Lecture 22-Markets for Factors of Production

Thursday, January 7th, 2010. Markets for Factors of Productions Full-Time Earnings (Year 2007 Dollars) Physicians (GPs): $140,832 Registered Nurses: $ 53,354 High School Teachers: $ 57,480 Actors: $ 41,694 Cooks: $ 24,353 1. What is economics explanation? (Answer: Value of Marginal Product) 2. How good is economics explanation? (Answer: Pretty Good) Factors of Production x Labour x Capital (equipment, structures) x Land Insights 1. Demand for factor is a derived demand 2. Price of factor is determined by demand and supply Example: FIRM PRODUCES WIDGETS (Perfect Competition) 1. Labour is variable factor (principle of diminishing marginal product applies) 2. Price of widget: $5 3. Wage rate: $150 per day www.notesolution.com (TP ) (MP) (VMP) No. of workers Total Product Marginal Product Vale of Marginal Product (¨TP/¨L) (P * MP) 0 0 -- -- 1 50 50 $250 2 90 40 $200 3 120 30 $150 4 140 20 $100 VMP slopes downward due to diminishing marginal product of labour Maximizing Profits 1. Firms hires workers until VMP = W If N = 2, VMP > W => hire more workers If N = 4, VMP < W => hire fewer workers If N = 3, VMP = W => profits are maximized 2. VMP = W and P = MC are Equivalent VMP = W => VMP/MP = W/MP => P = MC Note: (P * MP)/MP = P W/MP = MC VMP N VMP 4 150 100 3 2 200 www.notesolution.com Note: At N = 3, MP = 30 and W/MP = 150/30 = 5 = MC = P 3. VMP Schedule = Demand for Labour Schedule Wage Rate No. of Workers (W) Firm Hires . 100 4 150 3 200 2 250 1 300 0 1. Assume SSL is upward sloping 2. Shifts in DDL and SSL alter wage (W) and employment (M) 3. Equilibrium wage (W) is VMP of last worker hired DDL = VMP N W 4 150 100 3 2 200 SSL N W DDL (=VMP) W N www.notesolution.com PURGXFW3ULFH39 or 0DUJLQDO3URGXFW039 => DD for Labour Shifts Upward Interdependence of Product and Factor Markets DD1 = (P1 * MPL) Q0 P0 WIDGETS SS DD SS P1 Q1 DD1 P Q DD0 = (P0 * MPL) w1 w0 W WIDGETS WORKERS N0 N1 www.notesolution.comth Thursday, January 7 , 2010. Markets for Factors of Productions Full-Time Earnings (Year 2007 Dollars) Physicians (GPs): $140,832 Registered Nurses: $ 53,354 High School Teachers: $ 57,480 Actors: $ 41,694 Cooks: $ 24,353 1. What is economics explanation? (Answer: Value of Marginal Product) 2. How good is economics explanation? (Answer: Pretty Good) Factors of Production N Labour N Capital (equipment, structures) N Land Insights 1. Demand for factor is a derivedemand 2. Price of factor is determined by demand and supply Example: FIRM PRODUCES WIDGETS (Perfect Competition) 1. Labour is variable factor (principle of diminishing marginal product applies) 2. Price of widget: $5 3. Wage rate: $150 per day www.notesolution.com