Quiz8Notes - The markets for the factors of production...

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The markets for the factors of production 27/10/2007 11:39:00 ¾  of total income in the US goes to workers in the form of wages and fringe benefits the other  ¼  goes to landowners and the owners of capital as rent, profit, and interest the supply and demand for land, labor, and capital determine the price paid to  workers, landowners, and capital owners the demand for a factor of production is a derived demand, it depends on how much  of the good the firm chooses to supply, which is dependent on the demand for that  good THE DEMAND FOR LABOR Production function:  the relationship bw the quantity of inputs used to make a good  and the quantity of output of that good Marginal product of labor:  the increase in the amount of output from an additional unit  of labor. MPL= dQ/dL Diminishing marginal product:  the property whereby the marginal product of an input  declines as the quantity of the input increases.  Value of the marginal product:  the marginal product of an input times the price of the  output. VMPL = P x MPL the competitive profit maximizing firm. In our analysis the firms are price  takers, thus they must sell their goods at the price determined by the market  as a whole, and must pay the wage determined by the market as a whole. So  firms only can control how much to produce and how many laborer to hire the intersection of the supply and demand curves for labor determines the  wage the marginal product of labor decreases with more workers. Apple ex: more  workers, more apples picked, but the first workers have already picked the  best apples from the best trees. As you hire more workers, there aren’t as  many apples to be picked and they might be in hard to reach places. These  additional workers pick less apples, an ex of diminishing marginal product. 
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VMPL diminishes with more workers because price is multiplied by lower and  lower MPL, because additional workers are not as efficient as previous  workers because the best apples have been picked We can graph VMPL vs quantity of laborers. The downward sloping line is the  demand curve for labor, or the value of the marginal product. Firms will hire to  the point where wage intersects this demand curve because hiring any  additional workers would not be efficient because wage would exceed value  of the marginal product of labor, the workers wage would be greater than the  additional profits he brings to the firm.  a competitive firm hires up to the point  where the value of the marginal product of labor equals the wage. 
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