Lecture 15 Notes - Econ 101 Introduction to Microeconomics...

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  Econ 101 Introduction to Microeconomics Professor Richard V. Burkhauser 18 18 The Markets for the Factors of Production
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Econ 101 – Professor Burkhauser Key Concepts factors of production, p. 394 production function, p. 396 marginal product of labor, p. 396 diminishing marginal product, p. 396 value of the marginal product, p. 397 capital, p. 406 derived demand, class output effect, class substitution effect, class
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Econ 101 – Professor Burkhauser Short Run Demand for Labor in the Cookie Industry Capital Fixed Labor Variable
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Firm Industry Cookie Market Figure 18.1 Firm’s Output Choice in the Short Run P* Q* q* D S(W*) MC(W*)
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Econ 101 – Professor Burkhauser Firm’s Output Choice in the Short Run Profit maximization condition: P = MC P* determined by market Firm takes P* as given Chooses q* to maximize profit
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Econ 101 – Professor Burkhauser Demand for Labor is a Derived Demand P* = MC MC = w*d l /dq P*dq/d l = W* Value Marginal Product (VMP) = W* See Table 13.1.
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Table 13.1 Relationship between Marginal Physcial Product and Marginal Cost 5/2 5 66 5 7 5/4 5 64 5 6 5/5 5 60 5 5 5/10 5 55 5 4 5/15 5 $2.50 2 $1.25 4 $1.00 5 $0.50 10 $0.33 15 45 5 3 $0.25 5/20 5 20 30 5 2 $0.50 5/10 5 10 10 5 1 - - 5 0 0 5 0 MC w(d l /dq) w/(dq/d l ) Wage (w) MPP dq/d l Total Output (q) Capital (k) Labor ( l )
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W L Industry Firm Labor Market Figure 18.2 Demand for Labor in the Short Run S D(P*) D(P*, K 0 ) L* W* l *
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Econ 101 – Professor Burkhauser Firm’s Labor Demand in the Short Run Profit maximization condition: VMP = W* W*: determined by the market Firm takes W* as given Chooses l to maximize profits In equilibrium, l will exactly map into q for a given production function (Dual)
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Table 18.1: How the Competitive Firm Decides How Much Labor to Hire Labor K 0 Cookie Output (q) Marginal Physical Product Price (P*) Value MP (P*dq/d l ) Wage (W*) MC W*/(dq/d l ) 0 10 0 -- $2 -- $20 -- 1 10 5 5 $2 $10 $20 $4.00 2 10 15 10 $2 $20 $20 $2.00 3 10 30 15 $2 $30 $20 $1.33 4 10 50 20 $2 $40 $20 $1.00 5 10 65 15 $2 $30 $20 $1.33 6 10 75 10 $2 $20 $20 $2.00 7 10 83 8 $2 $16 $20 $2.50 8 10 88 5 $2 $10 $20 $4.00 VMP and MC
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Figure 18.3 Derived Demand Firm’s Demand for Labor when Price of Cookies = $2 4 $40 5 $30 6 $20 7 $16 8 $10 L VMP Price of Cookies = $2 8 $10 Price of labor 6 $20 5 $30 4 $40 D(2*,K 0 ) 7 $16
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Figure 18.4 Marginal Cost of Cookies for a Competitive Firm (Wage = $20) $/unit q $1.00 $2.50 $1.33 $2.00 $4.00 5 30 50 65 75 15 83 88 MR MC (W = $20) 8 7 6 5 4 3 2 1 l
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Table 18.2: An Increase in Price from $2 to $4 Labor K 0 Cookie Output (q) Marginal Physical Product Price (P*) Value MP (P*dq/d l ) Wage (W*) MC W*/(dq/d l ) 0 10 0 -- $2 -- $20 -- 1 10 5 5 $2 $10 $20 $4.00 2 10 15 10 $2 $20 $20 $2.00 3 10 30 15 $2 $30 $20 $1.33 4 10 50 20 $2 $40 $20 $1.00 5 10 65 15 $20 $1.33 6 10 75 10 $20 $2.00 7 10 83 8 $20 $2.50 8 10 88 5 $20 $4.00 VMP and MC $4 $60 $4 $40 $4 $32 $4 $20 $80 $4 $60 $4 $40 $4 $20 $4 $4
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Figure 18.5 Derived Demand Firm’s Demand for Labor when Price of Cookies = $2 4 $80 5 $60 6 $40 7 $32 8 $20 L VMP Price of Cookies = $4 Price of labor 8 $10 6 $20 5 $30 4 $40 D(2*,K 0 ) 7 $16 D(4*,K 0 )
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Figure 18.4 Marginal Cost of Cookies for a Competitive Firm (Wage = $20) $/unit q MR MR $1.00 $2.50 $1.33 $2.00 $4.00 5 30 50 65 75 15 83 88 MC (W = $20) 8 7 6 5 4 3 2 1 l
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Industry Firm Cookie Market Figure 18.6 Effect of a Change in Demand for Cookies D 1 S (W 1 ) MC(W 1 ) P 1 Q 1 q 1 Q 2 P 2 q 2 D 1
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Industry Firm Labor Market Figure 18.7 Effect of a Change in Demand for Cookies D 1 (P 1 ) S W 1 L 1 l 1 L 2 l 2 D 2 (P 2 ) d 1 (P 1 ) d 2 (P 2 )
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