The Markets for Factors of Production
Factors of Production – Resources that you use to make something else
- Land, Labour, Capital
- Perfectly Competitive
- Firm has no control over wage (Price Takers)
How a Firm Decides How Many Workers to Hire
Profit from another worker = How much they produce * How much you get for each good - their wage
To maximize profit, a firm hires workers up to the point where:
Wage = VMPL = P*MP
Value of the Marginal Product of Labour (VMPL):
A worker’s contribution is MP times the selling price of a good.
- Diminishes as more workers are hired (because MP diminishes)
If a company produced bottles at 50 cents each, at a wage of $20:
The VMPL curve IS the labour demand curve. A change in wage is just a movement along the labour demand curve. What makes wage shift?
1. Change in price of goods
a. Since D = VMPL = P*MP, if P↑ then D↑
2. Change in supply of other factors
a. Ex something that changes MP (such as supply of plastic bottles for above example)
3. Technological Change
The Supply of Labour
A change in wage is a movement along the labour supply curve.
What changes W in the labour supply market?