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ECO102H1 (155)
Lecture

# ECO100 - JAN 7

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School
University of Toronto St. George
Department
Economics
Course
ECO102H1
Professor
James Pesando
Semester
Fall

Description
● M:12 - 2pm, W: 9-11am GE213 ● Friday Jan 11: 11:00am to noon, GE351 ● MARKETS FOR FACTORS OF PRODUCTION 1. The Factors of Production ● 1) Labour ● 2) Capital (equipment, structures) ○ machinery, assembly lines ● 3) Land ○ any natural resources ● Our focus: labour (and wage rate/earnings) ● Demand for factor of production is a DERIVED DEMAND ○ Firms use the factor to produce goods and services ● DD and SS determine wage rate (price of labour) ○ Further, we can demonstrate that wage rate = Value of Marginal Product Value of Marginal Product (VMP) ● VMP = Price (of good produced) times Marginal product ● Result: VMP of labour depends upon ○ 1) Price of product produced ○ 2) Marginal product of labour (which falls if law of diminishing return applies) The Market for Widgets ● Assumptions: ○ 1) Firms are perfectly competitive ○ 2) Labour is only variable factor of production (so Law of Diminishing Returns applies) ○ 3) Price of widgets: \$5 No. of Workers Total Product Marginal Product (MP, Value of Marginal (TP) TP/ L) Product (VMP, P*MP) 0 0 - - 1 50 50 \$250 (5*50) 2 90 40 \$200 (5*40) 3 120 30 \$150 (5*30) 4 140 20 \$100 (5*20) ● Observations - Law of Diminishing Returns ○ 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? (the purpose of the chart) ○ 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 3rd worker (since VMP of 3rd worker is \$150) ○ If wage = 200, firm hires 2 workers = 150, firm hires 3 workers = 100, firm hires 4 workers VMP Schedule = Demand of Labour (demand curve of labour) ● How do we de
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