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Chapter 18

Chapter 18 - The Markets for the Factors of Production.pdf

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Enrico Moretti

Chapter 18: The Markets for the Factors of Production • your job will impact how much you earn, but why? •demand/supply for your work impacts your salary • factors of production: land, labor and capital • derived demand: the demand for a factor of production I. The Demand for Labor A. The Competitive Profit-Maximizing Firm •assume that firm is competitive both in market for product and market for labor • this means firm is a price taker •assume the firm is profit maximizing • firm does not directly care about number of workers it has or number of products produced, cares about profit • profit = total revenue - cost of production B. The Production Function and the Marginal Product of Labor •to make hiring decision, firm must consider how the size of its workforce affects the amount of output produced •production function: the relationship between the quantity of inputs used to make a good and the quantity of output of that good • input is labor • output is product •marginal product of labor: the increase in the amount of output from an additional unit of labor •diminishing marginal product: the property whereby the marginal product of input declines in the quantity of the input increases • because of this, firms won’t simply continue to hire labor • eventually, cost of labor outweighs benefit of extra workers Labor (L) Output (Q) Marginal Value of Wage (W) Marginal Product of Marginal Profit Labor (MPL Product of (∆Profit = = ∆Q ÷ ∆L) Labor VMPL- W) (VMPL= P* MPL) 0 workers 0 bushels 0 bushels 0 0 0 1 worker 100 bushels 100 bushels $1000 $500 $500 2 workers 180 bushels 80 bushels $800 $500 $300 3 workers 240 bushels 60 bushels $600 $500 $100 4 workers 280 bushels 40 bushels $400 $500 -$100 5 workers 300 bushels 20 bushels $200 $500 -$300 C. The Value of the Marginal Product and the Demand for Labor to find a worker’s contribution to revenue, must convert the marginal product of labor into the • value of the marginal product •value of the marginal product: the marginal product of an input * the price of the output •once the value of the marginal product does not exceed its cost, it is not worth to add that marginal gain • a competitive, profit-maximizing firm hires workers up to the point where the value of the marginal product of labor equals the wage • the value-of-marginal-product curve is the labor-demand curve for a competitive, profit- maximizing firm D. What Causes the Labor Demand Curve to Shift? 1. The Output Price • the value of the marginal product is marginal product * price of the firm’s output • thus, when output price changes, the value of marginal product changes • this causes a shift in the labor-demand curve 2. Technological Change • technological advances that raise the marginal product of labor shifts the labor-demand curve to the right • e.g. sewing machines given to sewers • technological changes that reduce the need for laborers will shift the labor-demand curve to the left • e.g. cheap industrial robot that sprays pesticide on plants 3. The Supply of Other Factors • the quantity available of one factor of production can affect the marginal product of other products • e.g. a fall in the supply of ladders will reduce the marginal product of apple pickers because without ladders, they cannot pick as many apples II. The Supply of Labor A. The Trade-off Between Work and Leisure • the more hours you spend working, the fewer hours you have for leisure • what do you give up for an hour of leisure? • with 1 hour of work, you earn $15 which means 1 hour of leisure gives up $15; once hourly wage changes to $20, your opportunity cost for 1 hour of leisure increases to $20 • the labor supply curve reflects how workers’decisions about the labor-leisure trade-off responds to a change in that opportunity cost • the upward slope means that an increase in wages induces workers to increase the quantity of labor they supply • sometimes labor-supply curve need not be upward sloping • e.g. raise from $15 to $20 per hour • the opportunity cost is greater, but you are also richer than you were before • might decide that with extra wealth, you can now afford to enjoy more leisure • i.e. with higher wage, you may choose to work fewer hours • if so, your labor-supply curve will slope backwards B. What Causes the Labor-Supply Curve to Shift? 1. Changes in Tastes • changing attitudes towards work may change its supply • e.g. more women working in 2009 than 1950 because women in the work force is more accepte
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