Chapter 18 - Chapter 18 Markets for Factors of Production I...

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Chapter 18: Markets for Factors of Production I. The Anatomy of Factor Markets a. Factors of Production: Labor, Capital, Land, Entrepreneurship b. Markets for Labor Service b.i. Labor service-physical and mental work effort that people supply to produce goods and services b.ii. Some labor services are traded day by day- casual labor b.iii. Most labor services are traded on contract- job b.iii.1. Have many buyer and sellers and are competitive b.iii.2. Wage rate is determined by supply and demand b.iv. In some markets, labor unions organizes labor b.iv.1. Bargaining process between the union and the employer determines the wage rate c. Markets for Capital Services c.i. Capital-consists of tools, instruments, machines, buildings, and other constructions that have been produced in the past and that businesses how use to produce goods and services c.ii. Capital goods are traded in goods markets c.iii. Market for capital services is a rental market-a market where services of capital are hired c.iii.1. Ex) vehicle rental market c.iii.2. Price is a rental rate c.iv. Most capital services are not traded but bought by firm who uses it itself c.iv.1. Implicit rental rate that comes from depreciation and interest cost c.iv.2. Firms are implicitly renting capital to themselves d. Markets for Land Services & Natural Resources d.i. Land-consists of all gifts of nature d.ii. Market for land is the services of land-use of land d.iii. Nonrenewable natural resources-resources that can be used only once d.iii.1. Price is determined in global commodity markets, called commodity prices e. Entrepreneurship e.i. Entrepreneurial services are not traded in markets e.ii. Receive profit or bear loss that results from business decisions II. Demand for a Factor of Production a. Derived demand-derived from the demand for the goods and services that it is used to produce b. Quantities of factors of production demand are consequence of firm’s output decision—hire quantities of production that maximize profits c. Value of marginal product-value to the firm of hiring one more unit of a factor of production (VMP) c.i. VMP = P (per unit of output) x MP (of factor of production) d. A Firm’s Demand for Labor d.i. VMP tells us what an additional worker is worth to a firm d.ii. Wage rate tells us what an additional worker costs a firm
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d.iii. VMP and Wage rate determine quantity of labor demanded by firm d.iv. Maximize profit: hire quantity of labor at which the VMP = Wage Rate d.iv.1. If VMP>Wage Rate, increase π by hiring one more worker d.iv.2. If VMP<Wage Rate, increase π by firing one more worker e. A Firm’s Demand for Labor Curve e.i. Derived from it’s VMP curve e.ii. A change in wage rate brings a change in quantity of labor demanded and movement along the demand for labor curve e.iii. A change in any other influence in firm’s labor hiring plans, changes the
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This note was uploaded on 11/14/2011 for the course ECO 201 taught by Professor Dunlevy during the Fall '08 term at Miami University.

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Chapter 18 - Chapter 18 Markets for Factors of Production I...

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