CHAPTER+18+.THE+MARKETS+FOR+THE+FACTORS+OF+PRODUCTION+;)

=Chapter 18: The Markets For the Factors of Production = = = 

=INTRODUCTION = = =  In this chapter, we will learn about labor markets and how its governed by the forces of supply and demand. It provides basic analysis of factor markets. The factors of production, inputs used to produce goods and services comes into play.

Labor markets are very different from most other markets because it is a derived demand, a demand that is derived from its decision to supply a good in another market. Instead of having services that create goods to give to a buyer, usually labor services are small inputs to others in the production of a good. Thus, to understand it the link between the production of goods and the demand for labor.

A typical firm usually decides the quantity of labor to demand. As it runs, it needs to hire workers, who in turn work for a certain good. The firm then sells the good, pays the workers, and keeps the remaining money as profit. To do this, there must be 2 things that a firm must be. First, it must be a competitive firm in both hiring the workers and creating the good. Thus, the firm becomes a price taker, only having to worry about how many workers to hire and how many of the goods to sell. Second, the firm must be a profit-maximizing firm. This means, it does not matter how many goods are sold, or how many workers are hired, as long as the firm is making profit. Thus the supply of apples sold and the amount of workers hired is reflected by the goal of the firm to maximize profit.

=**Production Function and the Marginal Product of Labor:** = = =  When making a hiring decision, a firm considers how much the production of goods is affected by the amount of workers.

So, to decide on the quantity of labor to hire, the company first looks at the marginal product of labor. Marginal product of labor is the increase in the amount of output from an additional unit of labor. However, as shown in the chart, it shows that marginal product of labor decreases with each worker. This is because as more and more workers are hired, there is less supply to create or produce the good. This is called diminishing marginal product.

Now, since firms are concerned with making more money, the firms considers how much profit each worker brings in. Profit is total revenue minus total cost, so the profit from an additional worker is the worker's contribution to revenue minus the worker's wage. So to find each workers contribution to revenue, first you must convert the marginal product of labor into the value of the marginal product. To do this, you must find the price of the good and compare it to the amount of goods being created by that worker. (see chart above again).

This is all called value of marginal prodcut. It is becasically the marginal product of an input times the price of the output. Now to finally find how many workers would be profit maximizing to the firm, the firm needs to compare the amount of money each worker brings in with the amount of pay each worker has to be paid. The firm keeps hiring until the point where they are losing profit, which would be 4 workers in the chart above. Thus, the firm only hires 3 workers.

To maximize profit the firm hires workers up to the point where market wage crosses with the value of marginal product.

 =**Why Labor-Demand Curves Shift:** = = =  There are several reason that the labor-demand curve shifts. Several examples include, the output price, techonological changes, and the supply of other factors

**Output Price:**
= =  Because the value of marginal is marginal product times the price of firms output, when the output porice changes, the value of marginal product changes. An increase in the price of a good would raise the marginal product of each worker and increase labor demand for these firms. This also works in the decrease of workers when marginal product decreases.

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<span style="font-family: 'Comic Sans MS',cursive;"> Change in echonology will create faster, better ways of doing things. More times than not, techonological change brings a rise in marginal product of labor. However, in cases such as cheaper ways of producing goods, labor demand can dropped. These are called labor-saving saving techological change. However, these advances still create a rising employment though the wages are continuaslly increasing.

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<span style="font-family: 'Comic Sans MS',cursive;"> The quantit abailable can easily affect the marginal product of other factors. A fall in a good to help create a certain good will reduce the marginal product of the workers, which in turn lowers the demand for the workers.

<span style="font-family: 'Comic Sans MS',cursive;"> =<span style="font-family: 'Comic Sans MS',cursive;">**Labor Supply:** = =<span style="font-family: 'Comic Sans MS',cursive;"> = <span style="font-family: 'Comic Sans MS',cursive;"> Now, after we have learned about labor demand, we need to learn about labor supply. The labor supply curve is mainly reflected by how workers' face trade-offs. The workers must consider the trade-off between work and leisure. With a higher increase in wage, workers want to supply more work. Though with higher pay, one might consider working less, for this section, let us only focus on the upward increase in slope of labor-supply.

Now, labor-supply curve shifts when people change the amount of work they want to work because of a change in wage. 3 main examples of this change are changes in tastes, changes in alternative opportunities and immigration.

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<span style="font-family: 'Comic Sans MS',cursive;"> As times goes on, changes in attitudes torward work changes the supply of labor. For instance, as more and more women begin to start working, the labor supply keeps increasing

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<span style="font-family: 'Comic Sans MS',cursive;"> The supply of labor usually depens on the opportunities available in other markets. As wages for a certain job increases, other people from otherjobs might want to change their occupations. Thus the supply of labor for one market falls and another increases.

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<span style="font-family: 'Comic Sans MS',cursive;"> Movement of workers, and immigration icreases an important amount in labor supply. Thus, many of the debates in immigration are usually about its effect on labor supply.

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<span style="font-family: 'Comic Sans MS',cursive;"> So now we established how the wagesisused to balance the supply and demandfor labor and how it equals the value of marginal product of labor. Thusanyacton the supply and demand for labor must changes the equilibrium wage and the value of the marginal product by the same amount because they are always equal. This is shown in the chart below.

As the supply of labor shirts to the right, the quantitiy of labor exceeds the quantity demanded. This creates a fall in wages for workers, which in turn makes firms turn to higher amounts of hiring due to the new profitable opportunities.

<span style="font-family: 'Comic Sans MS',cursive;"> =<span style="font-family: 'Comic Sans MS',cursive;">**Shifts in Labor Demand:** = =<span style="font-family: 'Comic Sans MS',cursive;"> = <span style="font-family: 'Comic Sans MS',cursive;"> An increase in the price of the good does not raise the value for marginal product of labor for each worker, but it does raise the value of marginal product. Thus, with a higher price of apples, hiring more apple picker is now more profitable. The chart below shows how the demand for labor shifts to the right from D1 to D2. thus the equilibrium wage rses, and the equilibrium employment rises. This shows that prosperity ofr firms is often linked to proseperity for workers in the industry.

<span style="font-family: 'Comic Sans MS',cursive;"> =<span style="font-family: 'Comic Sans MS',cursive;">**Land and Capital:** = =<span style="font-family: 'Comic Sans MS',cursive;"> = <span style="font-family: 'Comic Sans MS',cursive;"> While hiring workers, firms also have to think about other factors in production. Such factors are labor, land and capital. The first 2 terms, labor and land are easy to understand by the name itself. Capital on the otherhand, refers the the amount of equipment and the structures used to produce goods and services.

Equilibrium in the markets for Land and Capital. To determine how much owners of land and capital earn for their contribution, we need to distinguish the 2 different prices, the purchase price and the rental price. The purchase price of land or capital is the price a person pays to own a factor of production completely. A rental price is a price to use tha land or capital for a certain amount of times.

Now wages, are simply a rental price of labor. Thus the demand of labor and capital are determined excatly like wages, as shown in the 2 charts below.

As long as the firms continue to be competitive and profit-maximizing, each factor's rental price must be equal to the value of the marginal product for that factor. Thus, buyers are more willing to pay for a piece of land or capital if its more profitable and in turn equilibrium purchase price of a piece of land or capital depends on both the current value of margnal product and the value of the marginal product prices expected.

So in this chapter, we have learned about how labor land and capital are compensated for their roles in the production process. This is called the neoclissical theory of ditribution. According to this theory, the amount paid to each foctor of production depends on the supply and edmand for that factor. This theory of distribution is widely accepted. even most economists use this to xplain how the U.S. economy's inomes is distributed among the economy.

=<span style="font-family: 'Comic Sans MS',cursive;"> Key Terms/Concepts that you need to know = =<span style="font-family: 'Comic Sans MS',cursive;"> = <span style="font-family: 'Comic Sans MS',cursive;"> **-factors of production:** the inputs used to produce goods and services
 * -production function:** the relationship between the quantity of inputs used to make a good and the quanttiy 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 an input declines as the quantity of the input increases
 * -valueof the marginal product:** the marginal product of an input times the price of the output
 * -capital** **:** the equipment and structures used to produce goods and services