Chapter+18+(The+Markets+for+the+Factors+of+Production)

**Chapter 18 The Markets For The Factors Of Production**



source: http://www.library.sfsu.edu/about/depts/images/larc.jpg

(Introduction)

The supply and demand for labor, land, and capital are crucial because they determine the prices of wages, paid to landowners, and capital owners. The key term that you need to know is the factors of production, which are the inputs used to produce goods and services. The demand for a factor of production is derived from its supply; therefore it is called a derived demand. There are three major elements in a factor of production which are //land, labor, and capital //. However labor is the most important one.

(The Demand For Labor)

__//The Competitive Profit- Maximizing Firm//__

Two Assumptions to make:

1) the firm is competitive in the market 2) the firm is profit-maximizing

//The Production Function And The Marginal Product of Labor//

Diminishing marginal product: As the number of workers increases, the level of output increases for a certain period of time. However once it becomes overloaded with too many workers, the conflicts occur and the production level drops. Therefore the marginal product decreases.


 * Marginal product of labor: the increase in the amount of output from an additional unit of labor

//What Causes The Labor Demand Curve To Shift?//

1) the output price 2) technological change 3) the supply of other factors

(The Supply of Labor)

//The Tradeoff Between Work and Leisure//

//“You work or you don’t work”//

The labor supply curve reflects the opportunity cost for giving up leisure and working instead.

1) Changes in Tastes 2) Changes in Alternative Opportunities 3) Immigration

These three factors cause the labor supply curve to shift.

__//Equilibrium in the labor market//__

1) The supply and demand for labor balances itself. 2) The value of the marginal product of labor = wage
 * the value of the marginal product of labor: the marginal product of an input times the price of the output

When any changes occur in the equilibrium wage, the value of the marginal product and the equilibrium always change at the same amount. (Reason for this is #2)

__//Shift in Labor Supply and Demand//__



source: http://www.benbest.com/polecon/shift.gif

(The Other Factors of Production: Land and Capital)


 * Capital: the structures or equipments needed to produce goods and services

__//Equilibrium in the markets for land and capital//__

There are two prices: a) the purchase price and b) the rental price. a) Purchase price

- the price a person pays to own land or capital indefinitely.

b) Rental price

- the price a person pays to rent land or capital for a short period.

As long as the market is competitive and profit-maximizing, the rental price equals the value of the marginal product for factor.

media type="youtube" key="gOmWlwdHoOU" height="344" width="425" (Part 1)

media type="youtube" key="1zIssBOrpk8" height="344" width="425"

(Part 2)

Sources: http://kr.youtube.com/watch?v=1zIssBOrpk8&feature=related http://kr.youtube.com/watch?v=gOmWlwdHoOU&feature=related

Questions for Review

1. What are the two type of prices to pay for the production prices? 2. What is the diminishing marginal product? 3. What are the causes for the shift in the demand curve?

Answers

1. There are purchase prices and rental prices for the capital and land. 2. The diminishing marginal product happens when the increase in the number of workers begins to cause conflicts in production. The production level will decrease if any conflicts occur and as a result the marginal product level will drop. 3. The causes for the shift in the demand curve are the output price, technological change, and the supply of other factors.