10.20.08 - ECONOMICS 1 Professor Kenneth Train 10/20/08...

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ECONOMICS 1 Professor Kenneth Train 10/20/08 Lecture 15 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. LECTURE Today we’re going to talk explicitly about interrelated markets. I want to talk about interactions between markets and how to look at factor markets . Factor markets are simply the markets for inputs. FACTOR MARKETS Input and output markets are linked What’s interesting about factor markets is that input and output markets are related to each other. The only reason people want to buy inputs is to make outputs, so the markets are necessarily tied. This link drives demand. No one wants to hire labor just for the sake of it. So you can’t understand how output markets behave until you understand the input markets. We’re going to discuss this today. Demand and supply explain factor markets You could use your standard supply and demand information to understand this relationship: Demand for labor depends on the wage range; supply of labor depends on the people who know the skill and want to work in this market. The amount of labor is responsive to wage: as the wage gets higher, more people become programmers, for example, or work more hours to earn more money. So we see that the equilibrium of demand and supply gives you the quantity of everything in the market. This way of putting it is correct, but what’s underneath these curves? What forces motivate them? DEMAND FOR LABOR: Firm How is demand for labor determined? Let’s assume a perfectly competitive market on both sides of a market, input and output. Each firm is small compared to the overall market for output and for inputs. So let’s start by looking under the demand curve for labor. This is where the crucial link occurs: demand for a product (output market) creates demand for labor (input market.) To look at this we have a new terminology: marginal product of labor . This tells you the amount of extra output you can get if you hire one extra worker:
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ECONOMICS 1 ASUC Lecture Notes Online: Approved by the UC Board of Regents 10/20/08 D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. 2
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This note was uploaded on 07/25/2011 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.

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10.20.08 - ECONOMICS 1 Professor Kenneth Train 10/20/08...

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