week13 inputs demand
DESCRIPTION
for quantity surveyorsTRANSCRIPT
Input Demand:
The Labor and Land Markets
AQS 2141 Economics for Quantity Surveyors 1
Input Markets: Basic Concepts
Demand for Inputs: A Derived Demand
The demand for resources (inputs) that is
dependent on the demand for the outputs
those resources can be used to produce.
Inputs are demanded by a firm if and only if
households demand the good or service
produced by that firm.
AQS 2141 Economics for Quantity Surveyors 1
Input Markets: Basic Concepts
(Cont’d)
Inputs: Complementary and Substitutable
Inputs can be complementary or substitutable.
Diminishing Returns
Marginal product of variable inputs declines.
AQS 2141 Economics for Quantity Surveyors 1
Input Markets: Basic Concepts
(Cont’d)
Marginal Revenue Product (MRP)
The additional revenue a firm earns by
employing one additional unit of the input.
AQS 2141 Economics for Quantity Surveyors 1
Labor Markets
A profit-maximising firm will add inputs – in the
case of labor, it will hire workers – as long as
the marginal revenue product of that inputs
exceeds the market price of that input – in the
case of labor, the wage.
AQS 2141 Economics for Quantity Surveyors 1
Labor Markets (Cont’d)
For a perfectly competitive firm employing one
variable factor of production, labor, the
condition W = MRPL is exactly the same as the
condition P = MC.
Firms weigh the value of outputs as reflected
in output price against the value of inputs as
reflected in marginal cost.
AQS 2141 Economics for Quantity Surveyors 1
Labor Markets (Cont’d)
For a firm employs two variable factors of
production, a change in factor price has both a
factor substitution effect and an output effect.
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.
AQS 2141 Economics for Quantity Surveyors 1
Labor Markets (Cont’d)
Output effect of a factor price increase:
When a firm faces higher costs, it is likely to
produce less in the short run. When a firm
decides to decrease output, its demand for all
factors declines.
AQS 2141 Economics for Quantity Surveyors 1
Labor Markets (Cont’d)
Output effect of a factor price decrease:
A decrease in the price of a factor of
production, in contrast, means lower costs of
production. If their output price remains
unchanged, firms will increase output. This, in
turn, means that demand for all factors of
production will increase.
AQS 2141 Economics for Quantity Surveyors 1
Land Markets
Land is in strictly fixed supply, its price is
demand determined – that is, its price is
determined exclusively by what households
and firms are willing to pay for it.
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 that land. The firm will use land up to
the point at which MRPA = PA where A is land.
AQS 2141 Economics for Quantity Surveyors 1
Firm’s Profit-maximization
Condition in Input Markets
Every firm has an incentive to use variable
inputs as long as the revenue generated by
those inputs covers the costs of those inputs
at the margin.
Firms will employ each input up to the point
that its price equals its marginal revenue
product.
AQS 2141 Economics for Quantity Surveyors 1
Input Demand Curves
A shift in a firm’s demand curve for a factor of
production can be influenced by the demand
for the firm’s product, the quantity of
complementary and substitutable inputs, the
prices of other inputs, and changes in
technology.
AQS 2141 Economics for Quantity Surveyors 1
Reference:
Case, K.E. & Fair, R.C. (2007) Principles of Economics (8th Edition).
New Jersey: Pearson Education, Inc. Chapter 10.
AQS 2141 Economics for Quantity Surveyors 1
Input Demand:
The Capital Markets and the Investment Decision
AQS 2141 Economics for Quantity Surveyors 1
Capital
Those goods produced by the economic
system that are used as inputs to produce
other goods and services in the future.
AQS 2141 Economics for Quantity Surveyors 1
Physical, or Tangible Capital
Materials things used as inputs in the
production of future goods and services.
Social Capital, or Infrastructure
Capital that provides services to the public.
Intangible Capital
Nonmaterial things that contribute to the
output of future goods and services.
AQS 2141 Economics for Quantity Surveyors 1
Human Capital
A form of intangible capital that includes the
skills and other knowledge that workers have
or acquire through education and training and
that yields valuable services to a firm over
time.
AQS 2141 Economics for Quantity Surveyors 1
Measuring Capital
Capital Stock
For a single firm, the current market value of
the firm’s plant, equipment, inventories, and
intangible assets.
AQS 2141 Economics for Quantity Surveyors 1
Investment and Depreciation
Investment
New capital additions to a firm’s capital stock.
Depreciation
The decline in an asset’s economic value over
time.
AQS 2141 Economics for Quantity Surveyors 1
Capital Market
The market in which households supply their
savings to firms that demand funds to buy
capital goods.
AQS 2141 Economics for Quantity Surveyors 1
Capital Income: Interest and
Profits
Capital income: income earned on savings that
have been put to use through financial
markets.
Interest: The payments made for the use of
money.
Interest Rate: Interest payments expressed as
a percentage of the loan.
AQS 2141 Economics for Quantity Surveyors 1
Capital Income: Interest and
Profits (Cont’d)
Profit: The excess of revenues over cost in a
given period.
Functions of Interest and Profit
1. Interest may function as an incentive to
postpone gratification.
2. Profit serves as a reward for innovation and
risk taking.
AQS 2141 Economics for Quantity Surveyors 1
The Demand for New Capital and
The Investment Decision
Forming Expectation
The Expected Benefits of Investment
The investment process requires that the
potential investor evaluate the expected flow of
future productive services that an investment
project will yield.
AQS 2141 Economics for Quantity Surveyors 1
The Demand for New Capital and
The Investment Decision (Cont’d)
Forming Expectation (Cont’d)
The Expected Costs of Investments
The ability to lend at the market rate of interest
means that there is an opportunity cost
associated with every investment project.
AQS 2141 Economics for Quantity Surveyors 1
Comparing Cost and Expected
Return
Expected Rate of Return
The annual rate of return that a firm expects to
obtain through a capital investment.
The expected rate of return on an investment
project depends on the price of the investment,
the expected length of time the project
provides additional cost savings or revenue,
and the expected amount of revenue
attributable each year to the project.
AQS 2141 Economics for Quantity Surveyors 1
Comparing Cost and Expected
Return (Cont’d)
Expected Rate of Return (Cont’d)
Only those investment projects in the economy
that are expected to yield a rate of return
higher than the market interest rate will be
funded. At lower market interest rates, more
investment projects are undertaken.
AQS 2141 Economics for Quantity Surveyors 1
Comparing Cost and Expected
Return (Cont’d)
The Expected Rate of Return and the Marginal
Revenue Product of Capital
A perfect competitive profit-maximizing firm
will keep investing in new capital up to the
point at which the expected rate of return is
equal to the interest rate.
AQS 2141 Economics for Quantity Surveyors 1
Comparing Cost and Expected
Return (Cont’d)
The Expected Rate of Return and the Marginal
Revenue Product of Capital (Cont’d)
The firm will continue investing up to the point
at which the marginal revenue product of
capital is equal to the price or capital, or
MRPK = PK .
AQS 2141 Economics for Quantity Surveyors 1
Reference:
Case, K.E. & Fair, R.C. (2007) Principles of Economics (8th Edition).
New Jersey: Pearson Education, Inc. Chapter 11.
AQS 2141 Economics for Quantity Surveyors 1