Factors of Production - rhsweb.org

Factors of Production - rhsweb.org

Factor Markets Chapter 18: Markets for Factors of Production: Land, Labor, Physical Capital & Human Capital Capital Goods = Machines Labor = Workers Product vs. Factor Markets Price How many goods to Produce? MC ATC P Revenue Goods and services sold PRODUCT Markets Spending MR

Goods and services bought 0 Quantity produced Efficient scale Demand Quantity Set MR = MC Determines Qty produced Maximizes profit FIRMS Factors of production Wages, rent, and profit HOUSEHOLDS FACTOR Markets Labor, land, capital & entrepreneurship

Income How many inputs to hire? Factors of production: land, labor, capital = Flow of inputs and outputs = Flow of dollars Value of YOUR Production Pay is based on the $ value of what you produce Qty X Price output = $ value of output Wage Wage S2 Q1 D2 Qty Automation & Outsourcing => D Rise Immigration => S ---------------- W1 ------------ ----------------

------------ W2 ----------- W2 ----------- ------------- W1 10 cups coffee X $2 each = $20 value Q1 Q2 D2 Qty Wages rise with scarcity! Computer Coders High Demand = Tech companies Wage Rate Low Supply = Scarce human capital, difficult to learn, higher drop out rate

S1 W2 E2 W 1 End Result: Wages E1 D2 D1 0 Q1 Q2 Quantity of Coders Derived Demand Demand for a factor of production is a derived demand: Demand for an input (factor) is derived from demand for a firms output Demand Product Leads to Demand for Factors of Production Land, Labor, Capital, Technology, etc

- Demand for tech workers is derived from the market demand for Apple products Market for I-phones The Market for Tech Workers Price of I-Phone PRODUCT Market Supply Wage of Tech Workers FACTOR Market $100,000 P Demand Demand 0 Supply

Q Quantity of Apple Products 0 Q Quantity of Tech workers Any change in PRODUCT MARKET will change demand in FACTOR MARKET. Copyright2003 Southwestern/Thomson Learning Marginal Revenue Product (MRP) MRP = Measures the value in dollars of output produced MRP = demand curve for inputs (labor, physical capital, etc) MRP = marginal product of input X market price of output MRP = MP (of input) Price (of output) Example: MP Labor = 10 Shirts/day T-Shirt price= $30 dollars MRP = 10 X $30 = $300 Labor Demand Curve

MRP = Labor Demand curve (MP (labor) Price (output) ) Wage rate is fixed in short run Set wage rate = MRP (to determine # of workers) Value of the Marginal Product Qty Labor 0 1 2 3 4 Low Skilled Workers Total Product 0 25 45 60 70 Marginal Product _25 _20 _15 _10 MP

Price MRP _.50 _.50 _.50 _.50 $12.50 $10.00 $7.50 $5.00 MFC = wage rate Hire 2 workers where MRP = wage rate 0 ------------------- $10 2 Declining MP reduces value of next worker MRP (demand curve for labor) Quantity of Apple Pickers

To Maximize Profit: MRP = MFC Marginal Factor Cost (MFC)- additional cost to hire one additional factor of production (input) Firms hires a resource up to the point where MRP = MFC For Labor => MFC = Wage Rate Firms are Wage Takers! Wage rate fixed in short run Wage Factor Market: Labor Market MFC $12hr MRP Qty Practice Problem Lesson 2, Activity 44

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