Principles of Microeconomics: Ch. 18 First Canadian Edition

The Market for the Factors of Production

Factors of Production are the inputs used to produce goods and services.

–What are the major factors of production?

–What determines how much each factor of production is paid?

–What determines how much of each factor of production will be purchased?

Principles of Microeconomics: Ch. 18 First Canadian Edition

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.

Principles of Microeconomics: Ch. 18 First Canadian Edition

A Firm’s Demand For Labour Labour is the most important factor of

production. Labour markets, like other markets in the

economy, are governed by the forces of supply and demand.

Most labour services, rather than being final goods ready to be enjoyed by consumers, are inputs into the production of other goods.

Principles of Microeconomics: Ch. 18 First Canadian Edition

A Firm’s Demand For Labour:The Competitive Profit-Maximizing

Firm A Competitive Firm–is a price taker, for both the product

it sells (e.g. apples) and the input it buys (e.g. apple pickers)–has the goal to maximize profits

The firm’s supply of apples and its demand for workers are derived from its primary goal of maximizing profits.

Principles of Microeconomics: Ch. 18 First Canadian Edition

The Production Function and The Marginal Product of Labour

Illustrates and describes the relationship between the quantity of inputs used and the quantity of output from production.

Output

Input

Principles of Microeconomics: Ch. 18 First Canadian Edition

The Marginal Product of Labour

Marginal Product of Labour: The increase is the amount of output from an additional unit of labour.

MPL = (Q2 - Q1) ÷ (L2 - L1) Example:

MPL = (180 - 100) ÷ (2 - 1) = 80–The second unit of labour adds 80

additional bushels of apples picked

Principles of Microeconomics: Ch. 18 First Canadian Edition

The Diminishing Marginal Product of Labour

As the number of workers increases, the marginal product of labour declines.

As more and more workers are hired, each additional worker contributes less to the production.–The production function gets flatter as

the number of workers rises.

Principles of Microeconomics: Ch. 18 First Canadian Edition

The Marginal Product of Labour: How many workers to hire?

To maximize profits, the firm considers how much profit each worker would bring in. . .

Value of the Marginal Product

Principles of Microeconomics: Ch. 18 First Canadian Edition

Value of the Marginal Product...

… is the marginal product of the input (MPL) multiplied by the market price of the output:

VMPL = (MPL) x (Px )–VMPL is measured in dollars and

diminishes as the number of workers rises because the market price of the good (Px) is constant.

Principles of Microeconomics: Ch. 18 First Canadian Edition

How many workers to hire?

To maximize profit, the firm hires workers up to the point where the VMPL is equal to the cost of the labour, i.e. market wage.

VMPL = WAGE The value-of-marginal-product curve is

the labour demand curve for a competitive, profit-maximizing firm.

Principles of Microeconomics: Ch. 18 First Canadian Edition

Labour-Market Equilibrium

Labour supply and labour demand together determine the equilibrium wage, and shifts in the supply or demand curve for labour cause the equilibrium wage to change.

Profit maximization by competitive firms demanding labour, ensures that the equilibrium wage always equals the value of the marginal product.

Principles of Microeconomics: Ch. 18 First Canadian Edition

Labour-Market Equilibrium: Shifts in the Supply and Demand of Labour The wage adjusts to balance the

supply and demand for labour. Shift in Supply of labour: may be

caused by increased number of available labour.

Shift in Demand for labour: may be caused by an increased demand for the final product produced by labour.

Principles of Microeconomics: Ch. 18 First Canadian Edition

What causes productivity and wages to vary so much over time?

Physical Capital: when workers work with a larger quantity of equipment and structures, they produce more.

Human Capital: when workers are more educated, they produce more.

Technological Knowledge: When workers have access to more sophisticated technologies, they produce more.

Principles of Microeconomics: Ch. 18 First Canadian Edition

Other Factors of Production: Land and Capital

Capital: refers to the stock of equipment and structures used for production.–The economy’s capital represents the

accumulation of goods produced in the past that are being used in the present to produce new goods and services.