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Chapter 18

Chapter 18 Economics.docx

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Department
Economics
Course
Economics 10a
Professor
Gregory Mankiw
Semester
Fall

Description
Chapter 18 Economics: The Markets for the Factors of Production • Capital: the economy’s stock of equipment and structures • Factors of production: the inputs used to produce goods and services o Examples: labor, land, and capital • The demand for a factor of production is a derived demand o The firm’s demand for a factor of production is derived form its decision to supply a good in another market o Most labor services are inputs into the production of other goods • Assumptions made when looking at the labor market: o The firm is competitive both in the market for the good and in the market for laborit’s a price taker o The firm is profit-maximizing • Production function: the relationship between the quantity of inputs used to make a good and the quantity of output of that good • 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 as the quantity of the input increases • Because profit is total revenue minus total cost, the profit from an additional worker is the worker’s contribution to revenue minus the worker’s wage o To find the worker’s contribution to revenue, we must convert the MPL into the value of the marginal product (VMPL) o Value of the marginal product: the marginal product of an input times the price of the output (MP×P) o Marginal revenue product: the extra revenue that the firm gets from hiring an additional unit of a factor of production • Value of marginal product curve slopes downward because the marginal product of labor diminishes as the number of workers rises • To maximize profit, the firm hires workers up to the point where the market wage curve and value of marginal product curve cross (Value of marginal product=wage) o Below this level of employment, the value of the marginal product exceeds the wage, so hiring another worker would increase profit o Above this level of employment, the value of the marginal product is less than the wage, so the marginal worker is unprofitable • P=MC=W/MPL As MPL falls, MC rises • When a competitive firm hires labor up to the point at which the value of the MP=W, it also produces up to the point at which the price equals the marginal cost • The value-of-marginal product curve is the labor-demand curve for a competitive, profit- maximizing firm. It can be made to shift by: o When the output price changes, the value of the marginal product changes and the labor-demand curve shifts o Technological progress increases the marginal product of labor, which also increases the demand for labor and shifts the labor-demand curve to the right o Labor saving technological advance: decreases the demand for labor if a robot can do the work o Labor augmenting technological advance: explains the persistently rising employment in the face of rising wages o There is linkage among factors of production; a fall in the supply of a factor of production can affect the marginal product of other factors • The Luddites wanted the British government to save their jobs by restricting the spread of new technology; instead, Parliament suppressed their revolts o Today, the term Luddite refers to anyone who opposes technological progress • The labor-supply curve reflects how workers’decisions about the labor-leisure trade-off respond to a change in opportunity cost o The opportunity cost of an hour of leisure is the wage that you would have earned in that hour o An upward sloping labor supply curve means that an increase in the wage induces workers to increase the quantity of labor they supply o Because time is limited, workers respond to an increase in the opportunity cost of leisure by taking less of it o However, as one gains extra wealth, he/she might decide that it is worth the opportunity cost of leisure to work fewer hours (even with the higher wage) • The labor-supply curve shifts whenever people change the amount that they want to work at a given w
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