In this chapter you will analyze the labor demand of competitive, profitmaximizing firms, consider the household decisions that lie behind labor supply, learn why equilibrium wages equal the value of the marginal product of labor, consider how the other factors of production land and capital are compensated, examine how a change in the supply of one factor alters the earnings of all the factors.
6 THE ECONOMICS OF LABOR MARKETS The Markets for the Factors of Production Copyright©2004 South-Western 18 The Markets for the Factors of Production Factorsofproductionaretheinputsusedto producegoodsandservices Copyright â 2004 South-Western The Market for the Factors of Production • The demand for a factor of production is a derived demand • A firm’s demand for a factor of production is derived from its decision to supply a good in another market Copyright © 2004 South-Western THE DEMAND FOR LABOR Labormarkets,likeothermarketsinthe economy,aregovernedbytheforcesofsupply anddemand Copyright â 2004 South-Western Figure The Versatility of Supply and Demand (a) The Market for Apples (b) The Market for Apple Pickers Price of Apples Supply P Wage of Apple Pickers Supply W Demand Demand Q Quantity of Apples L Quantity of Apple Pickers Copyright©2003 Southwestern/Thomson Learning THE DEMAND FOR LABOR • Most labor services, rather than being final goods ready to be enjoyed by consumers, are inputs into the production of other goods Copyright © 2004 South-Western The Production Function and the Marginal Product of Labor • The production function illustrates the relationship between the quantity of inputs used and the quantity of output of a good Copyright © 2004 South-Western Table How the Competitive Firm Decides How Much Labor to Hire Copyright©2004 South-Western Figure The Production Function Quantity of Apples Production function 300 280 240 180 100 Quantity of Apple Pickers Copyright©2003 Southwestern/Thomson Learning Figure A Shift in Labor Demand Wage (price of labor) Supply W An increase in labor demand W increases the wage D Demand, D L L and increases employment Quantity of Labor Copyright©2003 Southwestern/Thomson Learning Shifts in Labor Demand • An increase in the demand for labor : • • • • Makes it profitable for firms to hire more workers Puts upward pressure on wages Raises the value of the marginal product Gives a new equilibrium. Copyright © 2004 South-Western Table Productivity and Wage Growth in the United States Copyright©2004 South-Western OTHER FACTORS OF PRODUCTION: LAND AND CAPITAL • Capital refers to the equipment and structures used to produce goods and services • The economy’s capital represents the accumulation of goods produced in the past that are being used in the present to produce new goods and services Copyright © 2004 South-Western OTHER FACTORS OF PRODUCTION: LAND AND CAPITAL • Prices of Land and Capital • The purchase price is what a person pays to own a factor of production indefinitely • The rental price is what a person pays to use a factor of production for a limited period of time Copyright © 2004 South-Western Equilibrium in the Markets for Land and Capital • The rental price of land and the rental price of capital are determined by supply and demand. • The firm increases the quantity hired until the value of the factor’s marginal product equals the factor’s price Copyright © 2004 South-Western Figure The Markets for Land and Capital (a) The Market for Land Rental Price of Land (b) The Market for Capital Rental Price of Capital Supply P Supply P Demand Demand Q Quantity of Land Q Quantity of Capital Copyright©2003 Southwestern/Thomson Learning Equilibrium in the Markets for Land and Capital • Each factor’s rental price must equal the value ofitsmarginalproduct. Theyeachearnthevalueoftheirmarginal contributiontotheproductionprocess Copyright â 2004 South-Western Linkages among the Factors of Production • Factors of production are used together • The marginal product of any one factor depends on the quantities of all factors that are available Copyright © 2004 South-Western Linkages among the Factors of Production • A change in the supply of one factor alters the earnings of all the factors Copyright © 2004 South-Western Linkages among the Factors of Production Achangeinearningsofanyfactorcanbefound byanalyzingtheimpactoftheeventonthe valueofthemarginalproductofthatfactor Copyright â 2004 South-Western Summary • The economy’s income is distributed in the markets for the factors of production • The three most important factors of production are labor, land, and capital • The demand for a factor, such as labor, is a derived demand that comes from firms that use thefactorstoproducegoodsandservices Copyright â 2004 South-Western Summary Competitive,profitưmaximizingfirmshireeach factoruptothepointatwhichthevalueofthe marginalproductofthefactorequalsitsprice • The supply of labor arises from individuals’ tradeoff between work and leisure • An upwardsloping labor supply curve means that people respond to an increase in the wage by enjoying less leisure and working more hours Copyright © 2004 South-Western Summary • The price paid to each factor adjusts to balance the supply and demand for that factor • Because factor demand reflects the value of the marginal product of that factor, in equilibrium each factor is compensated according to its marginalcontributiontotheproductionof goodsandservices Copyright â 2004 South-Western Summary Becausefactorsofproductionareused together,themarginalproductofanyonefactor dependsonthequantitiesofallfactorsthatare available Asaresult,achangeinthesupplyofonefactor alterstheequilibriumearningsofallthefactors Copyright â 2004 South-Western .. .The Markets for the Factors of Production Copyright©2004 South-Western 18 The Markets for the Factors of Production • Factors of production are the inputs used to produce goods and services... 2004 South-Western The Market for the Factors of Production Thedemandforafactorofproductionisa deriveddemand Afirmsdemandforafactorofproductionis derivedfromitsdecisiontosupplyagoodin anothermarket... South-Western THE DEMAND FOR LABOR • Labor markets, like other markets in the economy, are governed by the forces of supply and demand Copyright © 2004 South-Western Figure The Versatility of