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Lecture

MARKETS FOR FACTORS OF PRODUCTION.docx

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Department
Economics
Course
ECO100Y1
Professor
James Pesando
Semester
Winter

Description
MARKETS FOR FACTORS OF PRODUCTION 1. The Factors of Production 2. Derived Demand for Labour: An Example 2.1 Marginal Revenue Product (MRP) of Labour 2.2 Profit-Maximizing Behavior of Competitive Firm 2.3 Demand for Labour = MRP of Labour 3. Interdependence of Product and Factor Markets 4. Workers are Paid their MRP Factors of Production Labour – what we’re focusing on this year Capital (equipment, structures) Land (any natural resource) Our focus: labour and wage rate/earnings Demand for factor is a DERIVED DEMAND—linked to the market it is used to produce Firms use the factor to produce goods and service DD and SS determine wage rate (straightforward) Wage rate = value of marginal product (our focus) Value of Marginal product (VMP) is the price of the good produced times Marginal product (MP) Result: VMP depends upon: 1) Price of product produced 2) MP of labour (which falls if law of diminishing returns applies) The market for widgets Assumption: 1) Firms are perfectly competitive 2) Labour is only variable factor of production (so law of diminishing returns applies) 3) Price of widget: 5 No. of workers Total Product (TP) Marginal Product VMP Value of (MP) or (change in Marginal product TP)/(change in labour) 0 0 - - 1 50 50 $250 2 90 40 $200 3 120 30 $150 4 140 20 $100 Observations: 1) MP declines as number of workers increases (and thus) 2) VMP declines as number of workers increases How many workers will the firm hire? Insight: firm will not hire a worker unless VMP is at least equal to the wage rate Example: If wage rate is $200, firm will not hire the 3 worker since VMP is less than $200) Applications What happens to (1) wage rate, (2) employment of oil field workers in Alberta if there is an increase in the demand for oil? If Government raises minimum wage rate above market-clearing wage rate, hat happens to employment of low skilled workers? Answer: employment falls, until VMP of last work hired increases to new minimum wage rate Can a union increase both wages and employment? Observation: union wages are about 15% higher than non-union wages, other things equal No: DD for labour (=VMP) is downward sloping, cant force firms to hire more workers AND increase wage rate True or False? “The price of hockey tickets is high because the salaries of hockey stars are so high Insights: 1) Hockey game is “product” 2) Hockey players are “labour” Result: salaries are high BECAUSE the demand for tickets is highfuther: THE SUPPLY OF HOCKET PSTARS AT ANY POINT IN TIME IS PERFECTLY INELASTIC IF YOU DOUBLE THE SALARIES OF HOCKEY STARS THE NUMBER WOULD BE UNCHANGED VMP= price people are willing to pay to see hockey game Vmp = P * MP P= price of final product (good) Mp= marginal product of worker How does economics explain differences in income earned by different occupational groups? Answer: value of marginal product How good is economics explanation? Answer: pretty good How can economic theory (VMP) be true in light of: 1) Extraordinary incomes of superstars such as Celine Dion (singer) and Tiger Woods (golder)? 2) Low incomes of day care worker, who provide important service? 3) Male tend to earn higher
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