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CAS EC 101 (177)
Todd Idson (13)
Chapter 18

Chapter 18 The Markets for The Factors of Production

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CAS EC 101
Todd Idson

Chapter 18: The Markets for the Factors of Production Friday, December 6, 2013 11:11 AM I. The Demand for Labor ○ Labor demand is different from other demands because it is a derived demand  Most labor is an input of production A. The CompetitiveProfit-MaximizingFirm ○ Firms are competitive so they are price (wage) takers ○ The goal is to maximize profit when deciding on how many to hire B. The Production Function and the Marginal Product of Labor ○ Firm must consider how the size of its work force affects the amount of output produced ○ Production function: Relationship between the quantityof inputs used to make a good and the quantityof output of that good  Becomes flatter as the quantityof input increases ○ Marginal product of labor: Increase in the amount of output from an additional unit of labor ○ Diminishing marginal product: Marginal product of an input declines as the quantity of the input increases C. The Value of the Marginal Product and the Demand for Labor ○ Value of the marginal product: Marginal product of an input times the price of the output  Competitive profit-maximizingfirm 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? a. The Output Price: When the price of the product increases, the marginal product of each worker increases, thus the demand for labor increases b. Technological Change: Technology can increase and decrease demand for labor by changing the marginal product c. The Supply of Other Factors: Examples such as machines and tools II. The Supply of Labor A. The Trade-offbetween Work and Leisure ○ Higher the wage, the higher the opportunitycost of leisure B. What Causes the Labor-SupplyCurve to Shift? a. Changes in Tastes  Changes in attitude toward work b.
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