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Chapter 18

Chapter 18 EC120.docx

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Wilfrid Laurier University
Peter Sinclair

EC120 Chapter 18 The Markets for the Factors of Production Week 12 Introduction The distribution of wages is based on supply and demand The supply and demand for labour land and capital determine the prices paid to workers landowner and capital owners Factors of Productionthe inputs used to produce goods and services Labour land and capital are the three most important factors of production The demand for a factor of production is derived demand That is a firms demand for a factor of production is derived from its decision to supply a god in another market Labour is the most important factor of productionThe Demand for Labour Labour markets are governed by the forces of supply and demand Labour markets are different from most other markets because labour demand is a derived demand The Competitive ProfitMaximizing Firm We assume that our firm is competitive both in the market for applies and in the market for apple pickers A competitive firm is a price taker We assume that the firm is profitmaximizingThe firm does not care about the number of workers it has or the number of applies it produces It cares only about profitThe Production Function and the Marginal Product of LabourTo make its hiring decision the firm must consider how the size of its work force affects the amount of output produced Economists use the production functionthe relationship between the quantity of inputs used to make a good and the quantity of output of that goodto describe the relationship between the quantity of the inputs used in production and the quantity of output from production Marginal Product of Labourthe increase in the amount of output from an additional unit of labour Diminishing Marginal Productthe property whereby the marginal product of an input declines as the quantity of the input increases
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