1 / 12

Factor Markets: Introduction and Factor Demand

Module. Micro: Econ:. 33. 69. Factor Markets: Introduction and Factor Demand. KRUGMAN'S MICROECONOMICS for AP*. Margaret Ray and David Anderson. What you will learn in this Module :. How factors of production—resources like land, labor, and capital—are traded in factor markets.

thomaswright
Download Presentation

Factor Markets: Introduction and Factor Demand

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Module Micro: Econ: 33 69 Factor Markets:Introduction and Factor Demand • KRUGMAN'S • MICROECONOMICS for AP* Margaret Ray and David Anderson

  2. What you will learnin thisModule: • How factors of production—resources like land, labor, and capital—are traded in factor markets. • How factor markets determine the factor distribution of income. • How the demand for a factor of production is determined.

  3. 4 Factors of Production • Labor • Land • Capital: 2 Types • Physical Capital: Manufactured resources such as equipment, buildings, tools, etc • Human Capital: improvement in labor due to education and knowledge • Entrepreneurship

  4. Factor Prices Factor Distribution of Income in US • Factor prices allocate resources among producers • The demand for a factor of production is a deriveddemand • Derived Demand: demand for the factor is created by the demand for the firm’s output Ex: Demand for doctors created from the demand for health care. • Most people get the largest share of their income from factor markets

  5. Marginal Productivity and Factor Demand • Marginal product (MP) is the additional output produced as a result of hiring an additional unit of a factor of production. For example, MPL = additional output from hiring an additional worker. • The value of the marginal product (VMP) is the value of the additional output produced as a result of hiring an additional unit of a factor. For example, VMPL = MPL x P. • The VMP curve is the demand curve for a factor (with a perfectly competitive labor market).

  6. Marginal Productivity and Factor Demand A firm should employ workers until the point VMPL = Wage Rate This rule holds true for all factors of production. Profit maximizing firms will keep adding more units of each factor of production until the value of the marginal product of the last unit employed is equal to the factors price

  7. Figure 69.1 from text

  8. Figure 69.2 from text

  9. Price of wheat = $20 per bushelAt a wage rate of $200 what is the profit maximizing point?

  10. Profit Maximizing Point:VMPL=W (Point A)

  11. What Causes the Factor Demand Curve to Shift? W and VMPL VMP = D • Changes in the prices of goods • Changes in the supply of other factors • Changes in technology Units of Labor

  12. Summary • Derived Demand • Labor demand = MPL x P • Demand shifts from changes in: • Price • Supply of other factors • Technology

More Related