NOTE_Lecture_17_-_intro_to_factor_demand

NOTE_Lecture_17_-_intro_to_factor_demand - The Demand for...

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1 The Demand for Factors and Demand for Labor Objectives Demand in factor markets Derived demand Marginal physical product (MPP) Marginal revenue product (MRP) Changes in factor (or resource) demand The substitution and output effects Optimum resource mix for the firm Demand for factors (resources) Demand for resources (or factors) is a derived demand The four resources: land, labor, capital, and entrepreneurial ability The demand for these resources is derived from the demand for the final products. For ex.: The demand for land on which to grow corn is derived from the demand for corn The demand for labor in auto industry is derived from the demand for cars
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2 Productivity Definition: Productivity = amount of output produced per unit of input used The more productive a resource is, the higher its demand will be and the higher price it will be able to obtain. For ex.: Sally can get higher wages than John because she is more productive An acre of land that produces more cotton than another acre of land will command a higher rent Marginal physical product (MPP) Recall marginal =additional What does the term “physical product” bring to mind? Something to do with the output being produced! Therefore definition of MPP = the additional output that is produced from an additional unit of the resource (input) used Calculation of MPP Units of labor Output/ hour 1 15 2 29 3 41 4 51 5 58 6 62 7 63 8 63 9 62 10 60 Consider a watermelon farmer who is considering how many workers to hire. The table shows the number of watermelons harvested for different number of workers. We can calculate MPP from the data provided in the table…
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3 Calculation of MPP Units of labor Output/ hour 1 15 2 29 3 41 4 51 5 58 6 62 7 63 8 63 9 62 10 60 MPP 15 14 12 10 7 4 1 0 -1 -2 Notice that MPP declines as more labor is used. This is an example of the law of diminishing marginal returns . Law of diminishing marginal returns Definition: As additional units of a resource (or input) are added to a fixed amount of other resources, the marginal output produced from that additional resource (i.e., the marginal returns) will eventually decline Units of labor Output/ hour MPP 1 15 15 2 29 14 3 41 12 4 51 10 5 58 7 6 62 4 7 63 1 8 63 0 9 62 -1 10 60 -2 So let’s go back to our watermelon farmer. Now that she knows the contribution of each additional worker, she can determine how many workers she should hire. Suppose the hourly wage is $20. How many workers should the farmer hire? What else do we need to know to answer this question? The price of each watermelon!
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4 Units of labor Output MPP 1 15 15 2 29 14 3 41 12 4 51 10 5 58 7 6 62 4 7 63 1 8 63 0 9 62 -1 10 60 -2 Suppose each watermelon is $2. Now we can calculate the contribution to revenue of each additional worker…this is marginal revenue product (MRP). Marginal revenue product (MRP)
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This note was uploaded on 05/22/2011 for the course ECON 1B taught by Professor Jamie during the Spring '06 term at West Valley.

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NOTE_Lecture_17_-_intro_to_factor_demand - The Demand for...

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