Chapter 19 Flashcards
(18 cards)
factors of production
Inputs used to produce goods and services
(labor, land, capital)
Prices and quantities of Factors of production are determined by..
determined by supply & demand in factor markets.
Markets for the factors of production
Are like markets for goods & services
Except the demand for a factor of production is a derived demand
derived demand…
Derived from a firm’s decision to supply a good in another market
production function:
the relationship between the quantity of inputs used to make a good and the quantity of output of that good
(relationship between inputs and outputs)
Marginal product of labor
MPL= ΔQ / ΔL
The increase in the amount of output from an additional unit of labor
Diminishing marginal product
- The marginal product of an input declines as the quantity of the input increases
- Explains the shape of the production function
Value of the marginal product
VMPL=P x MPL
To maximize profits, hire workers up to the point where
VMPL = W(wage)
Anything that increases P or MPL at each L will increase
VMPL and shift the labor demand curve upward.
Things that Shift the Labor Demand Curve
Changes in the output price, P
Technological change (affects MPL)
The supply of other factors (affects MPL)
mc
MC = W / MPL
Labor-supply curve
Reflects how workers’ decisions about the labor-leisure trade-off
Respond to a change in opportunity cost of leisure
An increase in W is
an increase in the opp. cost of leisure.
What Causes the Labor-Supply Curve to Shift?
- Changes in preferences
- Changes in alternative opportunities
- Immigration
The wage adjusts to balance
supply and demand for labor.
The wage always equals VMPL.
Shifts in Labor Supply
- Increase in supply
- Decrease in wage
- Lower marginal product of labor
- Lower value of marginal product of labor
- Higher employment
Shifts in Labor Demand
- Increase in demand
- Higher wage
- No change in marginal product of labor
- Higher value of marginal product of labor
- Higher employment
