sign in sign up
<<
Home , Factors of production, Factor market, Physical capital

CHAPTER CHECKLIST

1. Describe the anatomy of the markets for Chapter labor, , and . Demand and Supply in Factor Markets 2. Explain how the of marginal product 16 determines the demand for a factor of .

3. Explain how wage rates and employment are determined.

Copyright © 2002 Addison Wesley

CHAPTER CHECKLIST LECTURE TOPICS

4. Explain how interest rates, borrowing, and The Anatomy of Factor Markets lending are determined. The Demand for a Factor of Production Wages and Employment 5. Explain how rents and natural Financial Markets are determined. Land and Markets

1 16.1 THE ANATOMY OF FACTOR MARKETS 16.1 THE ANATOMY OF FACTOR MARKETS

The four that produce goods and Factor services are: The price of a factor of production. • Labor • The wage rate is the price of labor. • Capital • The interest rate is the price of capital. • Land • Rent is the price of land. • Factor A market for labor, capital, or land.

16.1 THE ANATOMY OF FACTOR MARKETS 16.1 THE ANATOMY OF FACTOR MARKETS

Labor Markets Financial Markets Labor market Capital A collection of people and firms who are trading labor The tools, instruments, machines, and other services. constructions that have been produced in the past and Job that use to produce goods and services. A long-term contract between a firm and a household to provide labor services. The funds that firms use to buy and operate physical capital.

2 16.1 THE ANATOMY OF FACTOR MARKETS 16.1 THE ANATOMY OF FACTOR MARKETS

Financial Market Market A collection of people and firms who are lending and A stock market is a market in which the shares in borrowing to finance the purchase of physical capital. the of companies are traded. The two main types of financial market are: Examples: the New York Stock Exchange, NASDAQ. • Stock market • Bond market

16.1 THE ANATOMY OF FACTOR MARKETS 16.1 THE ANATOMY OF FACTOR MARKETS

Bond Market Land Markets

A bond market is a market in which bonds issued by Land consists of all the gifts of nature. firms or governments are traded. The markets for raw materials are called Bond markets. A promise to pay specified sums of money on specified dates. Competitive Factor Markets Most factor markets have many buyers and sellers and are competitive markets.

3 16.2 DEMAND IN 16.2 DEMAND IN FACTOR MARKET

Derived demand Value of Marginal Product The demand for a factor of production, which is Table 16.1 on the next slide walks you through the derived from the demand for the goods and services it calculation of the value of marginal product. is used to produce. Value of marginal product The value to a firm of hiring one more unit of a factor of production, which equals price of a unit of multiplied by the marginal product of the factor of production.

16.2 DEMAND IN FACTOR MARKET 16.2 DEMAND IN FACTOR MARKET

The first two columns of the table are the firm’s To calculate the total product schedule. value of marginal product, multiply the To calculate marginal marginal product product, find the numbers by the price change in total product of a car wash, which as the quantity of labor in this example is $3. increases by 1 worker.

4 16.2 DEMAND IN FACTOR MARKET 16.2 DEMAND IN FACTOR MARKET

Figure 16.1 shows the value of the marginal product at Max’s Wash’n’ Wax. The blue bars show the value of the marginal product of the labor that Max hires based on the numbers in the table.

16.2 DEMAND IN FACTOR MARKET 16.2 DEMAND IN FACTOR MARKET

The orange line A Firm’s Demand for Labor is the firm’s A firm hires labor up to the point at which the value of value of the marginal product equals the wage rate. marginal product of labor If the value of marginal product of labor exceeds the curve. wage rate, a firm can increase its by employing one more worker. If the wage rate exceeds the value of marginal product of labor, a firm can increase its profit by employing one fewer worker.

5 16.2 DEMAND IN FACTOR MARKET 16.2 DEMAND IN FACTOR MARKET

A Firm’s Demand for Labor Curve Figure 16.2 shows the demand A firm’s demand for labor curve is also its value of for labor at Max’s Wash’n’ Wax. marginal product curve. At a wage rate of $10.50 an If the wage rate falls, a firm hires more workers. hour, Max makes a profit on the first 2 workers but would incur a loss on the third worker.

16.2 DEMAND IN FACTOR MARKET 16.2 DEMAND IN FACTOR MARKET

Figure 16.2 shows the demand for labor at Max’s Wash’n’ Wax. The demand for labor curve At a wage rate of $10.50 an hour, Max makes a profit on the slopes downward because the first 2 workers but would incur a value of the marginal product of labor diminishes as the quantity loss on the third worker. of labor employed increases. So Max’s quantity of labor demanded is 2 workers. Max’s demand for labor curve is the same as the value of marginal product curve.

6 16.2 DEMAND IN FACTOR MARKET 16.2 DEMAND IN FACTOR MARKET

Changes in the Demand for Labor The Price of the Firm’s Output The demand for labor depends on: The higher the price of a firm’s output, the greater is • The price of the firm’s output its demand for labor. • The prices of other factors of production The Prices of Other Factors of Production • If the price of using capital decreases relative to the wage rate, a firm substitutes capital for labor and increases the quantity of capital it uses. Usually, the demand for labor will decrease when the price of using capital falls.

16.2 DEMAND IN FACTOR MARKET 16.3 WAGES AND EMPLOYMENT

Technology The Supply of Labor New decrease the demand for some People supply labor to earn an income. Many factors types of labor and increase the demand for other influence the quantity of labor that a person plans to types. provide, but the wage rate is a key factor. Figure 16.3 on the next slide shows an individual’s labor supply curve.

7 16.3 WAGES AND EMPLOYMENT 16.3 WAGES AND EMPLOYMENT

The table 1. At a wage shows Larry’s rate of labor supply $10.50 an schedule, hour, Larry which is … plotted in the 2. …supplies figure as 30 hours of Larry’s labor labor a week. supply curve.

16.3 WAGES AND EMPLOYMENT 16.3 WAGES AND EMPLOYMENT

3. As the wage rate rises, Larry’s quantity of labor Larry’s labor supplied … supply curve 4. …increases, eventually bends 5. …reaches a backward. maximum, … 6. …then decreases.

8 16.3 WAGES AND EMPLOYMENT 16.3 WAGES AND EMPLOYMENT

Market Supply Curve This supply A market supply curve shows the quantity of labor curve shows supplied by all households in a particular job. how the quantity of car It is found by adding together the quantities of labor wash workers supplied by all households at each wage rate. supplied Figure 16.4 on the next slide shows the supply of car changes when wash workers. the wage rate changes, other things remaining the same.

16.3 WAGES AND EMPLOYMENT 16.3 WAGES AND EMPLOYMENT

In a market for Influences on the Supply of Labor a specific type Three key factors influence the supply of labor: of labor, the quantity • Adult population supplied increases as • Preferences the wage rate increases, other • Time in school and training things remaining the same.

9 16.3 WAGES AND EMPLOYMENT 16.3 WAGES AND EMPLOYMENT

Adult Population Time in School and Training An increase in the adult population increases the The more people who remain in school for full-time supply of labor. and training, the smaller is the supply of low-skilled labor. Preferences There has been a large increase in the supply of female labor since 1960. The percentage of men with jobs has shrunk slightly.

16.3 WAGES AND EMPLOYMENT 16.3 WAGES AND EMPLOYMENT

Labor Market Equilibrium Labor market equilibrium determines the wage rate and employment. 1. The equilibrium wage Figure 16.5 on the next slide illustrates equilibrium in rate is $10.50 an hour. the market for car wash workers. 2. The equilibrium quantity of labor is 300 workers.

10 16.3 WAGES AND EMPLOYMENT

If the wage rate exceeds $10.50 an hour, the Chapter quantity demanded is less than the quantity supplied The End and the wage rate falls. 16 If the wage rate is below $10.50 an hour, the quantity demanded exceeds the quantity supplied and the wage rate rises. Copyright © 2002 Addison Wesley

16.4 FINANCIAL MARKETS 16.4 FINANCIAL MARKETS

The Demand for Financial Capital The Supply of Financial Capital A firm’s demand for financial capital stems from its The quantity of financial captial supplied results from demand for physical capital to produce goods and people’s saving decisions. services. The higher the interest rate, the greater is the quantity The quantity of physical capital that a firm plans to use of saving supplied. depends on the price of financial capital - the interest The main influences on the supply of saving are: rate. • Population Two factors that change the demand for captial are: • Average income • Population growth • Expected future income • Technological change

11 16.4 FINANCIAL MARKETS 16.4 FINANCIAL MARKETS

Financial Market Equilibrium and the The demand for financial Interest Rate capital is KD, and the supply of financial capital is Financial market equilibrium occurs when the interest KS. rate has adjusted to make the quantity of capital demanded equal the quantity of capital supplied. 1. The equilibrium interest rate is 6 percent a year. Figure 16.6 on the next slide illustrates financial market equilibrium. 2. The equilibrium quantity of financial capital is $200 billion.

16.5 LAND AND NATURAL 16.5 LAND AND NATURAL RESOURCES

All natural resources are called land, and they fall into The Market for Land (Renewable Natural two categories: Resources) • Renewable The lower the rent, the greater is the quantity of land • Nonrenewable demanded. Renewable natural resources The supply of a particular block of land is perfectly Natural resources that can be used repeatedly. inelastic. Nonrenewable natural resources Figure 16.7 illustrates this market for land. Natural resources that can be used only once and that cannot be replaced once they have been used.

12 16.5 LAND AND NATURAL RESOURCES 16.5 LAND AND NATURAL RESOURCES

and Opportunity Cost Economic rent The demand curve for a 10- The income received by any factor of production over acre block of land is D, and and above the amount required to induce a given the supply curve is S. quantity of the factor to be supplied. Equilibrium occurs at a rent The income that is required to induce the supply of a of $1,000 an acre per day. given quantity of a factor of production is its opportunity cost—the value of the factor of production in its next best use.

16.5 LAND AND NATURAL RESOURCES 16.5 LAND AND NATURAL RESOURCES

The Supply of a Nonrenewable Resource Figure 16.8 shows how the income of a factor of Over time, the quantity of a nonrenewable resource production divides between decreases as it is used up. economic rent and But the known quantity of a natural resource increases opportunity cost. because advances in technology enable ever less 1. Part of the income is accessible sources of the resource to be discovered. opportunity cost (the red Using a natural resource decreases its supply, which area). causes price to rise.

2. Part is economic rent New discoveries increase supply, which cause prices (the green area). to fall.

13