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The Markets for Factors of Production.docx

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Hannah Holmes

The Markets for Factors of Production Chapter 18 Factors of Production – Resources that you use to make something else - Land, Labour, Capital Labour Market - 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? 1. Increase
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