ECONOMICS N. G R E G O R Y M A N K I W. PowerPoint Slides by Kathryn Nantz and Laurence Miners PRINCIPLES OF FOURTH EDITION
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1 PRINCIPLES OF ECONOMICS FOURTH EDITION N. G R E G O R Y M A N K I W PowerPoint Slides by Kathryn Nantz and Laurence Miners 2006 Thomson South-Western, all rights reserved
2 The Markets for the Factors of Production Factors of production are the inputs used to produce goods and services. 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.
3 THE DEMAND FOR LABOR Labor markets, like other markets in the economy, are governed by the forces of supply and demand.
4 Figure 1 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 Quantity of Apples 0 L Quantity of Apple Pickers The apple producer s demand for apple pickers is derived from the market demand for apples. Copyright 2003 Southwestern/Thomson Learning
5 The Competitive Profit-Maximizing Firm Most labor services, rather than being final goods ready to be enjoyed by consumers, are inputs into the production of other goods.
6 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.
7 Figure 2 The Production Function Quantity of Apples Production function Quantity of Apple Pickers
8 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 = ΔQ/ΔL MPL = (Q 2 Q 1 )/(L 2 L 1 )
9 The Production Function and the Marginal Product of Labor 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.
10 The Production Function and the Marginal Product of Labor Diminishing marginal product refers to the property whereby the marginal product of an input declines as the quantity of the input increases.
11 Table 1 How the Competitive Firm Decides How Much Labor to Hire
12 The Value of the Marginal Product and the Demand for Labor The value of the marginal product is the marginal product of the input multiplied by the market price of the output. VMPL = MPL P
13 The Value of the Marginal Product and the Demand for Labor The value of the marginal product (also known as marginal revenue product) is measured in dollars. It diminishes as the number of workers rises because the market price of the good is constant.
14 The Value of the Marginal Product and the Demand for Labor To maximize profit, the competitive, profitmaximizing firm hires workers up to the point where the value of the marginal product of labor equals the wage. VMPL = Wage The value-of-marginal-product curve is the labor demand curve for a competitive, profitmaximizing firm.
15 Figure 3 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 Quantity of Apple Pickers
16 FYI Input Demand and Output Supply: Two Sides of the Same Coin 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.
17 What Causes the Labor-Demand Curve to Shift? The Output Price Technological Change The Supply of Other factors
18 THE SUPPLY OF LABOR The Trade-off between Work and Leisure The labor supply curve reflects how workers decisions about the labor-leisure trade-off 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.
19 What Causes the Labor Supply Curve to Shift? Changes in Tastes Changes in Alternative Opportunities Immigration
20 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.
21 Figure 4 Equilibrium in a Labor Market Wage (price of labor) Supply Equilibrium wage, W Demand 0 Equilibrium Quantity of employment, L Labor
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25 Shifts in Labor Supply 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 Figure 5 A Shift in Labor Supply Wage (price of labor) Supply, S S 1. An increase in labor supply... W W reduces the wage... Demand 0 L L Quantity of Labor and raises employment.
27 Shifts 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 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.
29 Figure 6 A Shift in Labor Demand Wage (price of labor) Supply W W increases the wage An increase in labor demand... D Demand, D 0 L L Quantity of Labor and increases employment.
30 Table 2 Productivity and Wage Growth in the United States
31 THE OTHER FACTORS OF PRODUCTION: LAND AND CAPITAL Capital refers to the equipment and structures used to produce goods and services. 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.
32 OTHER FACTORS OF PRODUCTION: LAND AND CAPITAL 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.
33 Summary The economy s income is distributed in the markets for the factors of production. The three most important factors of production are labor, land, and capital. The demand for a factor, such as labor, is a derived demand that comes from firms that use the factors to produce goods and services.
34 Summary 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. The supply of labor arises from individuals trade-off 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.
35 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.
36 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.
1 The Market for Factors of Production Factors of Production are the inputs used to produce goods and services. The markets for these factors of production are similar to the markets for goods and services
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