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Factors of Production

Factors of Production. Part II (Chapter 18). MRP. MRP sometimes call Value of Marginal Product ( VMP ). Economic Decision Making:. If MB ≥ MC do it If MB < MC don’t. Shifts in Labor Demand. Demand Curve shifts right when:. Demand for Product Productivity

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Factors of Production

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  1. Factors of Production Part II (Chapter 18)

  2. MRP MRP sometimes call Value of Marginal Product (VMP) Economic Decision Making: If MB ≥ MC do it If MB < MC don’t

  3. Shifts in Labor Demand Demand Curve shifts right when: • Demand for Product • Productivity • Technology, working conditions, etc... • Price of other resources: • Price of complementary resource • Price of substitute resource • “It Depends” • Two different substitute actions when price of substitute falls: • Substitution Effect- you hire less workers • Output Effect- MC falls, so output increases => you hire more workers

  4. MRP = Wage Rate Competitive Market:Supply of Labor • For a firm in a competitive market: • Wage is the firm’s labor supply curve • Each firm is a “wage taker” If demand rises, Firm hires more workers Wage is unchanged

  5. Demand For product Price of Product MRP Derived Demand More Workers Hired Wage rate Unchanged!

  6. What will Get me to work? The Market Supply Curve • Is upward sloping & represents the trade-off between Work & Leisure • upward-sloping means that an increase in wages induces more people to work

  7. 1. An increase in Supply, S labor supply . . . S W W 2. . . . reduces the wage . . . Demand L L 3. . . . and raises employment. A Shift in Labor Supply Wage (price of labor) More workers hired Wages Falls Marginal Product Falls Quantity of 0 Labor

  8. Supply W 1. An increase in labor demand . . . W 2. . . . increases the wage . . . D Demand, D L L 3. . . . and increases employment. A Shift in Labor Demand Wage More workers hired Wages Rise Marginal Product Increases (price of labor) Quantity of 0 Labor

  9. Optimizing 1-Resource • If Marginal Benefit ≥Marginal Costthen __________ • Marginal Factor Cost (MFC) – cost of additional factor of production • Sometimes called MRC • Competitive firms hire each factor of production until the MRP = MFC

  10. Capital or The Least-Cost Rule • Challenge: how do you decide optimal quantity between 2 resources? Labor • Your choice must satisfy the following equation • (Only one combination will work!) • MPL/PL = MPK/PKorMPL/ MPK = PL/PK • If MPL/PL > MPK/PKthen L & K • If MPL/PL < MPK/PKthen do opposite

  11. Worksheet • Labor Markets

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