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Principles of Economics- Mankiw (5th) 387

Principles of Economics- Mankiw (5th) 387 - CHAPTER 18 T H...

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CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION 399 being final goods ready to be enjoyed by consumers, are inputs into the produc- tion of other goods. To understand labor demand, we need to focus on the firms that hire the labor and use it to produce goods for sale. By examining the link be- tween the production of goods and the demand for labor, we gain insight into the determination of equilibrium wages. THE COMPETITIVE PROFIT-MAXIMIZING FIRM Let’s look at how a typical firm, such as an apple producer, decides the quantity of labor to demand. The firm owns an apple orchard and each week must decide how many apple pickers to hire to harvest its crop. After the firm makes its hiring decision, the workers pick as many apples as they can. The firm then sells the ap- ples, pays the workers, and keeps what is left as profit. We make two assumptions about our firm. First, we assume that our firm is competitive both in the market for apples (where the firm is a seller) and in the market for apple pickers (where the firm is a buyer). Recall from Chapter 14 that a
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