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© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
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Ch09

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Ch09

  1. 1. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair CHAPTERCHAPTER 99 Prepared by: FernandoPrepared by: Fernando Quijano and Yvonn QuijanoQuijano and Yvonn Quijano Input Demand:Input Demand: The Labor and Land MarketsThe Labor and Land Markets
  2. 2. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Firm Choices in Input MarketsFirm Choices in Input Markets
  3. 3. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Demand for Inputs: A Derived DemandDemand for Inputs: A Derived Demand • Derived demandDerived demand is demand for resourcesis demand for resources (inputs) that is dependent on the demand(inputs) that is dependent on the demand for the outputs those resources can befor the outputs those resources can be used to produce.used to produce. • Inputs are demanded by a firm if, and onlyInputs are demanded by a firm if, and only if, households demand the good or serviceif, households demand the good or service produced by that firm.produced by that firm.
  4. 4. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Inputs: Complementary and SubstitutableInputs: Complementary and Substitutable • TheThe productivity of an inputproductivity of an input is theis the amount of output produced per unit of thatamount of output produced per unit of that input.input. • Inputs can beInputs can be complementarycomplementary oror substitutable.substitutable. This means that a firm’sThis means that a firm’s input demands are tightly linked together.input demands are tightly linked together.
  5. 5. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Diminishing ReturnsDiminishing Returns • Faced with a capacity constraint in theFaced with a capacity constraint in the short-run, a firm that decides to increaseshort-run, a firm that decides to increase output will eventually encounteroutput will eventually encounter diminishing returns.diminishing returns. • Marginal product of labor (MPMarginal product of labor (MPLL)) is theis the additional output produced by oneadditional output produced by one additional unit of labor.additional unit of labor.
  6. 6. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Marginal Revenue ProductMarginal Revenue Product • The marginal revenue product (MRP)The marginal revenue product (MRP) ofof a variable input is the additional revenue aa variable input is the additional revenue a firm earns by employing one additional unitfirm earns by employing one additional unit of input,of input, ceteris paribusceteris paribus.. • MRPMRPLL equals the price of output,equals the price of output, PPXX, times, times the marginal product of labor,the marginal product of labor, MPMPLL..
  7. 7. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Marginal Revenue Product Per Hour ofMarginal Revenue Product Per Hour of Labor in Sandwich Production (One Grill)Labor in Sandwich Production (One Grill) (1)(1) TOTALTOTAL LABOR UNITSLABOR UNITS (EMPLOYEES)(EMPLOYEES) (2)(2) TOTALTOTAL PRODUCTPRODUCT (SANDWICHES(SANDWICHES PER HOUR)PER HOUR) (3)(3) MARGINALMARGINAL PRODUCT OFPRODUCT OF LABOR (LABOR (MPMPLL)) (SANDWICHES(SANDWICHES PER HOUR)PER HOUR) (4)(4) PRICE (PRICE (PPXX)) (VALUE(VALUE ADDED PERADDED PER SANDWICH)SANDWICH)aa (5)(5) MARGINALMARGINAL REVENUEREVENUE PRODUCT (PRODUCT (MPMPLL XX PPXX)) (PER HOUR)(PER HOUR) 00 00 −− −− −− 11 1010 1010 $$.50.50 $$ 5.005.00 22 2525 1515 .50.50 7.507.50 33 3535 1010 .50.50 5.005.00 44 4040 55 .50.50 2.502.50 55 4242 22 .50.50 1.001.00 66 4242 00 .50.50 00 aa The “price” is essentially profit per sandwich; see discussion in text.The “price” is essentially profit per sandwich; see discussion in text.
  8. 8. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Marginal Revenue Product Per Hour ofMarginal Revenue Product Per Hour of Labor in Sandwich Production (One Grill)Labor in Sandwich Production (One Grill) • When output price isWhen output price is constant, the behaviorconstant, the behavior ofof MRPMRPLL depends onlydepends only on the behavior ofon the behavior of MPMPLL.. • Under diminishingUnder diminishing returns, bothreturns, both MPMPLL andand MRPMRPLL eventuallyeventually decline.decline. MRPL = PX  MPL
  9. 9. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair A Firm Using One Variable Factor ofA Firm Using One Variable Factor of Production: LaborProduction: Labor • A competitive firm using only one variableA competitive firm using only one variable factor of production will use that factor asfactor of production will use that factor as long as its marginal revenue productlong as its marginal revenue product exceeds its unit cost.exceeds its unit cost. • If the firm uses only labor, then it will hireIf the firm uses only labor, then it will hire labor as long aslabor as long as MRPMRPLL is greater than theis greater than the going wage,going wage, W*.W*.
  10. 10. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Marginal Revenue Product and Factor Demand forMarginal Revenue Product and Factor Demand for a Firm Using One Variable Input (Labor)a Firm Using One Variable Input (Labor) • The hypothetical firm will demand 210 units of labor.The hypothetical firm will demand 210 units of labor. W* =MRPL = 10
  11. 11. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Short-Run Demand Curve for a FactorShort-Run Demand Curve for a Factor of Productionof Production • When a firm uses onlyWhen a firm uses only one variable factor ofone variable factor of production, that factor’sproduction, that factor’s marginal revenue productmarginal revenue product curve is the firm’scurve is the firm’s demand curve for thatdemand curve for that factor in the short run.factor in the short run.
  12. 12. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Comparing Marginal Revenue andComparing Marginal Revenue and Marginal Cost to Maximize ProfitsMarginal Cost to Maximize Profits • Assuming that labor is the only variableAssuming that labor is the only variable input, if society values a good more than itinput, if society values a good more than it costs firms to hire the workers to producecosts firms to hire the workers to produce that good, the good will be produced.that good, the good will be produced. • Firms weigh the value of outputs asFirms weigh the value of outputs as reflected in output price against the valuereflected in output price against the value of inputs as reflected in marginal costs.of inputs as reflected in marginal costs.
  13. 13. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair The Two Profit-Maximizing ConditionsThe Two Profit-Maximizing Conditions • The two profit-maximizing conditions are simplyThe two profit-maximizing conditions are simply two views of the same choice process.two views of the same choice process.
  14. 14. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair The Trade-Off Facing FirmsThe Trade-Off Facing Firms
  15. 15. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair A Firm Employing Two VariableA Firm Employing Two Variable Factors of ProductionFactors of Production • Land, labor, and capital are used togetherLand, labor, and capital are used together to produce outputs.to produce outputs. • When an expanding firm adds to its stockWhen an expanding firm adds to its stock of capital, it raises the productivity of itsof capital, it raises the productivity of its labor, and vice versa. Each factorlabor, and vice versa. Each factor complements the other.complements the other.
  16. 16. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Substitution and Output Effects of aSubstitution and Output Effects of a Change in Factor PriceChange in Factor Price • Two effects occur when the price of anTwo effects occur when the price of an input changes:input changes: • Factor substitution effectFactor substitution effect: The tendency of firms to substitute away from a factor whose price has risen and toward a factor whose price has fallen.
  17. 17. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Substitution and Output Effects of aSubstitution and Output Effects of a Change in Factor PriceChange in Factor Price • Two effects occur when the price of anTwo effects occur when the price of an input changes:input changes: • Output effect of a factor priceeffect of a factor price increase (decrease)increase (decrease): When a firm decreases (increases) its output in response to a factor price increase (decrease), this decreases (increases) its demand for all factors.
  18. 18. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Substitution and Output Effects of aSubstitution and Output Effects of a Change in Factor PriceChange in Factor Price • WhenWhen PPLL == PPKK = $1, the labor-intensive method of= $1, the labor-intensive method of producing output is less costly.producing output is less costly. TECHNOLOGYTECHNOLOGY INPUT REQUIREMENTSINPUT REQUIREMENTS PER UNIT OF OUTPUTPER UNIT OF OUTPUT UNIT COST IFUNIT COST IF PPLL = $1= $1 PPKK = $1= $1 ((PPLL xx LL) + () + (PPKK xx KK)) UNIT COST IFUNIT COST IF PPLL = $2= $2 PPKK = $1= $1 ((PPLL xx LL) + () + (PPKK xx KK))KK LL AA (capital intensive)(capital intensive) 1010 55 $15$15 $20$20 BB (labor intensive)(labor intensive) 33 1010 $13$13 $23$23 Response of a Firm to an Increasing Wage RateResponse of a Firm to an Increasing Wage Rate
  19. 19. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Substitution and Output Effects of aSubstitution and Output Effects of a Change in Factor PriceChange in Factor Price • When the price of labor rises, labor becomes moreWhen the price of labor rises, labor becomes more expensive relative to capital. The firm substitutes capitalexpensive relative to capital. The firm substitutes capital for labor and switches from techniquefor labor and switches from technique BB to techniqueto technique AA.. TO PRODUCE 100 UNITS OF OUTPUTTO PRODUCE 100 UNITS OF OUTPUT TOTALTOTAL CAPITALCAPITAL DEMANDEDDEMANDED TOTALTOTAL LABORLABOR DEMANDEDDEMANDED TOTALTOTAL VARIABLEVARIABLE COSTCOST WhenWhen PPLL = $1,= $1, PPKK = $1,= $1, firm uses technologyfirm uses technology BB 300300 1,0001,000 $1,300$1,300 WhenWhen PPLL = $2,= $2, PPKK = $1,= $1, firm uses technologyfirm uses technology AA 1,0001,000 500500 $2,000$2,000 The Substitution Effect of an Increase in Wages on a FirmThe Substitution Effect of an Increase in Wages on a Firm Producing 100 Units of OutputProducing 100 Units of Output
  20. 20. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Many Labor MarketsMany Labor Markets • If labor markets are competitive, the wagesIf labor markets are competitive, the wages in those markets are determined by thein those markets are determined by the interaction of supply and demand.interaction of supply and demand. • Firms will hire workers only as long as theFirms will hire workers only as long as the value of their product exceeds the relevantvalue of their product exceeds the relevant market wage. This is true in all competitivemarket wage. This is true in all competitive labor markets.labor markets.
  21. 21. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Land MarketsLand Markets • Unlike labor andUnlike labor and capital, the totalcapital, the total supply of land issupply of land is strictly fixed (perfectlystrictly fixed (perfectly inelastic.inelastic.
  22. 22. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Demand Determined PriceDemand Determined Price • The price of a good that isThe price of a good that is in fixed supply isin fixed supply is demanddemand determineddetermined.. • Because land is fixed inBecause land is fixed in supply, its price issupply, its price is determined exclusively bydetermined exclusively by what households and firmswhat households and firms are willing to pay for it.are willing to pay for it. • The return to any factor of production in fixedThe return to any factor of production in fixed supply is calledsupply is called pure rentpure rent..
  23. 23. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Land in a Given Use Versus Land of aLand in a Given Use Versus Land of a Given QualityGiven Quality • The supply of land in aThe supply of land in a given usegiven use may not bemay not be perfectly inelastic orperfectly inelastic or fixed.fixed. • The supply of land of aThe supply of land of a given qualitygiven quality at a givenat a given location is truly fixed inlocation is truly fixed in supply.supply.
  24. 24. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Rent and the Value of OutputRent and the Value of Output Produced on LandProduced on Land • A firm will pay for and use land as long asA firm will pay for and use land as long as the revenue earned from selling the outputthe revenue earned from selling the output produced on that land is sufficient to coverproduced on that land is sufficient to cover the price of the land.the price of the land. • The firm will use land (The firm will use land (AA) up to the point at) up to the point at which:which: MRPA = PA
  25. 25. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair The Firm’s Profit-MaximizationThe Firm’s Profit-Maximization Condition in Input MarketsCondition in Input Markets • Profit-maximizing condition for theProfit-maximizing condition for the perfectly competitive firm is:perfectly competitive firm is: PPLL = MRP= MRPLL = (= (MPMPLL XX PPXX)) PPKK == MRPMRPKK = (= (MPMPKK XX PPXX)) PPAA == MRPMRPAA = (= (MPMPAA XX PPXX)) wherewhere LL is labor,is labor, KK is capital,is capital, AA is land (acres),is land (acres), XX is output, andis output, and PPXX is the price of that output.is the price of that output.
  26. 26. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair The Firm’s Profit-MaximizationThe Firm’s Profit-Maximization Condition in Input MarketsCondition in Input Markets • Profit-maximizing condition for the perfectlyProfit-maximizing condition for the perfectly competitive firm, written another way is:competitive firm, written another way is: M P P M P P M P P P L L K K A A X = = = 1 • In words, the marginal product of the last dollar spent on labor must be equal to the marginal product of the last dollar spent on capital, which must be equal to the marginal product of the last dollar spent on land, and so forth.
  27. 27. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Input Demand CurvesInput Demand Curves • If product demand increases, product price willIf product demand increases, product price will rise and marginal revenue product will increase.rise and marginal revenue product will increase.
  28. 28. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Input Demand CurvesInput Demand Curves • If the productivity of labor increases, bothIf the productivity of labor increases, both marginal product and marginal revenue productmarginal product and marginal revenue product will increase.will increase.
  29. 29. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Impact of Capital Accumulation onImpact of Capital Accumulation on Factor DemandFactor Demand • The production and use of capital enhances theThe production and use of capital enhances the productivity of labor, and normally increases theproductivity of labor, and normally increases the demand for labor and drives up wages.demand for labor and drives up wages.
  30. 30. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair Impact of Technological ChangeImpact of Technological Change • Technological changeTechnological change refers to therefers to the introduction of new methods of productionintroduction of new methods of production or new products intended to increase theor new products intended to increase the productivity of existing inputs or to raiseproductivity of existing inputs or to raise marginal products.marginal products. • Technological change can, and does, haveTechnological change can, and does, have a powerful influence on factor demands.a powerful influence on factor demands.

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