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16. CHAPTER. The Markets for Labor and Other Factors of Production. The Yankees were able to offer Sabathia a better contract because of the much higher revenues the team generates from ticket sales, cable television, and broadcast television and radio. Prepared by:. Fernando Quijano. 16.

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  1. 16 CHAPTER The Markets for Laborand Other Factorsof Production The Yankees were able to offer Sabathia a better contract because of the much higher revenues the team generates from ticket sales, cable television, and broadcast television and radio. Prepared by: Fernando Quijano

  2. 16 CHAPTER Chapter OutlineandLearning Objectives The Markets for Laborand Other Factorsof Production

  3. The Markets for Labor and Other Factors of Production Factors of production Labor, capital, natural resources, and other inputs used to produce goods and services.

  4. 16.1 LEARNING OBJECTIVE Explain how firms choose the profit-maximizing quantity of labor to employ. The Demand for Labor Derived demand The demand for a factor of production; it depends on the demand for the good the factor produces. The Marginal Revenue Product of Labor Marginal product of labor The additional output a firm produces as a result of hiring one more worker. Marginal revenue product of labor (MRP) The change in a firm’s revenue as a result of hiring one more worker.

  5. 16.1 LEARNING OBJECTIVE Explain how firms choose the profit-maximizing quantity of labor to employ. The Demand for Labor The Marginal Revenue Product of Labor FIGURE 16-1 The Marginal Revenue Product of Labor and the Demand for Labor The marginal revenue product of labor equals the marginal product of labor multiplied by the price of the good. The marginal revenue product curve slopes downward because diminishing returns cause the marginal product of labor to decline as more workers are hired. A firm maximizes profits by hiring workers up to the point where the wage equals the marginal revenue product of labor. The marginal revenue product of labor curve is the firm’s demand curve for labor because it tells the firm the profit-maximizing quantity of workers to hire at each wage. For example, using the demand curve shown in this figure, if the wage is $600, the firm will hire 4 workers.

  6. 16.1 LEARNING OBJECTIVE Explain how firms choose the profit-maximizing quantity of labor to employ. The Demand for Labor The Marginal Revenue Product of Labor TABLE 16-1 The Relationship between the Marginal Revenue Product of Labor and the Wage

  7. 16.1 LEARNING OBJECTIVE Explain how firms choose the profit-maximizing quantity of labor to employ. The Demand for Labor The Market Demand Curve for Labor The market demand curve for labor is determined by adding up the quantity of labor demanded by each firm at each wage, holding constant all other variables that might affect the willingness of firms to hire workers.

  8. 16.1 LEARNING OBJECTIVE Explain how firms choose the profit-maximizing quantity of labor to employ. The Demand for Labor Factors That Shift the Market Demand Curve for Labor The five most important variables that cause the labor demand curve to shift are the following: • Increases in human capital. Human capital The accumulated training and skills that workers possess. • Changes in technology. • Changes in the price of the product. • Changes in the quantity of other inputs. • Changes in the number of firms in the market.

  9. 16.2 LEARNING OBJECTIVE Explain how people choose the quantity of labor to supply. The Supply of Labor FIGURE 16-2 FIGURE 16-3 The Labor Supply Curve A Backward-Bending Labor Supply Curve As the wage increases, the opportunity cost of leisure increases, causing individuals to supply a greater quantity of labor. Therefore, the labor supply curve is upward sloping. As the wage rises, a greater quantity of labor is usually supplied. As the wage climbs above a certain level, the individual is able to afford more leisure even though the opportunity cost of leisure is high. The result may be a smaller quantity of labor supplied.

  10. 16.2 LEARNING OBJECTIVE Explain how people choose the quantity of labor to supply. The Supply of Labor The Market Supply Curve of Labor The market supply curve of labor is determined by adding up the quantity of labor supplied by each worker at each wage, holding constant all other variables that might affect the willingness of workers to supply labor. Factors That Shift the Market Supply Curve of Labor • Increases in population. • Changing demographics. • Changing alternatives.

  11. 16.3 LEARNING OBJECTIVE Explain how equilibrium wages are determined in labor markets. Equilibrium in the Labor Market FIGURE 16-4 Equilibrium in the Labor Market As in other markets, equilibrium in the labor market occurs where the demand curve for labor and the supply curve of labor intersect.

  12. 16.3 LEARNING OBJECTIVE Explain how equilibrium wages are determined in labor markets. Equilibrium in the Labor Market The Effect on Equilibrium Wages of a Shift in Labor Demand FIGURE 16-5 The Effect of an Increase in Labor Demand Increases in labor demand will cause the equilibrium wage and the equilibrium level of employment to rise: 1. If the productivity of workers rises, the marginal revenue product increases, causing the labor demand curve to shift to the right. 2. The equilibrium wage rises from W1to W.2. 3. The equilibrium level of employment rises from L1 to L2.

  13. 16.3 LEARNING OBJECTIVE • YOUR TURN:Test your understanding by doing related problem 3.3 at the end of this chapter. MakingtheConnection Explain how equilibrium wages are determined in labor markets. • Will Your Future Income Depend on Which Courses You Take in College?

  14. 16.3 LEARNING OBJECTIVE Explain how equilibrium wages are determined in labor markets. Equilibrium in the Labor Market The Effect on Equilibrium Wages of a Shift in Labor Supply FIGURE 16-6 The Effect of an Increase in Labor Supply Increases in labor supply will cause the equilibrium wage to fall but the equilibrium level of employment to rise: 1. As population increases, the labor supply curve shifts to the right. 2. The equilibrium wage falls from W1to W2. 3. The equilibrium level of employment increases from L1to L2.

  15. 16.4 LEARNING OBJECTIVE • YOUR TURN:Test your understanding by doing related problem 4.7 at the end of this chapter. Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. Explaining Differences in Wages FIGURE 16-7 Baseball Players Are Paid More Than College Professors The marginal revenue product of baseball players is very high, and the supply of people with the ability to play Major League Baseball is low. The result is that the 750 Major League Baseball players receive an average wage of $3,260,000. The marginal revenue product of college professors is much lower, and the supply of people with the ability to be college professors is much higher. The result is that the 663,000 college professors in the United States receive an average wage of $81,000, far below the average wage of baseball players. Don’t Let This Happen to YOU!Remember That Prices and Wages Are Determined at the Margin

  16. 16.4 LEARNING OBJECTIVE Use demand and supply analysis to explain how compensating differentials, discrimination, and labor unions cause wages to differ. Explaining Differences in Wages Compensating Differentials Compensating differentials Higher wages that compensate workers for unpleasant aspects of a job.

  17. KEY TERMS Compensating differentialsDerived demand Factors of production Human capital Marginal product of laborMarginal productivity theory of income distribution Marginal revenue product of labor (MRP)

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