Scribd
Upload
67 views16 pages

Specific Factors and Income Distribution: Eleventh Edition

Chapter 5b

Uploaded by

Jonny Falentino
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
67 views16 pages

Specific Factors and Income Distribution: Eleventh Edition

Chapter 5b

Uploaded by

Jonny Falentino
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 16

International Economics: Theory and

Policy
Eleventh Edition

Chapter 4
Specific Factors
and Income
Distribution

Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved
Prices, Wages, and Labor Allocation (1 of
10)

• How much labor is employed in each sector?


– Need to look at supply and demand in the labor
market.
• Demand for labor:
– In each sector, employers will maximize profits by
demanding labor up to the point where the value
produced by an additional hour equals the marginal
cost of employing a worker for that hour.

Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved
Prices, Wages, and Labor Allocation (2 of 10)

• The demand curve for labor in the cloth sector:

MPLC  PC  W

• The demand curve for labor in the food sector:


MPLF  PF  W

Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved
The Allocation of Labor (3 of 10)

Labor is allocated so that the value of its marginal product (P ×


MPL) is the same in the cloth and food sectors.

Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved
Prices, Wages, and Labor Allocation (4 of 10)
• The two sectors must pay the same wage because labor
can move between sectors.
• If the wage were higher in the cloth sector, workers would
move from making food to making cloth until the wages
become equal.
• Where the labor demand curves intersect gives the
equilibrium wage and allocation of labor between the two
sectors.

Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved
Prices, Wages, and Labor Allocation (5 of 10)
• At the production point, the production possibility frontier
must be tangent to a line whose slope is minus the price of
cloth divided by that of food.

• Relationship between relative prices and output:


MPLF P
  C
MPLC PF

Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved
Production in the Specific Factors Model

Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved
Prices, Wages, and Labor Allocation (6 of 10)

• What happens to the allocation of labor and the distribution


of income when the prices of food and cloth change?

• Two cases:
1. An equal proportional change in prices
2. A change in relative prices

Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved
Prices, Wages, and Labor Allocation (7 of 10)
• When both prices change in the same proportion, no real
changes occur.
– The wage rate (w) rises in the same proportion as the
prices, so real wages (i.e., the ratios of the wage rate
to the prices of goods) are unaffected.
– The real incomes of capital owners and landowners
also remain the same.

Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved
An Equal-Proportional Increase in the
Prices of Cloth and Food

Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved
Prices, Wages, and Labor Allocation (8 of
10)

• When only PC rises, labor shifts from the food sector to the
cloth sector and the output of cloth rises while that of food
falls.
• The wage rate (w) does not rise as much as PC since cloth
employment increases and thus the marginal product of
labor in that sector falls.

Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved
A Rise in the Price of Cloth

Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved
The Response of Output to a Change
in the Relative Price of Cloth

Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved
Determination of Relative Prices

In the specific factors model, a higher relative price of cloth will


lead to an increase in the output of cloth relative to that of food.
Thus, the relative supply curve RS is upward sloping.

Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved
Prices, Wages, and Labor Allocation (9 of 10)
• Relative Prices and the Distribution of Income
– Suppose that PC increases by 10%. Then, the wage
would rise by less than 10%.
• What is the economic effect of this price increase on the
incomes of the following three groups:
– owners of capital ?
– owners of land ?
– workers ?

Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved
Prices, Wages, and Labor Allocation (10 of 10)

• Cannot say whether workers are better or worse off:

– Depends on the relative importance of cloth and food


in workers’ consumption.

Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved

You might also like