12-1 (4) EQ: What is Derived Demand? EQ: What is Marginal Physical Product? Factor Demand

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1 E: What is a Factor Market? 12-1 (4) o far, when discussing markets, we have focused on the supply of and demand for products that consumers purchase and consume. However, there are also markets for the things that businesses buy so they can make stuff to sell. Remember that businesses use factors of production to create the stuff they sell. Land, Labor, and Capital The markets for land, labor, and capital are called factor markets. E: What is a Factor Market? Factor emand Businesses are the demanders of factors of production. emand for factors of production is driven by the need for resources to produce products and NOT by the need for consumer satisfaction. Factor upply Land usually provided by other businesses (vendors). Capital usually provided by businesses (vendors). Labor provided by people and rented rather than purchased. Most talk of factor markets focuses on labor. E: What is erived emand? emand for factors of production is referred to as derived demand. erived demand means that the demand for a factor depends on the demand for the good or service created using that factor of production. For example, if there is high demand for video games in the product market, then there will be high demand for video game programmers in the factor market. E: What is Marginal Physical Product? Marginal Physical Product (MPP and sometimes called Marginal Product) is the change in output quantity with the employment of one more unit of a factor input. Answers the question: How much more stuff can I make and sell if I hire one more worker or buy one more computer, truck, robot, etc.? It is how much more stuff you can produce when you invest in one more factor of production. To calculate MPP, subtract the quantity output with one 23 = less worker from the quantity 5 23 = output with the added worker = =

2 E: What is Marginal Revenue Product? Marginal Revenue Product (MRP) is the change in Total Revenue with the employment of one more unit of a factor input. Answers the question: How much more money will my business make if I hire one more worker or buy one more computer, truck, robot, etc.? It is how much more sales you will have when you invest in one more factor of production. To calculate MRP, subtract the total revenue with one less worker from the total revenue with the added worker. E: What is Marginal Factor Cost? Marginal Factor Cost (MFC) is the change in Total Cost with the employment of one more unit of a factor input. Answers the question: How much will my total costs go up if I hire one more worker or buy one more computer, truck, robot, etc.? It is how much more money you will have to pay out when you invest in one more factor of production. o you notice that MFC is the same? That s because you will probably pay all of your employees the same wage. E: How do I Identify the Profit Maximizing uantity of Output? The profit-maximizing quantity is the point at which Marginal Revenue = Marginal Cost Remember: Marginal Cost (MC) the change in total cost that results from producing an additional unit. Marginal Factor Cost is the same thing as the Marginal Cost of a factor of production! Marginal Revenue (MR) the change in total revenue arising from the sale of an additional unit. Marginal Revenue Product is the same thing as the Marginal Revenue of a factor of production! E: How do I Identify the Profit Maximizing uantity of Output? The profit-maximizing quantity is the point at which Marginal Revenue = Marginal Cost Remember: Marginal Cost (MC) the change in total cost that results from producing an additional unit (11 Marginal Revenue (MR) the change If it s in not total quite equal, revenue arising from the sale of an additional pick the factor unit unit. that has a MRP just above MFC.

3 E: What is a Factor Market? 12-2 (9) The markets for land, labor, and capital are called factor markets. Factor emand Businesses are the demanders of factors of production. emand for factors of production is driven by the need for resources to produce products and NOT by the need for consumer satisfaction. Factor upply Land usually provided by other businesses (vendors). Capital usually provided by businesses (vendors). Labor provided by people and rented rather than purchased. Most talk of factor markets focuses on labor. E: What Represents the emand Curve for a Factor of Production? A demand curve is a representation of how much buyers are willing to pay for different quantities of a good or service (or factor) ince the MRP is the maximum a business is willing to pay for a factor, the MRP curve is the same as the demand curve for the factor ee the next slide for a visual Thus, the MRP curve is the demand curve for a factor of production. E: What Represents the emand Curve for a Factor of Production? E: What Variables will Cause Changes in Factor emand and How will They Affect It? Any quantity where MFC is less than MRP will be in this area. o, the MRP line determines the quantity of a factor demanded by producers based on its price. That is the definition of a demand curve. Any quantity where MFC is greater than MRP will be in this area. MRP eterminants of Product emand Changes in Income When consumers have more money, demand increases. When consumers have less money, demand decreases. Popularity or Preference When a product is more popular, it gives you more satisfaction and demand for it increases. When a product is less popular, it gives you less satisfaction and demand for it decreases. Price of Related Goods ubstitutes when substitutes are cheaper, people demand less of what your selling and they demand more when substitutes are more expensive. Complements when complements are cheaper, people demand more of what your selling and they demand less when complements are more expensive.

4 E: What Variables will Cause Changes in Factor emand and How will They Affect It? E: What Variables will Cause Changes in Factor emand and How will They Affect It? eterminants of Factor emand Product Price When businesses have more money, they can afford more factors. When businesses have less money, they can afford fewer factors. Factor Productivity When a factor is more productive (higher MPP), it can produce more output & businesses can buy more of them because MRP is higher. When a factor is less productive (lower MPP), it produces less output & businesses will buy fewer of them because MRP is lower. Price of Related Factors ubstitutes when substitute factors are cheaper, businesses demand fewer of this factor and when substitute factors are more expensive, businesses demand more of this factor. Complements when complement factors are cheaper, businesses demand more of this factor and when complement factors are more expensive, businesses demand fewer of this factor. The following will cause an increase in Factor emand: 1. Increase in the price of the product being produced by the factor. 2. Increase in the MPP (productivity) of the factor. 3. ecrease in the price of a complement factor. 4. Increase in the price of a substitute factor. When there is an increase in emand for a factor, the Factor emand curve shifts to the right and there is also an increase in uantity upplied of that factor. MRP MRP E: What Variables will Cause Changes in Factor emand and How will They Affect It? E: What Variables will Cause Changes in Factor upply and How will They Affect It? MRP The following will cause a decrease in Factor emand: 1. ecrease in the price of the product being produced by the factor. 2. ecrease in the MPP (productivity) of the factor. 3. Increase in the price of a complement factor. 4. ecrease in the price of a substitute factor. When there is a decrease in emand for a factor, the Factor emand curve shifts to the left and there is also a decrease in uantity upplied of that factor. MRP eterminants of Land and Capital upply: Land and Capital are products sold to businesses and are determined by the same things that determine product supply. Employee Wage Rates, Costs of Production Materials, Real Estate Costs (Rent, Taxes, etc.), Costs to purchase new equipment, Advertising, utility, and maintenance cost. eterminants of Labor upply Working Conditions Rareness of kills Required Training Costs Wage Rates in other Labor Markets

5 E: What Variables will Cause Changes in Factor upply and How will They Affect It? eterminants of Labor upply Working Conditions When the job has better working conditions, more people want the job (increase in labor supply). When the job has undesirable working conditions, fewer people want the job (decrease in labor supply). Rareness of kills Required When very few people have the skills required to perform the job, there are fewer people to fill the job (decrease in labor supply). When many people have the skills required to perform the job, there are more people to fill the job (increase in labor supply). E: What Variables will Cause Changes in Factor upply and How will They Affect It? eterminants of Labor upply Training Costs When it costs more to have the proper skills, fewer people will have the skills because fewer will pay the money to get the skills (decrease in labor supply). When it costs less to have the proper skills, more people will have the skills because more can afford to pay the money to get the skills (increase in labor supply). Wage Rates in other Labor Markets When other labor markets offer higher wages, supply will move from this labor market to that labor market to get paid more (decrease in labor supply). When other labor markets offer lower wages, supply will move from that labor market to this labor market to get paid more (increase in labor supply). E: What Variables will Cause Changes in Factor upply and How will They Affect It? E: What Variables will Cause Changes in Factor upply and How will They Affect It? The following will cause an increase in Factor upply: 1. Better working conditions for the job. 2. Increase in the number of people who have the necessary skills to perform the job. 3. ecrease in the cost of obtaining the skills necessary to perform the job. 4. ecrease in the wage rates in other labor markets requiring the same skills and credentials. The following will cause a decrease in Factor upply: 1. Less desirable working conditions for the job. 2. ecrease in the number of people who have the necessary skills to perform the job. 3. Increase in the cost of obtaining the skills necessary to perform the job. 4. Increase in the wage rates in other labor markets requiring the same skills and credentials. When there is an increase in upply of a factor, the Factor upply curve shifts to the right and there is also an increase in uantity emanded of that factor. When there is a decrease in upply of a factor, the Factor upply curve shifts to the left and there is also an decrease in uantity emanded of that factor.

6 E: What happens to Equilibrium Price/uantity in a Factor Market When There is a Change in Factor upply/emand? E: What happens to Equilibrium Price/uantity in a Factor Market When There is a Change in Factor upply/emand? Change Eq Price Eq uantity emand Increases Increases Increases emand ecreases ecreases ecreases upply Increases ecreases Increases upply ecreases Increases ecreases Pe Pe This table shows the four possible changes in factor demand and factor supply and the effect of each change on the equilibrium price and quantity. e e E: What happens to Equilibrium Price/uantity in a Factor Market When There is a Change in Factor upply/emand? E: What happens to Equilibrium Price/uantity in a Factor Market When There is a Change in Factor upply/emand? Pe Pe Pe Pe e e e e

7 E: What happens to Equilibrium Price/uantity in a Factor Market When There is a Change in Factor upply/emand? E: What is the Elasticity of emand for Labor? 12-2 (25) The Elasticity of emand for Labor can also be called the Price Elasticity of emand for Labor. Pe Pe Price Elasticity of emand is the relative change in quantity demanded in response to a change in price. PE is measured by the percentage change in quantity demanded of a good divided by the percentage change in its price. e e E: What is the Elasticity of emand for Labor? Elasticity of emand for Labor is the relative change in quantity demanded for labor in response to a change in the wage rate. EL is measured by the percentage change in quantity demanded of labor divided by the percentage change in the wage rate. Change in of Labor Average of Labor Change in Wage Rate Average Wage Rate What etermines the Elasticity of Labor emand? ubstitutes for Labor PE of Product produced by Workers % of TC made up by Labor Costs Elasticity of emand for Labor What are the Consequences of Elastic or Inelastic Labor emand? + Pay Raises Employer Power Employee Power

8 E: What etermines the Elasticity of Labor emand? eterminants of Elasticity of emand for Labor: The number of substitutes for labor (i.e., robotics, other available workers, migrant workers, etc.) More substitutes = Greater labor demand elasticity Fewer substitutes = Lower labor demand elasticity Elasticity of emand of what is being Produced Higher PE of good = Greater labor demand elasticity Lower PE of good = Lower labor demand elasticity % of Total Costs made up by Labor Costs Higher % of TC = Greater labor demand elasticity Lower % of TC = Lower labor demand elasticity E: What are the Consequences of Elastic or Inelastic Labor emand? Consequences of Elasticity of emand for Labor: Pay Raises for Employees Greater labor demand elasticity Fewer Pay Raises Lower labor demand elasticity More Pay Raises Employer Negotiating Power Greater labor demand elasticity More Power Lower labor demand elasticity Less Power Employee Negotiating Power Greater labor demand elasticity Less Power Lower labor demand elasticity More Power