Chapter+18

=The Markets for the Factors of Production =

Table of Content: 1. Title 2. Intro 3. Content 4. Conclusion 5. Glossary

by Everyone

//This chapter we will be looking at the supply and demand for labor, land, and capital (aka factors of production) This time we'll be looking at the profit-maximizing firm deciding how much factor to buy. //

 ===Demand for Labor  How do we know the firm's demand for labor?(example livestock farm)=== We must assume //2 things //: 1) assume that our firm is //competitive// in both market for livestock and for farmers. 2) assume that the firm is //profit-maximizing //.  //Production function //: relationship b/t the quantity of inputs used to make a good and the quantity of output of that good //***As quantity of the input increases, the production function gets flatter because of the diminishing marginal product *** // // diminishing marginal product <span style="font-family: Arial,Helvetica,sans-serif;">: property whereby the marginal product of an input declines as the quantity of the input increases // As each additional labor is added, //<span style="color: #7ac0eb; font-family: 'Times New Roman',Times,serif; font-size: 120%;">marginal product of labor // decreases. //<span style="color: #dc60dc; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Value of the marginal product is proportional // with the ** MPL **
 * ** MPL ** is the increase in the amount of output from an additional unit
 * change in Quantity / change in Labor
 * ** VMPL ** is the marginal product of an input times the price of the output //<span style="color: #fb2323; font-family: 'Times New Roman',Times,serif; font-size: 120%;">(basically the revenue each additional labor force brings) //
 * Thus, a competitive, profit-maximizing firm hires workers up to the point //<span style="color: #7ac0eb; font-family: 'Times New Roman',Times,serif; font-size: 120%;">where VMPL (revenue of having an additional laborer) equals wage (he cost each laborer) //***

<span style="color: #7ac0eb; display: block; font-family: 'Comic Sans MS',cursive; font-size: 195%; text-align: left;">Supply for Labor
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?

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

**Equilibrium in the Labor Market**

 * 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.

Citations: http://library.thinkquest.org/C004323/low/micro1a.jpg 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