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1 The Economics of Labor Markets salary
2 Factors of Production Factors of production are the inputs used to produce goods and services.
3 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.
4 The Demand for Labor Labor markets, like other markets in the economy, are governed by the forces of supply and demand.
5 The Versatility of Supply and Demand... (a) The Market for Apples (b) The Market for Apple Pickers Price of Apples Supply Wage of Apple Pickers Supply P W Demand Demand 0 Q 0 Quantity of Apples L Quantity of Apple Pickers
6 The Demand For Labor Most labor services, rather than being final goods ready to be enjoyed by consumers, are inputs into the production of other goods.
7 The Production Function and The Marginal Product of Labor The production function illustrates the relationship between the quantity of inputs used and the quantity of output of a good.
8 How the Competitive Firm Decides How Much Labor to Hire Labor L Marginal Product of Labor MPL Value of the Marginal Product of Labor VMPL=PxMPL Marginal Profit Output Q MPL = D Q/ D L Wage W $1,000 $500 $ $800 $500 $ $600 $500 $ $400 $500 -$ $200 $500 -$300 D Pr ofit = VMPL - W
9 Quantity of Apples The Production Function Quantity of Apple Pickers
10 The Production Function and The Marginal Product of Labor The marginal product of labor is the increase in the amount of output from an additional unit of labor. MPL = DQ/DL MPL = (Q2 Q1)/(L2 L1)
11 Diminishing Marginal Product of Labor As the number of workers increases, the marginal product of labor declines. As more and more workers are hired, each additional worker contributes less to production than the prior one. The production function becomes flatter as the number of workers rises. This property is called diminishing marginal product.
12 Quantity of Apples The Production Function Quantity of Apple Pickers
13 The Value of the Marginal Product of Labor The value of the marginal product is the marginal product of the input multiplied by the market price of the output. VMPL = MPL X P
14 The Value of the Marginal Product of Labor The value of the marginal product is measured in dollars. It diminishes as the number of workers rises because the market price of the good is constant.
15 The Value of the Marginal Product and the Demand for Labor To maximize profit, the competitive, profit-maximizing firm hires workers up to the point where the value of marginal product of labor equals the wage. VMPL = Wage
16 The Value of the Marginal Product and the Demand for Labor The value-of-marginal-product curve is the labor demand curve for a competitive, profit-maximizing firm.
17 The Value of the Marginal Product of Labor... Value of the Marginal Product Market wage Value of marginal product (demand curve for labor) 0 Profit-maximizing Quantity of quantity Apple Pickers
18 Input Demand and Output Supply When a competitive firm hires labor up to the point at which the value of the marginal product equals the wage, it also produces up to the point at which the price equals the marginal cost.
19 What Causes the Labor Demand Curve to Shift? Output Price Technological Change Supply of Other factors
20 The Labor Supply Curve The labor supply curve reflects how workers decisions about the labor-leisure tradeoff respond to changes in opportunity cost. An upward-sloping labor supply curve means that an increase in the wages induces workers to increase the quantity of labor they supply.
21 The Labor Supply Curve Wage (price of labor) Supply 0 Quantity of Labor
22 What Causes the Labor Supply Curve to Shift? Changes in Tastes Changes in Alternative Opportunities Immigration
23 Equilibrium in the Labor Market The wage adjusts to balance the supply and demand for labor. The wage equals the value of the marginal product of labor.
24 Equilibrium in the Labor Market... Wage (price of labor) Supply Equilibrium wage, W 0 Equilibrium employment, L Demand Quantity of Labor
25 Equilibrium in the Labor Market Labor supply and labor demand determine the equilibrium wage. Shifts in the supply or demand curve for labor cause the equilibrium wage to change.
26 A Shift in Labor Supply... Wage (price of labor) Supply, S 1 S 2 1. An increase in labor supply... W 1 W reduces the wage... Demand L and raises employment. 0 L 2 Quantity of Labor
27 A Shift in Labor Supply An increase in the supply of labor : Results in a surplus of labor. Puts downward pressure on wages. Makes it profitable for firms to hire more workers. Results in diminishing marginal product. Lowers the value of the marginal product. Gives a new equilibrium.
28 A Shift in Labor Demand... Wage (price of labor) Supply W 2 W increases the wage An increase in labor demand... D 2 Demand, D 1 0 L 1 L 2 Quantity of Labor 3....and increases employment.
29 Shifts in Labor Demand An increase in the demand for labor : Makes it profitable for firms to hire more workers. Puts upward pressure on wages. Raises the value of the marginal product. Gives a new equilibrium.
30 Three Determinants of Productivity 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.
31 Productivity and Wage Growth in the United States Time Period Growth Rate of Productivity Growth Rate of Wages
32 Productivity and Wage Growth around the World Growth Rate Country Growth Rate of Productivity of Real Wages South Korea Hong Kong Singapore Indonesia Japan India United Kingdom United States Brazil Mexico Argentina Iran
33 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.
34 Prices of Land and Capital The purchase price is what a person pays to own a factor of production indefinitely. The rental price is what a person pays to use a factor of production for a limited period of time.
35 Equilibrium in Markets for Land and Capital The rental price of land and the rental price of capital are determined by supply and demand. The firm increases the quantity hired until the value of the factor s marginal product equals the factor s price.
36 The Markets for Land and Capital... (a) The Market for Land (b) The Market for Capital Rental Price of Land Supply Rental Price of Capital Supply P P Demand Demand 0 Q 0 Quantity of Land Q Quantity of Capital
37 Equilibrium in Markets for Land and Capital Each factor s rental price must equal the value of their marginal product. They each earn the value of their marginal contribution to the production process.
38 Linkages Among the Factors of Production Factors of production are used together. The marginal product of any one factor depends on the quantities of all factors that are available.
39 Linkages Among the Factors of Production A change in the supply of one factor alters the earnings of all the factors.
40 Linkages Among the Factors of Production A change in earnings of any factor can be found by analyzing the impact of the event on the value of the marginal product of that factor.
41 Summary The three most important factors of production are labor, land, and capital. The demand for factors, such as labor, is a derived demand that comes from firms that use the factors to produce goods and services. Competitive, profit-maximizing firms hire each factor up to the point at which the value of the marginal product of the factor equals its price.
42 Summary The supply of labor arises from individuals tradeoff between work and leisure. An upward-sloping labor supply curve means that people respond to an increase in the wage by enjoying less leisure and working more hours.
43 Summary The price paid to each factor adjusts to balance the supply and demand for that factor. Because factor demand reflects the value of the marginal product of that factor, in equilibrium each factor is compensated according to its marginal contribution to the production of goods and services.
44 Summary Because factors of production are used together, the marginal product of any one factor depends on the quantities of all factors that are available. As a result, a change in the supply of one factor alters the equilibrium earnings of all the factors.
45 Graphical Review
46 The Versatility of Supply and Demand... (a) The Market for Apples (b) The Market for Apple Pickers Price of Apples Supply Wage of Apple Pickers Supply P W Demand Demand 0 Q 0 Quantity of Apples L Quantity of Apple Pickers
47 Quantity of Apples The Production Function Quantity of Apple Pickers
48 The Value of the Marginal Product of Labor... Value of the Marginal Product Market wage Value of marginal product (demand curve for labor) 0 Profit-maximizing Quantity of quantity Apple Pickers
49 The Labor Supply Curve Wage (price of labor) Supply 0 Quantity of Labor
50 Equilibrium in the Labor Market... Wage (price of labor) Supply Equilibrium wage, W 0 Equilibrium employment, L Demand Quantity of Labor
51 A Shift in Labor Supply... Wage (price of labor) Supply, S 1 S 2 1. An increase in labor supply... W 1 W reduces the wage... Demand L and raises employment. 0 L 2 Quantity of Labor
52 A Shift in Labor Demand... Wage (price of labor) Supply W 2 W increases the wage An increase in labor demand... D 2 Demand, D 1 0 L 1 L 2 Quantity of Labor 3....and increases employment.
53 The Markets for Land and Capital... (a) The Market for Land (b) The Market for Capital Rental Price of Land Supply Rental Price of Capital Supply P P Demand Demand 0 Q 0 Quantity of Land Q Quantity of Capital
The Markets for the Factors of Production THE DEMAND FOR LABOR
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