input demand: the labor and land marketsocw.upj.ac.id/files/slide-mgt101-slide10.pdf · or rkets ©...

© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

Prepared by:

Fernando & Yvonn Quijano

10 Chapter

Input Demand: The Labor

and Land Markets

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© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 2 of 26

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Chapter Outline

10 Input Demand: The Labor

and Land Markets

Input Markets: Basic Concepts

Demand for Inputs: A Derived Demand

Inputs: Complementary and Substitutable

Diminishing Returns

Marginal Revenue Product

Labor Markets

A Firm Using Only One Variable Factor of

Production: Labor

A Firm Employing Two Variable Factors of

Production in the Short and Long Run

Many Labor Markets

Land Markets

Rent and the Value of Output Produced on Land

The Firm’s Profit-Maximization Condition in

Input Markets

Input Demand Curves

Shifts in Factor Demand Curves

Resource Allocation and the Mix of Output

in Competitive Markets

The Distribution of Income

Looking Ahead

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INPUT DEMAND: THE LABOR

AND LAND MARKETS

FIGURE 10.1 Firm and Household Decisions

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INPUT MARKETS: BASIC CONCEPTS

DEMAND FOR INPUTS: A DERIVED DEMAND

derived demand The demand for

resources (inputs) that is dependent on the

demand for the outputs those resources

can be used to produce.

productivity of an input The amount of

output produced per unit of that input.

Inputs are demanded by a firm if and only if households demand the good or service

produced by that firm.

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INPUTS: COMPLEMENTARY AND SUBSTITUTABLE

Inputs can be complementary or substitutable.

DIMINISHING RETURNS

marginal product of labor (MPL) The

additional output produced by one

additional unit of labor.

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TABLE 10.1 Marginal Revenue Product per Hour of Labor in Sandwich Production (One Grill)

(1)

TOTAL LABOR

UNITS

(EMPLOYEES)

(2)

TOTAL

PRODUCT

(SANDWICHES PER

HOUR)

(3)

MARGINAL

PRODUCT OF

LABOR (MPL)

(SANDWICHES

PER HOUR)

(4)

PRICE (PX) (VALUE

ADDED PER

SANDWICH)a

(5)

MARGINAL

REVENUE

PRODUCT

(MPL X PX)

(PER HOUR)

0 0

1 10 10 $ .50 $ 5.00

2 25 15 .50 7.50

3 35 10 .50 5.00

4 40 5 .50 2.50

5 42 2 .50 1.00

6 42 0 .50 0

aThe “price” is essentially profit per sandwich; see discussion in text.

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MARGINAL REVENUE PRODUCT

marginal revenue product (MRP) The

additional revenue a firm earns by

employing one additional unit of input,

ceteris paribus.

MRPL = MPL x PX

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FIGURE 10.2 Deriving a Marginal

Revenue Product Curve

from Marginal Product

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LABOR MARKETS

A FIRM USING ONLY ONE VARIABLE

FACTOR OF PRODUCTION: LABOR

A profit-maximizing firm will add inputs—in the case

of labor, it will hire workers—as long as the marginal

revenue product of that input exceeds the market

price of that input—in the case of labor, the wage.

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LABOR MARKETS

FIGURE 10.3 Marginal Revenue Product and Factor Demand for a Firm

Using One Variable Input (Labor)

When a firm uses only one variable factor of production, that factor’s marginal revenue

product curve is the firm’s demand curve for that factor in the short run.

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LABOR MARKETS

FIGURE 10.4 The Two Profit-Maximizing Conditions Are

Simply Two Views of the Same Choice Process

Comparing Marginal Revenue and Marginal

Cost to Maximize Profits

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LABOR MARKETS

FIGURE 10.5 The Trade-Off Facing Firms

Assuming that labor is the only variable input, if society values a good more than it costs

firms to hire the workers to produce that good, the good will be produced. In general, the

same logic also holds for more than one input. Firms weigh the value of outputs as

reflected in output price against the value of inputs as reflected in marginal costs.

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LABOR MARKETS

A FIRM EMPLOYING TWO VARIABLE FACTORS

OF PRODUCTION IN THE SHORT AND LONG RUN

In firms employing just one variable factor of production,

a change in the price of that factor affects only the

demand for the factor itself. When more than one factor

can vary, however, we must consider the impact of a

change in one factor price on the demand for other

factors as well.

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LABOR MARKETS

Substitution and Output Effects of a Change

in Factor Price

TABLE 10.2 Response of a Firm to an Increasing Wage Rate

TECHNOLOGY

INPUT REQUIREMENTS

PER UNIT OF OUTPUT

UNIT COST IF

PL = $1

PK = $1

(PL x L) + (PK x K)

UNIT COST IF

PL = $2

PK = $1

(PL x L) + (PK x K) K L

A (capital intensive) 10 5 $15 $20

B (labor intensive) 3 10 $13 $23

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LABOR MARKETS

TABLE 10.3 The Substitution Effect of an Increase in Wages on a Firm Producing 100

Units of Output

TO PRODUCE 100 UNITS OF OUTPUT

TOTAL

CAPITAL

DEMANDED

TOTAL

LABOR

DEMANDED

TOTAL

VARIABLE

COST

When PL = $1, PK = $1,

firm uses technology B 300 1,000 $1,300

When PL = $2, PK = $1,

firm uses technology A 1,000 500 $2,000

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LABOR MARKETS

factor substitution effect The tendency

of firms to substitute away from a factor

whose price has risen and toward a factor

whose price has fallen.

output effect of a factor price increase

(decrease) When a firm decreases

(increases) its output in response to a

factor price increase (decrease), this

decreases (increases) its demand for all

factors.

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LABOR MARKETS

MANY LABOR MARKETS

If labor markets are competitive, the wages in those markets are

determined by the interaction of supply and demand. As we have

seen, firms will hire workers only as long as the value of their

product exceeds the relevant market wage. This is true in all

competitive labor markets.

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LAND MARKETS

demand determined price The price of a

good that is in fixed supply; it is determined

exclusively by what firms and households

are willing to pay for the good.

pure rent The return to any factor of

production that is in fixed supply.

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LAND MARKETS

The supply of land of a given quality at a given location is truly fixed in supply. Its value

is determined exclusively by the amount that the highest bidder is willing to pay for it.

Because land cannot be reproduced, supply is perfectly inelastic.

FIGURE 10.6 The Rent on Land Is Demand Determined

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LAND MARKETS

A firm will pay for and use land as long as the revenue earned from selling the product

produced on that land is sufficient to cover the price of the land. Stated in equation form, the

firm will use land up to the point at which MRPA= PA, where A is land (acres).

RENT AND THE VALUE OF OUTPUT PRODUCED

ON LAND

The demand for land is a derived demand.

Agricultural or even desert land will be developed

when there is a demand for housing because land

is a key input used in the production of housing.

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THE FIRM’S PROFIT-MAXIMIZATION CONDITION

IN INPUT MARKETS

Profit-maximizing condition for the perfectly

competitive firm is

PL = MRPL = (MPL x PX)

PK = MRPK = (MPK x PX)

PA = MRPA = (MPA x PX)

where L is labor, K is capital, A is land (acres), X is

output, and PX is the price of that output.

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INPUT DEMAND CURVES

SHIFTS IN FACTOR DEMAND CURVES

If product demand increases, product price will rise and

marginal revenue product (factor demand) will increase—the

MRP curve will shift to the right. If product demand declines,

product price will fall and marginal revenue product (factor

demand) will decrease—the MRP curve will shift to the left.

The Demand for Outputs

The production and use of capital enhances the productivity of

labor and normally increases the demand for labor and drives

up wages.

The Quantity of Complementary and

Substitutable Inputs

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INPUT DEMAND CURVES

When a firm has a choice among alternative technologies,

the choice it makes depends to some extent on relative input

prices.

The Prices of Other Inputs

Technological Change

Technological change can and does have a powerful influence on factor demands. As new

products and new techniques of production are born, so are demands for new inputs and

new skills. As old products become obsolete, so, too, do the labor skills and other inputs

needed to produce them.

technological change The introduction of

new methods of production or new products

intended to increase the productivity of

existing inputs or to raise marginal products.

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RESOURCE ALLOCATION AND THE MIX OF

OUTPUT IN COMPETITIVE MARKETS

marginal productivity theory of income

distribution At equilibrium, all factors of

production end up receiving rewards

determined by their productivity as measured

by marginal revenue product.

THE DISTRIBUTION OF INCOME

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LOOKING AHEAD

We have now completed our discussion of competitive

labor and land markets. The next chapter takes up the

complexity of what we have been loosely calling the

“capital market.” There we discuss the relationship

between the market for physical capital and financial

capital markets, and look at some of the ways that firms

make investment decisions.

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demand determined price

derived demand

factor substitution effect

marginal product of labor

(MPL)

marginal productivity theory

of income distribution

marginal revenue product

(MRP)

REVIEW TERMS AND CONCEPTS

output effect of a factor price

increase (decrease)

productivity of an input

pure rent

technological change

Equations:

MRPL = MPL x PX

W*= MRPL

input demand: the labor and land marketsocw.upj.ac.id/files/slide-mgt101-slide10.pdf · or rkets ©...

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