Chapter+18+THE+MARKETS+FOR+THE+FACTORS+OF+PRODUCTION+JennY+Kelsey


 * Factors of production:** the inputs sued to produce products
 * Production function:** the relationship between the quantity of inputs and quantity of outputs
 * Marginal Product of Labor:** the increase in the quantity of output from an additional unit of labor
 * Diminishing Marginal Product:** property where an input declines as the quantity of the input increases
 * Value of the Marginal Product:** the marginal product of an input with the price of the output
 * Capital:** the stock of equipment and structures used for production.

=Summary= The economy's income is distributed in the markets for factors of production. There are labor, land, and capital. The demand for factos is a derived demand that comes from the firms that sue the factors to produce goods and services. The supply of labor arises from individual's trade-off between work and leisure. The price paid to each factor adjusts to balance the supply and demand for that factor. Because factors of production are sued together, the marginal product of any one facotr depends on the quantitiees of all factors that are available.

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=The Demand for Labor=

The Competitive Profit-Maximizing Firm
The supply and demand curves determine the price of products. http://www.doctorhousingbubble.com/wp-content/uploads/2008/05/basic_supply_demand.png The supply and demand for workers determine wages for workers. http://www.eoearth.org/upload/thumb/3/36/Supply_and_Demand_Model_for_Labor_graph.gif/250px-Supply_and_Demand_Model_for_Labor_graph.gif

The Production Function and the Marginal Product of Labor
To make its hiring decision, the firm must consider how the size of its work force affects the amount of output produced. The economists use the term production function to describe the relationship between the quantity of inputs sued in production and the quantity of output from production. To make a rational decision, the firm should consider the marginal product of labor. When the firm increases the number of workers form 1 to 2, the amount of products produced rises. The firms must be also aware that the production process creates diminishing marginal product. http://library.thinkquest.org/C004323/low/micro1a.jpg

The Value of the Marginal Product and the Demand for Labor
To find the worker's contribution to revenue, the firm must convert the marginal product of labor into the value of the marginal product. Because the market price is constant for a competitive firm, the value of the marginal product diminishes as the number of workers rises. Economists sometimes call this the firm's marginal revenue product: It is the extra revenue the firm gets from hiring an additional unit of a factor of production.

[[image:http://www.cis.org/articles/2005/back201.gif width="367" height="367" caption="The Value of the Marginal Product of Labor"]]
http://www.cis.org/articles/2005/back201.gif This figure shows how the value of the marginal product depends on the number of workers. The curve slopes downward because of diminishing marginal product. For a competitive, profit-maximizing firm, this value of-marginal-product curve is also the firm's labor-demand curve. A competitive, profit-maximizing firm hires workers up to the point where the value of the marginal product of labor equals the wage. The value-of-marginal-product curve is the labor-demand curve for a competitive, profit maximizing firm.

What Causes the Labor-Demand Curve to Shift?
> =The Supply of Labor=
 * 1) The output price: The value of the marginal product is marginal product times the price of the firm's output. Thus, when the output price cahnges, the value of the marginal product chagnes, and the labor-demand curve shifts.
 * 2) Technological Change: Technological advance typically raises the marginal product of labor, which in turn increases the demand for labor and shifts the labor-demand curve to the rights. The invention of a cheap industrial robot, for instance, could conceivably reduce the marginal product of labor shifting the labor-demand curve to the left. This is called labor-saving. Labor augmenting is technological advance that persistently rising employment in the face of rising wages.
 * 3) The Supply of Other Factors: A fall in the supply of products will reduce the marginal product of workers and thus the demand for workers.

The Trade-off between Work and Leisure
The labor-supply curve reflects how workers' decisions about the labor-leisure trace-off respond to a change in that opportunity cost. An upward-sloping labor supply curve means that an increase in the wage induces workers to increase the quantity of labor they supply.

What Causes the Labor-Supply Curve to Shift?
=**Equilibrium in the Labor Market**=
 * 1) Changes in Tastes
 * 2) Changes in Alternative Opportunities
 * 3) Immigration

**Shifts in Labor Supply **


When labor supply increases from perhaps because of an immigration of new workers, the equilibrium wage falls from W1 to W2. At this lower wage, firms hire more labor, so emplyment rises from L1 to L2. The change in the wage reflects a change in the value of the marginal product of labor: with more workers, the added output from an extra worker is smaller.



**Shifts in Labor Demand**
When labor demand increase maybe because of an increase in the price of the firm's output, the equilibrium wage rises and employment rises. Again, the change in the wage reflects: WIth a higher outpur price, the added output from an extra worker is more valuable.

**Capital**: all the the equipment and factors that are needed/ used to produce the product of the company whether it is goods or services.
Capital represents the goods produced in the past that are being used NOW to produce the companies goods and services. For instance, in a orange firm, the capital stock includes: chairs used to pick oranges, the trucks used to transport the oranges and even the buildings used to store the oranges.


 * Labor, land and capital each earn the value of their marginal contribution to the production process.

Questions Answers for Chapter18 Jenn
 * 1) Give two examples of events that shifts the demand for labor.
 * 2) Give two examples of events that shifts the supply of labor.