ECN 104 Chapter Notes - Chapter 18: Opportunity Cost, Farmer Jack, Market Power

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ECN104Chapter 18 Notes
Chapter 18 Notes
Questions
oWhat determines a competitive firm’s demand for labour?
oHow does labour supply depend on the wage? What other factors affect
labour supply?
oHow do various events affect the equilibrium wage and employment of
labour?
oHow are the equilibrium prices and quantities of other inputs
determined?
Factors of Production and Factor Markets
oFactors of production: the inputs used to produce goods and services
Labour
Land
Capital: the equipment and structures used to produce goods
and services
oPrices and quantities of these inputs are determined by supply &
demand in factor markets
Derived Demand
oMarkets for the factors of production are like markets for goods &
services, except:
Demand for a factor of production is a derived demand
derived from a firm’s decision to supply a good in another market.
Two Assumptions
o1. We assume all markets are competitive.
The typical firm is a price taker
In the market for the product it produces
In the labour market
o2. We assume that firms care only about maximizing profits
Each firm’s supply of output and demand for inputs are derived
from this goal.
Our Example: Farmer Jack
oFarmer Jack sells wheat in a perfectly competitive market
oHe hires workers in a perfectly competitive labour market
oWhen deciding how many workers to hire, Farmer Jack maximizes profits
by thinking at the margin:
If the benefit from hiring another worker exceeds the cost, Jack
will hire that worker
oCost of hiring another worker:
The wage – the price of labour
oBenefit of hiring another worker:
Jack can produce more wheat to sell, increasing his revenue
oThe size of this benefit depends on Jack’s production function: the
relationship between the quantity of inputs used to make a good and the
quantity of output of that good
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Marginal Product of Labour (MPL)
oMarginal product of labour: the increase in the amount of output
from an additional unit of labour
MPL = (Change in Output) / (Change in Labour)
The Value of the Marginal Product
oProblem:
Cost of hiring another worker (wage) is measured in dollars
Benefit of hiring another worker (MPL) is measured in units of
output
oSolution:
Convert MPL to dollars
oValue of the marginal product: the marginal product of an input
times the price of the output
VMPL = value of the marginal product of labour
VMPL = P x MPL
Things that Shift the Labour Demand Curve
oChanges in the output price, P
oTechnological change (affects MPL)
oThe supply of other factors (affects MPL)
E.g., If firm gets more equipment (capital), then workers will be
more productive; MPL and VMPL rise, labour demand shifts
upward
The Connection Between Input Demand & Output Supply
oRecall: Marginal Cost (MC)
= cost of producing an additional unit of output
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