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ECONOMICS

The document discusses the economics of labor markets, focusing on the factors of production, particularly labor, and how demand for labor is derived from firms' production decisions. It explains concepts such as the production function, diminishing marginal product of labor, and the equilibrium in labor markets where wages adjust to balance supply and demand. Additionally, it highlights the importance of productivity determinants like physical capital, human capital, and technological knowledge in influencing wages and overall economic output.

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Mikka Ella
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36 views8 pages

ECONOMICS

The document discusses the economics of labor markets, focusing on the factors of production, particularly labor, and how demand for labor is derived from firms' production decisions. It explains concepts such as the production function, diminishing marginal product of labor, and the equilibrium in labor markets where wages adjust to balance supply and demand. Additionally, it highlights the importance of productivity determinants like physical capital, human capital, and technological knowledge in influencing wages and overall economic output.

Uploaded by

Mikka Ella
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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THE ECONOMICS OF LABOR MARKET

FACTORS OF PRODUCTION
~ are the inputs used to produce goods and services.

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.

The Demand for Labor


~ Labor markets, like other markets in the economy, are governed by the forces of supply and
demand.

The Versatility of Supply and Demand…

The Demand for Labor


~ Most labor services, rather than being final goods ready to be enjoyed by customers, are inputs
into the production of other goods.

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.
How the Competitive Firm Decides How Much Labor to Hire

The Production Function

The Production Function and The Marginal Product of Labor


~ The marginal product of labor is the increase in the amount of output from an individual unit
of labor.

Diminishing Marginal Product of Labor


~ As the number of workers increases, marginal product of labor declines.
~ As more and more workers are hired, each additional worker contributes less to production
than the prior one.
~ The production function becomes flatter as the number of workers rises.

This property is called diminishing marginal product.

The Value of the Marginal Product of Labor


~ The value of the marginal product is the marginal product of the input multiplied by the
market price of the output.
The Value of the Marginal Product and the Demand for Labor
~ The value of the marginal product is measured in dollars.
~ It diminishes as the number of workers rises because the market price of the good is constant.
~ To maximize profit, the competitive, profit-maximizing firm hires workers up to the point
where the value of marginal product of labor equals the wage.
VMPL = Wage
~ The value-of-marginal-product curve is the labor demand curve for a competitive, profit-
maximizing firm.

Input Demand and Output Supply


When a competitive firm hires labor up to the point at which the value of the marginal product
equals the wage, it also produces up to the point at which the price equals the marginal cost.

What causes the Labor Demand Curve Shift?


● Output Price
● Technological Change
● Supply of Other Factors

The Labor Supply Curve


~ The labor supply curve reflects how workers' decisions about the labor-leisure tradeoff respond
to changes in opportunity cost.
~ An upward-sloping labor supply curve means that an increase in the wages induces workers to
increase the quantity of labor they supply.
What causes the Labor Curve to Shift?
● Changes in Tastes
● Changes in Alternative Opportunities
● Immigration

Equilibrium in the Labor Market


~ The wage adjusts to balance the supply and demand for labor.
~ The wage equals the value of the marginal product of labor.

~ Labor supply and labor demand determine the equilibrium wage.


~ Shifts in the supply or demand curve for labor cause the equilibrium wage to change.

A Shift in Labor Supply…

● An increase in the supply of labor:


~ Results in a surplus of labor.
~ Puts down pressure on wages.
~ Makes it profitable for firms to hire more workers.
~ Results in diminishing marginal product.
~ Lowers the value of the marginal product.
~ Gives a new equilibrium.

A Shift 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.

THREE DETERMINANTS OF PRODUCTIVITY


● PHYSICAL CAPITAL
~ When workers work with a larger quantity of equipment and structures, they produce
more.
● HUMAN CAPITAL
~ When workers are more educated, they produce more.
● TECHNOLOGICAL KNOWLEDGE
~ When workers have access to more sophisticated technologies, they produce more.

PRODUCTIVITY AND WAGE GROWTH IN THE UNITED STATES


PRODUCTIVITY AND WAGE GROWTH AROUND THE WORLD

Other Factors of Production:


Land and Capital
● Capital refers to the stock of equipment and structures used for production.
● 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.

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.

Equilibrium in 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.
Equilibrium in Markets for
Land and Capital
● Each factor's rental price must equal the value of their marginal product.
● They each earn the value of their marginal contribution to the production process.

Linkages Among the Factors of Production


Factors of production are used together.
● Marginal product of any one factor depends on the quantities of all factors that are
available.
● A change in the supply of one factor alters the earnings of all the factors.
● A change in earnings of any factor can be found by analyzing the impact of the event on
the value of the marginal product of that factor.

Summary
● The three most important factors of production are labor, land, and capital.
● The demand for factors, such as labor, is a derived demand that comes from firms that
use the factors to produce goods and services.
● Competitive, profit-maximizing firms hire each factor up to the point at which the value
of the marginal product of the factor equals its price.
● The supply of labor arises from individuals' tradeoff between work and leisure.
● An upward-sloping labor supply curve means that people respond to an increase in the
wage by enjoying less leisure and working more hours.
● 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 marginal contribution to the
production of goods and services.
● Because factors of production are used together, the marginal product of any one factor
depends on the quantities of all factors that are available.
● As a result, a change in the supply of one factor alters the equilibrium earnings of all the
factors.

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