Factors%20of%20Production

1
Factors of Production

• Part II
• (Chapter 18)

2
MRP
MRP sometimes call Value of Marginal Product
(VMP)
Economic Decision Making
If MB MC do it If MB lt MC dont
3
Shifts in Labor Demand
Demand Curve shifts right when

• Demand for Product
• Productivity
• Technology, working conditions, etc...
• Price of other resources
• Price of complementary resource
• Price of substitute resource

• It Depends
• Two different substitute actions when price of
  substitute falls
• Substitution Effect- you hire less workers
• Output Effect- MC falls, so output increases
  gt you hire more workers

4
Competitive Market Supply of Labor

• For a firm in a competitive market
• Wage is the firms labor supply curve
• Each firm is a wage taker

If demand rises, Firm hires more workers Wage is
unchanged
5
Derived Demand
More Workers Hired Wage rate Unchanged!
6
The Market Supply Curve

• Is upward sloping represents the trade-off
  between Work Leisure
• upward-sloping means that an increase in wages
  induces more people to work

7
A Shift in Labor Supply
Wage
(price of
labor)
More workers hired Wages Falls Marginal Product
Falls
Quantity of
0
Labor
8
A Shift in Labor Demand
Wage
More workers hired Wages Rise Marginal Product
Increases
(price of
labor)
0
Quantity of
Labor
9
Optimizing 1-Resource

• If Marginal Benefit Marginal Cost then
  __________
• Marginal Factor Cost (MFC) cost of additional
  factor of production
• Sometimes called MRC
• Competitive firms hire each factor of production
  until the MRP MFC

10
The Least-Cost Rule

• Challenge how do you decide optimal quantity
  between 2 resources?

Labor

• Your choice must satisfy
  the following equation
• (Only one
  combination will work!)
• MPL/PL MPK/PK or MPL/
  MPK PL/PK
• If MPL/PL gt MPK/PK then L K
• If MPL/PL lt MPK/PK then do opposite

11
Worksheet

• Labor Markets