest shares of our income

• Income usually comes in the form of _________ and _________

• Prices of factors of production differ among different groups

– Factor distribution of income


• Most factor markets in the modern American economy are perfectly competitive – buyers and sellers are __________________

7 86543210

1917151311975

Marginal product of

labor (bushels

per worker)

7 86543210

100

80

60

40

20

Quantity of wheat (bushels)

(a) Total Product (b) Marginal Product of Labor


The Production Function for George and Martha’s Farm


Value of Marginal ProductThe value of the marginal product of a factor

is the extra value of output generated by employing ___________of that factor.

Value of the marginal product of labor = _____________________

The general rule is that a profit-maximizing, price-taking producer employs each factor of production up to the point at which the value of the marginal product of the last unit of the factor employed is equal to that factor’s price.


• Should George and Martha hire anextra worker?


• The decision to hire is a marginal decision

• What is the optimal choice?

Value of Marginal Product• VMPL = W

• General Rule: profit-maximizing price-taking producer employs each factor of production up to the point at which the value of the marginal product of the last unit of the factor employed is equal to that factor’s price


• Price is $20

Quantity of LaborL

(workers)

Marginal product of laborMPL

(bushels per worker)

Value of the Marginal Product of

LaborVMPL = P X MPL

019

117

215

313

411

59

67

75

8



VMPL

A

0 1 2 3 4 8765

$400

300

200

100

Wage rate, VMPL



• The value of the marginal product curve of a factor shows how the value of the marginal product of that factor depends on the quantity of the factor employed.


• Problem:– Martha and George currently employ 3 workers

who get paid $200– Should Martha and George employ an additional

worker?• If they add one worker, increase the value of

their production by $260 but increase their cost by $200 which means an increased profit of $60


• A producer can always increase profit by employing on e more unit of a factor of production as long as the value of the marginal product produced by that unit exceeds it factor price



VMPL

A

0 1 2 3 4 8765

$400

300

200

100

Wage rate, VMPL



• Firms use the marginal product curve in order to determine the profit-maximizing level of employment

• The value of the marginal product of labor curve is the individual producer’s labor demand curve

• In general…..

Documents

Factors of Production. Remember? 1.Land 2.Labor 3.Physical capital 4.Human capital What is capital? The value of the assets that are used by a firm in